KBRA: Catastrophe Pricing Improvement Was Upside for Reinsurers

Kroll Bond Rating Agency (KBRA) recently provided its views on key insurance and reinsurance industry trends and issues in the US property and casualty and global reinsurance subsectors.

The rating agency believes that traditional reinsurers will report strong levels of capital at year-end 2019 due to a generally favorable investment environment, lower-than-average catastrophe losses, continued favorable prior-year reserve development, and a slight increase in demand throughout the year.

KBRA projects that reinsurance capacity will remain adequate through 2020; however, as the year develops, it anticipates more caution on the part of reinsurers surrounding capacity deployment as they address higher retrocessional costs, lower interest rates, and increased reserving uncertainty.

According to KBRA, shrinking alternative capital in 2019 was driven by loss payments, investor redemptions, and minimal entry of new money. KBRA said it "estimates that the overall market size will range between $90 billion and $95 billion by YE 2019, or basically flat, with approximately $15 billion to $20 billion still trapped due to 2017 and 2018 losses."

KBRA further advised, "Until investor confidence is restored … investors will favor the transparency and liquidity of the Rule 144A catastrophe bond market in the intermediate term, over private deals in the collateralized and sidecar markets."

The rating agency said that "major reinsurers [will] continue to report substantial excess capital above their individual targets. Share buybacks are likely to continue and may serve as a first line of defense against adverse events to protect credit quality and ratings."

Furthermore, KBRA observed January 1, 2020, renewal pricing increases were tempered amid a fragmented market with elevated capacity, trapped capital, and increased risk appetite on the part of large traditional players. The rating agency noted that "there have been some withdrawals of reinsurers from long-tail business.

"Modest pricing improvement in US property catastrophe pricing, relative to noncatastrophe property and casualty lines, particularly for ceding companies with catastrophe losses in 2019, was the upside for reinsurers," according to KBRA.