Global reinsurance players small and large expect the soft market conditions to persist into 2016 as the search for a pricing floor continues and ongoing market challenges test reinsurers’ sustainability and market relevance, according to Standard & Poor’s (S&P).
The global reinsurance industry is enduring a testing time says insurance and reinsurance ratings agency S&P, with soft pricing, tighter regulations, intense competition, a lack of losses, excess capacity and a desire to remain relevant to cedants driving the sector’s most recent evolution.
“It’s a tough time now for the reinsurance business. Standard & Poor’s Ratings Services believes the industry is confronting these conditions with defensive strategies that for now will protect their market positions and balance sheet strength in this soft market,” said S&P.
After meeting with numerous reinsurance industry analysts, experts and executives during the recent industry event in Monte Carlo, S&P explains that like them, the expectation from many is that the soft market will carry on into 2016, “although the decline in rates will probably be less severe than in 2014 and 2015.”
This notion has been widely adopted by the majority of the reinsurance industry, with a number of analysts, companies and experts predicting a more stable reinsurance pricing environment moving forward, albeit at structurally lower levels than seen before.
S&P, in its post-Monte Carlo industry commentary, expects that on average pricing across all lines in the global reinsurance sector will fall up to 5% in 2016, so certainly an improvement from the double-digit declines witnessed throughout 2015.
Furthermore, the ratings agency noted some widening of terms and conditions (T&C) in the sector during 2015, but stressed that most industry participants it spoke with said this was occurring at the margins, “and that their companies were agreeing to such terms only for risks they could correctly price and prudently manage,” said S&P.
Again, this notion supports the maturity and growing underwriting discipline that became so vital as the market started to turn soft and continued down its challenging path.
When the rise of alternative reinsurance capital and heightened competition really started to pressure smaller and some of the larger traditional market players, relaxation of certain T&Cs was seen as a way of securing business in a competitive market, but a strategy that runs the risk of over-exposure and potentially crippling losses.
The maturity and shift to a more disciplined approach to reinsurance business was welcomed by S&P, which said; “This is consistent with Standard & Poor’s view, which credits the industry’s overall strong enterprise risk management (ERM) framework for supporting disciplined pricing and keeping rates from falling further than they already have.”
Despite average rate declines in the reinsurance space consistently being in the double-digits, across the majority of business lines during 2015, most large, European domiciled reinsurers experienced premium revenue growth during H1, says S&P.
“We expect this is because these companies can increase their share of business with existing cedants by leveraging their expertise, size, and scope to write private or bespoke deals that don’t reach the open market,” explained S&P.
In fact, according to S&P’s report the majority of large reinsurers that it spoke with at Monte Carlo digressed that recent growth had come from transactions of this nature, which can have more favourable economics than the competitive open market.
While this may have been the case for the majority of the larger, more diversified global reinsurance entities; it certainly isn’t the case for the smaller, most likely less-diversified market participants, of which the most promising avenue for growth appears to be through the engagement in merger and acquisition (M&A) activity, another market trend expected to continue and even intensify.
“Because all reinsurers can’t generate organic growth from existing clients or in bespoke transactions, we expect that there will be more M&A activity in the coming year, most likely involving smaller companies who feel they need the added heft to bolster their competitiveness,” says S&P.
The ratings agency also notes that it’s possible some of the smaller players will look to merge together, as the wave of consolidation that has been happening over the last 12 months or so in the insurance and reinsurance space has left a diminished number of potential targets.
Another force that is shaping the evolution of the reinsurance market and is also on the minds of European market players is heightened regulation across the globe, but in particular with the impending Solvency II implementation across Europe in January 2016.
S&P explains that many companies during Monte Carlo expressed a desire to gain an insight and better understand how the ratings agency will assess capital adequacy after the introduction of Solvency II, claiming that it “will continue to use our proprietary risk-based capital model to assess capital adequacy, as it is globally consistent and comparable.”
The general consensus from the reinsurance industry points to a continuation of the softening market environment into 2016 with further rate decreases likely, although at a structurally lower level than previously witnessed.
The larger, more diversified reinsurers are better equipped to withstand and navigate the competitive environment, but for smaller firms the challenging times signal a need for scale and relevance, which will most likely be achieved via M&A as organic growth for these companies is limited and currently extremely difficult to do so.
“Thanks to the actions the global reinsurers are taking, or contemplating taking, Standard & Poor’s doesn’t expect the industry’s rough patch to result in widespread rating changes.
“But because we expect their competitive positions, earnings, and capital to remain under pressure over the next year, we’ll be attentive to how reinsurers are assessing pricing, and the scope and speed of their responses to market conditions,” concludes S&P.
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