Investment yields, low interest rates, less-favorable reserves and high catastrophe losses are working together to create a market hardening, according to reinsurance and specialty-insurance executives on various earnings conference calls this quarter.
However, rate increases are not enough to offset losses.
“Broadly speaking, nearly every line of business is now showing either flat or positive rate change for the second straight quarter,” says Michael S. McGavick, chief executive officer at XL Group.
McGavick says he is not prepared to call it a hard market, but “clearly, managements in our industry are becoming frustrated by reality—the reality that we are in a prolonged low interest-rate environment; the reality that for some companies, reserves are running dry; the reality that the sector has been underpricing most of these products for an extended period of time.”
Asked if he thought rate increases would offset losses, McGavick flatly says no.
“We are seeing positive movement in rate without question, but we are not seeing it to the level that will be necessary, both to offset the losses that are seen across investment yield or even the loss trend,” he says. “Neither we nor the market are where we think it needs to be.”
Costas Miranthis, president and chief executive of PartnerRe, tells analysts that there is “a clear recognition that rates should rise” as implications of lower interest rates are understood and recent catastrophes has “lead to greater respect for risk.”
Miranthas says insurance conditions are “slowly” beginning to improve in the United States and internationally, but “perhaps the U.S. is slightly ahead of this trend.”
He adds, “Reinsurance demand, particularly for peak exposures, remains strong. While there is no capital crunch, I believe capital will be deployed only if the risk-adjusted returns are appropriate.”
RenaissanceRe Holdings CEO Neill A. Currie says catastrophes this year have consumed a lot of reinsurance capital, which could create “some opportunity to increase price,” though, to date, increases are limited to areas that have experienced losses.
Changes to hurricane-risk models could also translate to rate increases as the market transitions to this new paradigm, he adds.
Alterra Capital CEO Marty Becker says he thinks the company is in a good position to “take advantage of what appears to be more favorable market opportunities” as the Jan. 1 renewal season approaches.
ACE CEO Evan Greenberg says September was the best month for pricing this year, adding that “pricing overall continues to firm” as “more classes achieve positive rate while rate decreases were smaller.”
W.R. Berkley CEO William R. Berkley says a cycle change is “more evident.” The P&C market remains competitive but not as much as a year ago, he says.
Though rates are not rising as fast as the 5 percent-to-8 percent pace he previously predicted, Berkley says a turn in the market “is definite.”