Reinsurance market’s capital structure transformed: JLT Re

New institutional and third-party capital entities augmenting the global reinsurance market’s capacity at a time of persistent benign loss activity has transformed the sector’s capital structure, but developments at mid-year renewals could signal change is near, according to JLT Re.

Jardine Lloyd Thompson (JLT) Group’s reinsurance brokerage subsidiary, JLT Re, has joined a host of reinsurance and capital markets experts and analysts in examining the influential changes witnessed in the reinsurance industry in recent years, and the resultant structural changes.

In the reinsurance brokers latest Viewpoint report, ‘Change in the air?,’ its Global Head of Analytics, David Flandro says; “The capital structure of the reinsurance market has undergone its most significant transformation in living memory as asset managers have been attracted to the sector’s low portfolio correlations and relatively high yields.”

The persistent influx of alternative reinsurance capital, adding to the base of traditional capacity that still enters the sector, low levels of losses and changing reinsurance buying habits has contributed to several years of price declines in the reinsurance market.

The ensuing competition from many alternative, or third-party reinsurance capital providers also helped to spark a merger and acquisition (M&A) trend that is ongoing today, forcing firms to search for scale, relevance and profit while rates continued to drop in the double-digits.

JLT Re notes that this trend continued into 2015 and further dictated the January renewal season, with many expecting more of the same at the recent June/July renewals.

However, this wasn’t the case, and as noted by JLT Re’s Global Chief Executive Officer (CEO), Mike Reynolds; “Although pricing remained under pressure across most lines of business at 1 June and 1 July, there were early signs of some stabilisation in certain segments, albeit at historically low-levels.

“The flattening trajectory of reinsurance rates during these renewals indicates change is again underway as increasing demand for reinsurance, an easing in the rate of alternative capital entry and reinsurer consolidation are coalescing to create an eventual pricing trough.”

Other market analysts noted recently that alternative reinsurance capitals influence on the sector likely means a structural change in the reinsurance pricing cycle, while Goldman Sachs reiterated the prediction of price stabilisation, albeit at structurally lower levels.

And this is exactly what JLT Re noticed during the mid-year renewal period, a time that has become increasingly influential in shaping the direction of the market, something that JLT Re says was particularly evident in 2015.

Increased reinsurance demand, ease in the influx of alternative reinsurance capital entry and structural M&A activity, says JLT Re, saw prices across some business lines stabilise at mid-year renewals, “albeit at structurally lower levels,” confirmed JLT Re.

On these points, the report states that increased reinsurance demand was a result of buyers taking advantage of low pricing and favourable terms and conditions, and that demand should rise with global efforts to increase re/insurance take-up.

While JLT Re expects the entry of alternative capital to persist, it does see it slowing more than some forecasts and predicts that insurers will still prefer traditional reinsurance companies for certain risks.

Furthermore, as the growing protection gap, which is also highlighted in the report and has been emphasised by numerous industry participants in recent months, continues to reveal a significant opportunity for the re/insurance and insurance-linked securities (ILS) markets to innovate and protect, some of the capacity should find its way into new, emerging markets.

Flandro expands on this; “The report shows that this is the time for buyers to review strategies and relative costs of capital. The burgeoning increase in demand will create important opportunities for insurers and reinsurers, alike.

“Today’s current environment of abundant capacity, coupled with a renewed focus on innovation, provides an opportunity for carriers to make genuine strides in creating new solutions for underinsured risks, including comprehensive flood and terrorism coverage, and the development of cover for relatively new risks such as cyber, reputational, supply chain, fourth generation nuclear and autonomous vehicles to name a few.”

It remains to be seen if the price stabilisation witnessed during mid-year renewals is a sign of things to come or somewhat of an anomaly, but if the glut of capital and benign loss period continue underwriting discipline, innovation and the ability to adapt will remain as important as ever.

And perhaps reinsurance market players will have to get used to the structurally lower, but more stable pricing environment that so many industry analysts have predicted in recent times.

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