U.S. wind reinsurance prices moderate most at July renewal: Guy Carpenter

by Artemis on July 9, 2015

Reinsurance broker Guy Carpenter is in agreement with its peers, that at the July 1st renewal price declines were seen to moderate, although it notes that this moderation has been predominantly on U.S. wind exposed programs.

Hurricane Irene satellite imageIt’s unsurprising that U.S. wind exposed property catastrophe reinsurance programs should be the first to see the price declines slow down, given this has been the area of highest competition, greatest volume of available capacity and where much of the insurance-linked securities (ILS) market capacity has concentrated.

More broadly, however, ongoing price declines were seen across “virtually all geographies and lines of business,” Guy Carpenter notes.

The broker also cites the additional demand for limits as partly responsible for the stabilisation of prices, particularly for U.S. property risks. At least $4 billion of new demand for U.S. wind exposed programs has been reported as seen at the mid-year June and July renewal, helping to absorb a little of the excess capital targeting that sector.

Guy Carpenter saw increased demand for reinsurance capacity at the July renewal, compared to previous seasons, with an expansion of tailored coverage solutions also witnessed.

“It was hard to imagine based on the two previous years that we would hear a reinsurer reference lack of capacity as a reason for cutting back on a program, but this did occur at times this June and July,” commented Lara Mowery, Managing Director and Head of Global Property Specialty at Guy Carpenter.

Reinsurance capital continued to grow at the mid-point of 2015, with interest in the sector and new underwriting opportunities remaining high. This has helped to stimulate demand, with ample capacity now available at low pricing, as well as to limit further rate softening.

“There is certainly no capacity shortage overall and reinsurance capital has grown once again. However, the combination of a significant increase in limit purchased and margins that have continued to thin, created a dampening on the market’s response to additional rate pressure, particularly with regard to US wind,” Mowery explained.

Following two consecutive seasons of price declines and with new demand helping to soak up some capacity, reinsurance price declines slowed over the past couple of months, especially on the U.S. wind exposed programs. This led to July seeing markets in a position of “dwindling aggregate for US wind-exposed zones” for the first time over the last three renewal seasons.

That’s certainly an important factor, demonstrating discipline among many markets, including the ILS players some of which returned capital at the mid-point of this year. However demand is now seen to be rising elsewhere around the globe which could help the capital flows to continue.

Worldwide property catastrophe coverage demand continued to grow, Guy Carpenter said, estimated to be up about 8% since spring 2014 by the reinsurance broker. This is primarily due to new demand as well as companies using a portion of their savings to enhance their protection, fill gaps in coverage or to increase their coverage as their businesses grow.

“New capital continues to flow into the market and become increasingly embedded in the reinsurance space,” Mowery continued. “This has spurred insurers’ confidence to execute business plans that may require additional limit purchased, such as geographic expansion or line of business growth. The industry is also beginning to assess solutions for some of the larger under-insured or uninsured risk issues, including expansion of flood coverage options and the evolution of cyber coverage.”

In the U.S. property reinsurance market Guy Carpenter reports that capacity that was authorised but unused shrunk to 17% versus 26% at the previous July renewal season. However that figure remains above the average of 15% seen since January 2011. U.S. property per risk excess of loss reinsurance placements continued to be dominated by the traditional market, with capacity remaining abundant at the July renewal.

Globally, the Latin America market saw both coverage and capacity increased for most pro rata business in July. Rates continued to decline in the Asia Pacific region, but at a lesser degree than previous renewals. Australia and New Zealand, was the only market where recent catastrophe events were seen to influence the renewal, with impacts to the net accounts of insurers and to reinsurers that were underwriting quota share and aggregate excess of loss reinsurance.

Alternative reinsurance capital from third-party investors continued to impact the reinsurance market through the first half of 2015, but pricing discipline has been evident and this leads Guy Carpenter to join the calls for a floor on pricing to have been reached.

“Investors’ pricing discipline persisted into the first half of 2015 and recent feedback suggests that further catastrophe bond pricing reductions will be unlikely in the near-term,” commented Cory Anger, Global Head of ILS Structuring at GC Securities.

GC Securities figures show that the first-half saw $5.15 billion of maturing 144A catastrophe bonds, which resulted in the market shrinking to $21.559 billion of outstanding 144A issues, as new issuance only amounted to $3.84 billion (144A only). Note, Artemis’ figures include some privately placed deals and life transactions, hence our figures for issued and outstanding cat bonds and ILS are higher.

The U.S. casualty reinsurance market continued to soften at the July renewal, Guy Carpenter notes, although at a slower pace than seen in 2014 and early 2015. Ceding commissions on casualty programs continued to show moderate improvements, with excess of loss programs seeing modest rate reductions, the broker reports.

UK directors and officers liability and professional liability renewals saw expanded coverage and widening of terms and conditions, while at the same time there was more consolidation of programs. Reinsurers are now monitoring cyber risk accumulations within this sector specifically and also across their entire portfolios.

U.S. workers compensation quota share capacity grew at the renewal, with additional and higher single claimant limit quoting and binding seen up to $20 million. Guy Carpenter also notes that the renewal of the Terrorism Risk Insurance Program Reauthorization Act (TRIA) added some stability to this market.

Finally, in the global aviation and aerospace reinsurance renewals Guy Carpenter did not notice any adverse effect from recent aviation loss experience. Abundant reinsurance capacity continues to exist for aviation risks, the broker notes.

So overall the downward trend is continuing, although at a more moderate rate, while the spill-over effect from property catastrophe exposed pressure into other lines may even be expanding to a degree.

However the stabilisation in U.S. wind exposed reinsurance programs will be seen as positive by the markets and ILS players alike. It will be interesting to see whether other core property catastrophe lines such as U.S. earthquake risks are next to plateau.

Whether we have truly reached a bottom for the U.S. property catastrophe wind exposed market remains to be seen.

If global catastrophe insured losses remain low throughout the rest of 2015 we could see further declines in property catastrophe pricing at the January 2016 renewals, although likely at a slower pace as the markets seek to minimise any further erosion of margin.

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