Reinsurance cycle may have turned, rate increases expected for US cat-exposed captives

In a development that may impact certain captives, the reinsurance underwriting cycle may finally have turned, although price rises look modest, suggesting a flatter cycle, according to a Fitch Ratings report.

"Group captives that have meaningful exposure to catastrophe risk we expect will see their reinsurance rates rising," said Don Thorpe, senior director at Fitch.

Thorpe explained that catastrophe reinsurance rates for these captives will rise most (low double digits) for captives with US property-catastrophe exposure - especially in the areas that suffered losses in 2017 - and less so (single digits) outside of the US.

Property-catastrophe reinsurance rates increased at January 1, 2018, which according to recent report from brokers is the first rise since 2013.

Natural catastrophes caused economic losses in excess of $300 billion globally in 2018 and insured losses of around $130 billion, making 2017 on of the most costly years for the insurance sector on record.

The losses had a relatively limited impact on most reinsurers' capital as they were well spread between insurers, reinsurers and capital markets, and Fitch did not downgrade any reinsurers as a result.

In spite of large catastrophe losses in 2017, such as from the Californian wildfires and hurricane Harvey, Irma and Maria, the rate increases were modest.

The report suggested that growth in the alternative capital sector has altered reinsurance market dynamics, making capacity shortages less likely and the underwriting cycle potentially flatter.

Fitch noted that ILS investors have already largely replenished most of the capital consumed by last year's cat losses.

The agency's outlook for the reinsurance sector remains negative, reflecting continued pressure on earning from competitive pricing, alternative capital and low investment yields.