Willis Re and JLT Re published their reviews of the 1.1 renewal season today and, on first read, it is difficult to match their analysis with the “hardening” predictions heard with increasing confidence in Q4 2018 by underwriters.

JLT Re even said their global property cat index fell 1.2 percent at 1.1 despite the $80bn+ of losses in 2018. This time last year, in contrast, it was up 4.8 percent and that was a renewal widely regarded as “disappointing” by reinsurers and their investors.

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While Willis Re called its report “Contrasting Realities” and drew a distinction between loss-affected and peak peril exposed property cat markets and those that are loss-free.

This dichotomy was particularly noticeable in Europe - where 1.1 is a key renewal - and renewal rates were typically flat to down, explained Willis Re.

So much for a hardening market? Perhaps unsurprisingly, reinsurance stocks fell today albeit in another poor day for global equities.

But on reflection what the reports highlight is the reinsurance and specialty markets are behaving in a very economically rational way.

After all, capital is still plentiful despite the losses, tougher capital requirements and some modest investor withdrawals. What both the reports show is that (re)insurance underwriting capacity was the key driver of pricing at 1.1 and this will almost certainly remain the case throughout 2019.

In markets and classes where capacity has shrunk, rates are increasing - both in specialty and reinsurance classes.

For example, Willis Re estimates that over $500mn of primary global construction all risk capacity has exited the market during the last twelve months. As a consequence, it expects 2019 rates to be typically up 20-50 percent.

Aviation is another primary class experiencing consistent rate increases, albeit at more modest levels, and again reflecting the recent capacity withdrawals.

Retro rates were also up significantly at 1.1 with JLT Re saying “double digit”.

And again, capacity - was the key factor.

Collateralised capacity is a significant component of the retro markets and yet available capital to deploy at 1.1 was down because it was tied to support potential 2018 losses and creep.

Unlike Q4 2017 - which saw an estimated $10bn of new capital injected by ILS investors - there was not the same capital flows this time.

While there was some notable fresh capital - such as the $600mn+ injected by experienced ILS Dutch investor PGCC to capitalise RenaissanceRe’s Vermeer Re - other Third-party capital managers, such as Securis, Markel CATCo and Stone Ridge - are thought to have received a number of investor redemption requests.

Retro rates behaved accordingly.

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“Early JLT Re analysis indicates that alternative capital growth in 2018 abated for the first time since the global financial crisis”, JLT Re’s analytics head David Flandro explained.

“This is consistent with the tightening observed in the retrocession market as some investors pulled back allocations due to what were perceived as disappointing returns throughout the year, continued loss creep from Hurricane Irma and another series of costly catastrophe losses in 2018.”

And where ILS plays a less significant role and where capacity is plentiful - namely European treaties - rates were under pressure.

For reinsurers there was, however, good news in that demand for the product continues to grow. Including life and JLT Re believes the reinsurance market is now as high as $270bn in ceded premiums - an increase of nearly $10bn.

The big question remains at the 1.4 Japan renewals and the mid-year US renewals. Both markets experienced significant losses in 2018 but ultimately rate increases will be determined by how much capacity is available…

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