Traditional reinsurers have continued to seek to differentiate themselves in order to secure signings at the January reinsurance renewals, as they fight back against alternative reinsurance capital and ILS, according to a report from broker Aon Benfield.
Reinsurers have focused on using what Aon Benfield term their competitive strength in underwriting as they respond to price decreases of between 25% to 40% allowed by insurance-linked securities (ILS) investors and some collateralized reinsurance funds in 2013.
Traditional reinsurers have strategically underwritten contractual features that are difficult for ILS and alternative reinsurance capital players to replicate, said Aon Benfield, referring to a general relaxing of terms and conditions that have been a feature of the January reinsurance renewals.
Of course, what this means is that reinsurers have been underwriting at some of the lowest pricing levels seen since at least 2005 while at the same time relaxing terms and conditions on the contracts underwritten. To some this may sound like giving away much more for much less as a reaction to the influx of more efficient underwriting capital from third-party investors through ILS and collateralized funds. It is to be hoped that underwriting diligence has been maintained and that too much is not being given away in an effort to maintain share of markets where perhaps traditional capital is not the most efficient type.
Aon Benfield says that continued inflows of competitive capital look set to help reinsurance buyers to attractive renewals through the rest of 2014 at the key April, June and July market junctures. It will be interesting to see how much further pricing can decline at these points, as any further declines will be on top of declines experienced a year earlier, particularly at the mid-year renewals.
Global reinsurer capital grew by 5% during 2013, according to the report, but at the same time demand for U.S. hurricane reinsurance remained flat. With alternative reinsurance capital also up slightly, with Aon Benfield putting it at $45 billion, and likely taking a larger share of U.S. wind risk this suggests that the additional traditional reinsurer capital will have gone into other lines of business.
The expected returns of pension funds, life insurers, endowments and high net worth family offices continue to drive interest in alternative asset classes including insurance-linked securities and collateralized reinsurance funds, said Aon Benfield. Reinsurers will continue to incorporate the strengths of this alternative capital within their businesses through sponsorship of catastrophe bonds, use of sidecars and formation of collateralized reinsurance and third-party reinsurance capital management units.
Aon Benfield said that it will; “Continue to focus on contractual differences that can detract from the value proposition of traditional reinsurance for each client in comparison to alternative capital.” In this mission the broker said that it has made material progress for clients who wanted the hours clause on named storms relaxed, more favourable reinstatement provisions and other terms and conditions adjustments.
Through this relaxation of various terms and focus on areas that ILS and alternative reinsurance capital providers cannot offer as yet Aon Benfield says the value proposition of traditional reinsurers is improved as it enhances relationships, better meets reinsurance buyers needs and will help the market grow as a whole.
Again, it has to be noted that by relaxing terms at a time of declining prices traditional reinsurers need to be extremely careful not to increase their exposures too much. This could result in a greater use of retrocessional reinsurance in future years, as reinsurers take on more risk for lower returns meaning they need to ensure a greater level of retrocessional protection for themselves.
The cost of reinsurance capital has been on the decline for nearly every class of reinsurance business for two renewal cycles now, according to Aon Benfield, with the most dramatic declines being in U.S. hurricane risks. The broker expects that this will result in more opportunistic reinsurance buying in the near-term and says that buyers of reinsurance continue to look at how they can leverage these low reinsurance prices to help them grow strategically in peak risk zones.
Aon Benfield believes that an increased availability of multi-year catastrophe reinsurance from traditional reinsurers who incorporate alternative capital into their underwriting will help buyers believe that strategic growth is a sustainable opportunity and will ultimately help to grow reinsurance demand over the long-term.
Aon Benfield believes that the excess capital in the reinsurance market, from both alternative and traditional sources, will eventually help to stimulate greater demand. This should bring growth opportunities to all sides of the market and it is in these growth opportunities that the real opportunities will lie with those who understand how best to leverage different types of underwriting capital.
If an equilibrium between alternative reinsurance capital and traditional reinsurance capital can be found and the market learns where its capital is most efficiently focused we could enter a period of much stronger reinsurance demand growth. The market still needs to focus on development of models and analytics in tandem with this search for an equilibrium in order to support deployment of capital into new growth areas.
Aon Benfield says that for insurers and reinsurance buyers the opportunities to make use of cheaper risk transfer and more attractive coverage options to generate growth have never been greater. This buyers market for reinsurance will benefit the end-users of insurance policies in future, helping to keep prices down and lower the chances of significant spikes in insurance costs after catastrophe events strike.
The current market conditions should also further smooth the reinsurance pricing cycle after catastrophe events as well. With the market already well-capitalised and further alternative capital likely to enter the market at the sign of any price rises, we may now have reached a point where the cycle is much less prone to the price spikes seen in hard markets in the past. For any traditional reinsurers who have relaxed their terms at this renewals in the hope of maintaining market share so they can benefit from the next time prices harden this could be a concern.
Aon Benfield said that an evolution is needed to enhance the competitiveness of traditional reinsurance. It has already begun to push this goal through encouraging reinsurers to relax the hurricane hours clause and to focus on improving reinstatement provisions and lowering their costs, which it sees as a way for traditional reinsurers to differentiate and fight back against ILS and alternative reinsurance capital.
The broker said that it has made substantial progress at these renewals for clients who wanted to enhance relationships with large, traditional reinsurers, rather than bind coverage with lesser known alternative providers.
This is perhaps another sign of some sort of equilibrium being found. With some reinsurance buyers more focused on relationships becoming more tied to large global reinsurers who offer more relaxed terms, while others who are more happy diversifying their sources of capital rely increasingly on alternative reinsurance capital. Where this leaves smaller traditional reinsurers is an interesting question.
The January 2014 reinsurance renewals seem to have been a buyers market for most companies seeking cover, whether from alternative and ILS sources where prices continued to decline or from traditional reinsurance firms where terms became more attractive.
This has likely been a good renewal for ILS investors and collateralized reinsurance funds, who have likely grown their share a little. It has also been positive for large, global reinsurers who have maintained shares through offering better terms and pricing.
There is a segment of reinsurers, however, who may not be feeling so positive, the smaller perhaps more property catastrophe focused, where it may not have been so possible to drop pricing as far or to relax terms enough to get on signings. We will likely better understand whether this has been the case as we move further into 2014 and reinsurers report results including these renewals.
Read our other January 2014 reinsurance renewal coverage:
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