Soft pricing and overcapacity providing buyers with leverage: AmWINS

by Artemis on October 28, 2015

Excess capital and the resulting soft prices, in the global insurance and reinsurance market, gives buyers in the sector additional leverage, but established relationships continue to show benefits, according to AmWINS.

The largest specialty insurance distributor in the U.S., AmWINS Group, Inc., has underlined the fact that buyers are in control in many areas of the insurance and reinsurance market, while markets are experiencing stiff competition and an overabundance of capacity from traditional, but more notably alternative sources.

While “alternative sources are nonetheless bringing new capacity into the marketplace with a variety of creative reinsurance vehicles (direct and sidecar),” says Jeff McNatt, public entity practice co-leader at AmWINS, “there is value in track record.”

The glut of alternative and traditional sources of reinsurance capital entering the market has resulted in a softening environment, of which the impacts are increasingly filtering down into primary and non-catastrophe exposed business lines, applying similar pressures, raising competition and dampening returns.

According to property practice co-leader at AmWINS, Harry Tucker; “Alternative capital levels are hovering in the $25 billion to $30 billion range, and are expected to increase at least into 2016.”

We’d hasten to add that the figure provided by Tucker likely refers to collateralized reinsurance and ILS capital put to work in insurance lines, but likely doesn’t include fully securitized products such as catastrophe bonds, which significantly increase the total volume of alternative capital in the global reinsurance space.

As buyers are confronted with a growing base from which they can purchase their re/insurance protection, naturally, providers try to secure transactions by offering cheaper rates and the inclusion of other incentives, such as relaxations on certain terms and conditions.

However, while some buyers are taking advantage of the current market challenges and resultant operating environment, others are happy to pay a little more to maintain industry relationships AmWINS notes.

“Loyal buyers are willing to pay a little more to someone they know and are comfortable with, syndicates they know will be around if there’s a big loss,” said McNatt.

It’s an interesting point, as one of the key discussion surrounding the rise of alternative capital and its providers, largely institutional investors, has been its longevity and permanence post a large loss event.

In recent months discussion has turned to the inability of some syndicates to get featured on programs and the fact that the largest ILS managers are increasingly seen as key partners, building relationships with counterparties and in many cases more likely to be around after major losses, it is thought.

The majority of reinsurance industry analysts, experts and executives in recent times, perhaps owing to its continuous growth and expanding sources of providers, have expressed an expectation that for the most part alternative capital will remain a feature of the market post-event.

Furthermore, notes McNatt, new entrants in the reinsurance space “are realising how hard it can be to get in on the property side,” an area where long-standing, solid relationships exist.

For this reason, and others, including the persistent rate decreases witnessed in the property re/insurance space, where the slump in pricing has been most dramatic and prolonged, alternative, or third-party reinsurance capital providers are increasingly looking to enter primary insurance business.

“Alternative capital sources such as Nephila Capital also are making a concerted push into the direct insurance marketplace, showing an appetite for risks in such areas as power transmission and distribution lines,” says McNatt.

This expansion trend has been documented by numerous industry analysts and experts in recent times, most notably surrounding the growing negative pressures that an overcapitalised and highly competitive property reinsurance market is having on other lines such as casualty and primary commerical insurance.

So while the glut of alternative and traditional reinsurance capital certainly results in a buyers market, the security, reliability and understanding that long-standing relationships offer both parties, is still an important and valuable element to ensuring sustainability and relevance in a rapidly evolving sector.

Hence the ILS managers, especially the larger ones, are seeking to make themselves regular partners for cedants, featuring at every renewal and growing their share of programs, while those suffering as a result can be the smaller monoline traditional players or the smaller Lloyd’s syndicates.

With the January renewals fast approaching buyers look set to take advantage of the additional leverage once again. Early reports are that some buyers are looking to strike deals to get price reductions beyond those that were expected, but we’re already hearing of push-back on this.

Leverage is a great thing, but not at the expense of discipline. Walking away perhaps remains the most disciplined approach to a buyer who thinks of nothing but further price reductions.

Here’s the thing. Buyers benefit from additional leverage, due to competition, excess capacity and lower prices, as AmWINS suggests, but if they push it too far then what do they end up getting?

In some cases the poorest quality of capacity and perhaps the underwriters that are willing to expand terms the furthest. At some point, as the market continues to soften, that has to become a less desirable thing for the average re/insurance buyer.

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