The direction of reinsurance pricing hangs in the balance as insurers, reinsurers and brokers prepare to convene in Monte Carlo for their annual discussions in the run-up to the Jan. 1 renewals.

Reinsurers registered price rises in the midyear renewals in April, June and July, dominated by Asian and U.S. business, mainly in response to the heavy catastrophe losses of 2017 and 2018. They were also buoyed by a resolve from primary insurers to fix underperforming parts of their business, with the resulting higher prices having a knock-on effect on reinsurance rates.

An eye on the weather

But what happens to pricing next will depend greatly on what happens with catastrophes throughout the remainder of 2019. The industry had a relatively loss-light first half — Swiss Re estimated that catastrophes cost the insurance industry $19 billion in the first half of 2019, down from $26 billion in the same period of 2018, and well below the 10-year average of $36 billion.

Mike Van Slooten, head of market analysis in broker Aon PLC's reinsurance solutions division, said in an interview that if catastrophe activity remains as benign as in the first half, "I think a lot of the pressure on reinsurance pricing is probably going to dissipate." He added that there was still a lot of capital in the traditional reinsurance sector, and that Aon is expecting growth to resume in the alternative reinsurance sector.

The alternative reinsurance sector, which features capital markets-backed products such as insurance-linked securities and collateralized reinsurance, suffered heavily from the 2017 and 2018 catastrophe losses, as it was hit by both claims and so-called trapped capital, where investors' funds are retained until ultimate claims payouts become clear. But although some investors have retreated from the market, Van Slooten said newer investors, including asset manager PIMCO, have entered.

However, with Hurricane Dorian having reached Category 5 status before making landfall in the Bahamas, and threatening a wide swath of the Southeastern U.S. coast, a quiet second half is starting to look unlikely. Van Slooten said that if a series of big losses were to occur again in 2019, leaving investors facing three years of losses in a row, "it is potentially going to have quite a big impact." He added: "There is quite a lot of sensitivity around what happens."

Although the rate rises seen at the midyear renewal dates were confined to territories and lines of business that had suffered losses, what happens in the alternative market could have an effect on the Europe-focused Jan. 1 renewals, Van Slooten said, because of its influence on the retrocession market. Reinsurers buy retrocession to ease the burden of claims on their capital bases, just as insurers do with reinsurance.

"If alternative capital is impacted by another series of losses, retro capacity is only going to be more difficult to find," Van Slooten said.

Upside risk

But others think the effects might not be so significant for European business. Scott McIntosh, group reinsurance and credit director at U.K.-based insurance group Aviva PLC, said in an interview that he didn't think the activity in the alternative space would have a big impact.

"I would say the more stable and better-rated reinsurers haven't been as reliant on the retro market for their capacity," he said. In the current market, he added, "There is probably a little bit more upside risk than downside risk as far as a buyer goes."

He pointed out that a big influence on the price a buyer pays is where the majority of the insurer's business is and whether it had suffered losses. For Aviva, whose major markets are the U.K. and Canada, it has been "a relatively quiet year," he said.

Noting that Aviva has had "another clean year" on its big reinsurance programs, such as its catastrophe program, McIntosh said that based on his discussions with brokers and other market participants, he was expecting a "flat renewal" for programs with no losses.

"I think trying to get rate reductions this year will prove maybe a little bit more difficult, but we will have to see where the market comes in," he said.

He also noted that reinsurers had reported positive first-half results, and that when this happens heading into a renewal season, "they have all got a little bit of extra capital and they want to deploy that."

Breaking the silence

While pricing is a staple of insurers', brokers' and reinsurers' pre-renewal discussions at Monte Carlo, cyberrisk, and in particular how to share the burden of silent cyberrisk, is also becoming a regular talking point.

Silent, or nonaffirmative, cyberrisk occurs where cyber cover is neither explicitly included in nor excluded from a policy, potentially exposing insurers and reinsurers to risks they had not anticipated nor priced for. Rating agencies and regulators have been pushing for the industry to tackle it, but companies have found it difficult to progress.

Asked whether reinsurers were becoming more willing to help insurers with the burden of silent cyberrisk, Patrick Bousfield, executive director and head of the New York cyber practice at reinsurance broker Capsicum Re, said: "Watch this space."

Noting that Monte Carlo was a good place for insurers and reinsurers to discuss tackling silent cyber, he added that in the coming weeks, "reinsurers are going to make big statements to say: Rather than just cover [cyber] as nonaffirmative, we are going to work through methodology to affirm this and to make this part of the P&C market."