Pressure abounds at mid-year reinsurance renewals: Guy Carpenter

by Artemis on June 3, 2014

Pressure on pricing, pressure on terms and conditions, pressure on reinsurers, pressure on retrocessionaires, pressure on the traditional reinsurance business model. Pressure is a key word in most commentary on the June 1 reinsurance renewals, it seems.

Yesterday we provided a first look at the results of the June, Florida-focused reinsurance renewals with our article discussing comments made by Validus Re’s Jeff Clements, in which he cited reinsurance price declines of 15% to 25% across many accounts in Florida.

This morning Guy Carpenter is next in-line with a review of the June renewal and the reinsurance broker also paints a picture of price declines, further relaxation of terms and conditions, high competition for signings and all-round pressure in the reinsurance marketplace.

Guy Carpenter said that the downward pressure on reinsurance pricing has increased since June 2013, as continued pressure from the capital markets and alternative capital, strong traditional reinsurer balance sheets and continued low levels of losses, all converge to create a perfect storm of declining prices.

Markets, both traditional and alternative, offered abundant capacity at reduced pricing, said the broker, ramping up the competition while at the same time pressuring terms and conditions and bringing multi-year transactions increasingly into focus.

Exacerbating the competitive market environment is the fact that traditional reinsurance markets are trying to protect their market share, while the alternative markets and ILS managers seek to deploy their growing capital bases, resulting in the race to the bottom on pricing we discussed yesterday as the competitive nature of some in their effort to secure premiums forces further price declines.

“Assessing the outcome of the June 1, 2014 renewal, it is clear that the pace of the pricing decline observed in 2013 has not relented. Reinsurance buyers received significant rate decreases for both Florida and non-Florida renewals, compounding 2013 decreases,” commented Lara Mowery, Global Head of Property Specialty at Guy Carpenter. “As catastrophe bond pricing continues to fall, reinsurers are continuing to find ways to compete. New product offerings are abundant, as flexibility and tailored coverage are becoming trademarks of this rapidly evolving market.”

That is an important point that we hope to hear more about in the coming months. New product development becomes ever more important as the competition increases in the reinsurance market. At the same time efforts must be taken to ensure reinsurers do not become over-exposed by offering more cover at ever looser terms, a job the brokers need to take ownership of to a degree as the advisors in the reinsurance transaction.

Continuing impact of reinsurance convergence

On the ILS and alternative reinsurance capital market Guy Carpenter said the impact of convergence on the broader reinsurance market continues apace. Investor demand for insurance-linked securities (ILS) continues to be robust despite the significant decline in ILS and catastrophe bond pricing seen over the last 18 months.

Guy Carpenter estimates that capacity from the alternative and ILS markets now amounts to $50 billion, or 15% of the global property catastrophe reinsurance limit available. Artemis believes this is likely a underestimation as the Artemis Directory of ILS Fund Managers shows close to $49 billion under management and does not include many of the more direct institutional investors in ILS and reinsurance.

Guy Carpenter notes the continuation of efforts to broaden the remit of ILS and alternative capital into longer-tailed lines of reinsurance business, such as casualty risks, noting the growing willingness of capital market investors to explore these opportunities.

The entry of ILS and alternative capital into casualty lines of reinsurance, as well as the renewed focus on those lines from traditional reinsurers seeking to avoid the declining prices in property cat, will converge and create pressured market conditions in casualty too it is expected. This is likely to benefit cedents with additional negotiating power at renewal time, as well as ultimately an improvement in pricing, structure and coverage.

Florida reinsurance renewals

Florida’s reinsurance rates have been on a steady decline over the last 18 months or so as the market became the most competitive area of the reinsurance market as ILS and alternative capital continued to seek to deploy the growing ILS capital base into the state’s property cat market.

Guy Carpenter notes that the June 2013 renewal was the first to see Florida experience the full magnitude of catastrophe bond price declines and the subsequent response from the traditional reinsurers. That means that we are now into compounded year-on-year declines compared to where the market was in 2012 from a profitability and return on equity point of view.

Guy Carpenter said that some quotes were above 2013 pricing levels, at the top end of the market spectrum, but the majority represented decreases of 5% to 15%. However, the broker said that on a risk adjusted basis many Florida reinsurance renewals saw price declines of 12.5% to 20%, with some accounts even seeing 25% declines from the levels seen a year earlier in June 2013.

When you add those declines to the accepted 10% to 20% decline in pricing seen in June 2013 you can begin to see how some reinsurers may not be finding the Florida market profit margin acceptable anymore, as Validus said yesterday when Jeff Clements stated that its Florida portfolio now has a lower RoE than other regions of the world.

“As reinsurers look to position themselves in a market that is particularly attractive to alternative capital, pricing approaches are more varied than has been typical for the Florida market,” said George Carse, Tampa Branch Manager for Guy Carpenter. “This year, heading into wind season following eight consecutive years with no hurricane loss and continued excess capacity, we are seeing solid discounts from last year’s pricing. Of course, there are still a range of outcomes around the average for individual company characteristics, so it is essential for those operating in the market to have a sound holistic and individual understanding of market dynamics.”

Retrocessional reinsurance renewals

Guy Carpenter also said that retrocession pricing fell at the June renewals, which it puts down to over-capitalisation in the retro reinsurance market as well as low loss levels.

The mid-year renewal is not typically a big time for retro buyers, with many buying annual covers on January 1st, but with the buyers marker conditions and opportunities that presents the retrocession market was busier than expected this year. Buyers now feel that market pricing and conditions make transferring large amounts of retro catastrophe risk more attractive than before.

However, Guy Carpenter notes that some retro programs had difficulty getting placed, perhaps as buyers tried to be too aggressive on pricing and the markets pushed back. This could signify the establishment of a floor on pricing for new retro protection in the Florida market, said the broker.

“As noted a year ago, one of the main challenges facing reinsurance buyers is the expanding variety of structure options from a growing number of providers,” Mowery said. “The dynamics of this renewal season demonstrate the benefits of consistent communication with markets and a thorough understanding of the risk being presented, particularly in a rapidly evolving marketplace.”

Guy Carpenters review of the mid-year June reinsurance renewal is does not present any surprises, the pressure has increased, prices have fallen further, terms continue to relax and the resulting options for buyers continue to expand.

The appetite of the alternative and ILS market continues to show investors understanding of their cost of capital, while the traditional market continues to seek to match this. It is encouraging that Guy Carpenter has noticed some push-back on pricing for retrocession, which Validus Re’s Clements also noted yesterday, and this aligns with the recent pricing of catastrophe bonds which have largely moved to pricing at mid and upper levels of guidance in recent weeks.

The next challenge for reinsurers and the ILS market will be getting through the 2014 Atlantic Hurricane Season unscathed, never a certainty, after which thoughts will turn to the January 2015 reinsurance renewals and just how far pricing might decline on global reinsurance programs at that key market juncture. All the signs point to further declines at that time if the loss experience of the reinsurance market remains relatively benign through the rest of this year.

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