London market to take on 10% more U.S. windstorm risk in 2014

by Artemis on December 16, 2013

The London insurance and reinsurance market plans to take on at least 10% more U.S. windstorm risk in 2014, adding to abundant capacity from both traditional and non-traditional sources as we approach the January reinsurance renewals.

Executives from PwC said today that they expect the London reinsurance market to increase its exposure to U.S. wind in 2014, compared to the amount of hurricane risk underwritten in the market in 2013. The reason for the increased interest in U.S. wind is a desire to tap into markets which have the best rates available in a generally softening U.S. property catastrophe market.

Reeken Patel, insurance partner at PwC, said; “As we approach the 1/1 milestone, confidence from the London market about the coming year is broadly in line with 12 months ago. A barometer for confidence is comparing how plans this time last year for 2013 compare to those now set for 2014. It seems market participants are holding aggregate planned combined ratios broadly flat.”

It’s a difficult time for the London reinsurance market to achieve this goal, the property catastrophe market is awash with both traditional and non-traditional underwriting capacity, but it does need to find ways to maintain its profitability wherever possible and U.S. hurricane risk is one area of focus.

“This won’t be easy to achieve as there continues to be an abundance of capital in the property catastrophe market. We are seeing this manifest itself through plans for the London market to take on more than 10% greater exposure to US windstorm risks in 2014 than they had planned to in 2013. This increased capacity for such risk, coupled with lower than expected losses, are piling pressure on 1/1 rates as well as terms and conditions in related lines,” continued Patel.

Dom del Re, catastrophe insurance expert at PwC, added; “2013 has been the least active hurricane season since 1982. Whilst this is good news for earnings, it puts further downward pressure on rates in peak regions such as the US. The London market is responding to this by using its networks to access new markets where rates are holding or increasing.”

London insurers and reinsurers will also be looking outside of property catastrophe risks to find areas of higher and rising rates. This may bring focus to new markets which with the addition of new capacity from re/insurers in search of rates and the chance to maintain combined ratios could result in softer rates further down the line.

Patel explained; “Our market view suggests an improvement in initial planned profitability from 2013 for some classes, in particular for accident and health. Interestingly we see greater consideration of increased acquisition costs as part of the planning process. It seems as though the market is pricing in the expectation that aggregate acquisition costs will rise as brokers modify the way in which they serve their clients and how they charge for this. Their challenge seems to be to ensure they recognise value for any such increases and to engage their brokers accordingly.”

Herein lies the fear for many reinsurers as we move into 2014. An already soft U.S. property catastrophe reinsurance market still offers some of the best rates around, which to alternative reinsurance capital and insurance-linked securities (ILS) players are still very attractive and now we see more traditional markets also increasing their focus on these risks.

This could become the perfect storm for the property catastrophe focused reinsurer; declining rates, increasing capacity from ILS and alternative sources taking a larger share of the market, now increasing capacity available from the traditional side as well, higher retentions at primary insurers and increasingly relaxed terms and conditions.

None of that bodes well for some reinsurers as we move through 2014. Expect some interesting earnings statements and calls at the end of each quarter as the real impact of the January reinsurance renewals becomes clearer.

The Insider today reports that broker Aon Benfield is squeezing reinsurers even harder than ever before, pushing for further relaxation of terms and conditions such as the removal of the hours clause for named storms and reinstatements being paid on a pro-rata basis.

Less available business, more competition on both sides of the market, efficient underwriting capacity growing fast and a further relaxation of terms could all add up to some tough decisions needing to be made if expense ratios begin to look less sustainable at some major players later in 2014.

There is an interesting and potentially structurally important year ahead.

Subscribe for free and receive weekly Artemis email updates

Sign up for our regular free email newsletter and ensure you never miss any of the news from Artemis.

← Older Article

Newer Article →