Reinsurance sector a story of good news & bad news: Guy Carpenter

by Artemis on September 12, 2015

Reinsurance broker Guy Carpenter opened the 2015 Monte Carlo Rendez-vous with its regular and now eighth press briefing, but the news for the reinsurance underwriting community is mixed, with it being described as a “good news, bad news story.”

Guy Carpenter sees the challenging market environment continuing, with no signs of anything turning the current situation of excess capacity, low levels of loss and resulting price pressure more positive.

“Abundant capacity, the ongoing influx of new capital and limited loss experience, continue to put pressure on the reinsurance sector, while recent M&A activity is adding a new dynamic to the mix,” the broker explained.

Speaking at the Monte Carlo press briefing, David Priebe, Vice Chairman of Guy Carpenter, commented; “As brokers we’re the glass half full type, we see opportunities in all phases of the market.

“For the underwriting community the U.S. market remains challenging. It’s a good news, bad news story.”

The news in the run up to Monte Carlo this year has perhaps been more negative than many would have hoped for and Guy Carpenters messaging is aligned with other observers, rating agencies and market participants.

For reinsurers, conditions aren’t set to get any easier any time soon.

Priebe continued, explaining the two sides to the story; “Good news; the industry continues to benefit from below average catastrophe loss activity and further positive reserve development.

“Bad news; this has resulted in excess capacity, which continued to weigh on pricing resulting in a very competitive insurance and reinsurance market.”

President and CEO of Guy Carpenter Alex Moczarski concurred, saying; “The reinsurance industry continues to evolve and adapt to changing and challenging market conditions on several fronts.

“Continuing inflows of new capital and moderate loss experience mean that capacity remains abundant, maintaining pressure on pricing, terms and conditions. The long-predicted consolidation of the market has now started with inevitable consequences for rationalizing reinsurance buying.”

However, we would perhaps put the fact that pricing declines have noticeably slowed, every report in the run up to this years Rendez-vous has reflected this, into the good news bracket, to at least give reinsurers something to be cheerful about.

Moczarski said that a number of factors are mitigating price decreases, including; “More moderate decreases in U.S. catastrophe reinsurance, especially the wind peril.”

And also that; “Reinsurers were more successful in resisting demands for large price reductions following two years of steep declines, while demand actually increased in some lines as clients continued to seek access to innovative new products and improved terms and conditions.”

Priebe explained that U.S. price decreases have also been offset by increased Florida demand, where $4 billion of additional limit was required to meet client needs at the mid-year renewals.

And while property catastrophe remains the most competitive and challenged part of the market, it is still growing, Priebe said.

“Globally we estimate the overall property cat market has expanded by 8% to $352 billion,” he explained.

Moczarski said that there is a trend towards clients demanding more from brokers and reinsurers, but they don’t want to pay more in the current environment, while regulatory requirements are becoming more intrusive and expensive. All of which adds to the pressure in reinsurance today.

Priebe explained that from Guy Carpenter’s view-point, which is important to take note of as the broker has a broad view of the global reinsurance market, that the mid-year renewals saw a focus on adequate pricing of risk.

“Discipline has been present, as many reinsurers resisted demands for very aggressive price decreases, resulting in reduced capacity from those markets,” he commented.

This was most evident in new programs and layers where reinsurers were keenly focused on price adequacy, he continued, resulting in a number of firm orders having to be revised before programs could be completed.

The U.S. casualty reinsurance market is also still softening, Priebe added, with this largely due to excess capacity migrating from catastrophe risks to casualty, as well as improved loss ratios in underlying lines of business.

However, more good news is that the pace of rate softening in casualty was slower at the mid-year renewals than was seen in January, further reflecting the nearing of a floor to pricing perhaps.

Looking ahead the pricing expectations from Guy Carpenter are aligned with the rating agencies and other intermediaries, with an expectation that further softening of rates is to be expected at the key January 2016 renewal, but at a slower rate than seen last January.

“We anticipate ample capacity for the U.S. casualty reinsurance market, with pricing not expected to firm at January 1st 2016 renewals. We also expect U.S. property reinsurance prices to remain relatively weak as supply for the most parts exceeds demand.

“It also remains to be seen whether the tactical exploitation of soft markets by some buyers, and reinsurers’ resistance to aggressive demands for decreases will be repeated at January 1st.”

And the outlook for the EMEA region, given by CEO of EMEA operations at Guy Carpenter, Nick Frankland, is not much different, following what Frankland terms a “testing period” for the market in the last year.

“Clients will continue to seek improved terms, yet reinsurers are beginning to get near to technical minimums, which will not allow enough scope for firm orders to be easily won,” he forecast.

The impact of recent M&A on reinsurance groups, capacity and how that affects buying patterns is also likely to play into future renewals, Frankland suggested.

“Such a dramatic tension should work to clients’ benefit as they try to find the greatest value available and construct the most responsive panels,” he said.

For Asia Pacific, James Nash the CEO of the region at the broker, said that M&A is also a factor that will affect the future market environment, as capital from the East travels West in deals, but also comes the other way as well.

Overall the view is that capital levels in reinsurance globally are high and perhaps set to get even higher, as interest from the ILS space and alternative capital plus the new investors coming into the market from Asian markets all apply further pressure.

There could be an “intense battle over reinsurance signings” as the years M&A deals play out, according to Frankland, with new companies looking to grow and prove their value, while those that haven’t merged continue to seek to remain relevant and protect positions.

“All vying for their shares of a still shrinking pot of overall ceded premium,” Frankland said. This could generate further competition, but can generate value for clients who can pick and choose the counterparties they want to work with.

Frankland closed with what could be a prescient prediction for the way the market is shaking out, under the weight of capital and new risk transfer structures and business models.

Reinsurance is increasingly assessed within a company’s capital structure, making the “imperative to optimise the cost of capital and its allocation likely to reduce traditional reinsurance spend over time, but provide significant opportunities for alternative approaches to risk transfer,” Frankland said.

That could be the worst scenario possible for the traditional reinsurance business model, perhaps making adapting and leveraging the new alternative approaches to risk transfer and also capital, a vital piece of the market’s future.

Read all of our Monte Carlo Rendez-vous 2015 coverage here.

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