Reinsurance renewals favour cedents, same expected mid-year: Aon

Ample capacity, favourable pricing and terms & conditions (T&C) witnessed at Q1 2016 renewals are expected to continue at the important mid-year reinsurance renewal season, supporting a continuation of the buyers market seen in 2015, according to broker Aon Benfield’s latest report.

Aon Benfield has noted that April renewals “continued the positive trend in the reinsurance value proposition for insurance companies,” which were seen at the key January 2016 renewals, as cedents “found ample capacity to meet risk transfer needs as well as support geographic and product growth goals.”

In line with reinsurance market commentary from other industry participants and analysts, brokers highlighted an uptick in demand for reinsurance at April renewals, in major markets that includes the U.S., Japan and the expanding Indian re/insurance sector.

Insurers and reinsurers continue to benefit from benign catastrophe losses that is helping firms report profits and combined ratios that perhaps mask true underwriting performance, aided in part by some aggressive reserve releasing from certain companies.

For reinsurers the wealth of capacity from both traditional and alternative sources continued to dampen rates at April renewals, as seen at January 1^st 2016 and throughout last year, resulting in an intensely competitive marketplace that remains favourable to cedents.

“Reinsurers continue to invest in capabilities to support ceding company growth from diversifying exposures including US mortgage credit risk, life and annuity risk and other emerging risks such as cyber liability and corporate giga-liability risks,” said Aon.

The previous trend of insurers reportedly retaining more risk and therefore needing less reinsurance appeared to have shifted somewhat at January 1^st renewals, and it looks as though some cedents continued the trend at April renewals.

Aon notes increased demand for tactical reinsurance transactions also emerged during the April renewals, something that was highlighted by Moody’s Investors Service recently, which highlighted a rise in insurers utilising reinsurance for strategic purposes.

As noted by Aon the longevity risk transfer market continues to grow and currently reinsurers appear more than capable of assuming as much longevity risk that comes their way, supporting the recent rise in demand for reinsurance protection.

Also, as the market heads towards the June/July renewal period Aon predicts further demand for Florida risks that will likely result in a net increase, with the depopulation from Florida Citizens expected to continue.

“Continued depopulation and potential opportunistic purchases will drive additional private market demand, though demand changes from government entities remain less clear,” said Aon.

So long as the global reinsurance marketplace remains overcapitalised insurers will likely continue to take advantage of favourable pricing, T&Cs and the flood of efficient, diversifying capacity from both the traditional and increasingly alternative markets to satisfy their risk transfer needs.

Reinsurers are increasingly fighting for a seemingly shrinking share of the market, and absent consolidation or a significant loss event, it’s possible T&Cs will loosen further and additional coverages that perhaps aren’t properly understood, such as cyber and terror, will be assumed more and more as reinsurers look to secure business and see off competition.

Clearly, this can be a dangerous game to play for reinsurers and brings discipline and efficiency to the forefront of industry discussions once again, a common theme throughout the current softening landscape.

Another avenue for increased reinsurance demand could come from regulatory changes including Solvency II and relaxed guidelines for foreign companies in places like India, says Aon.

“Our outlook for the June and July renewals period remains positive, with insurers likely to achieve improvements in pricing, terms and conditions similar to those achieved for Q1 2016 renewals,” said Aon.

While any rise in demand is positive for reinsurers and also insurance-linked securities (ILS) players that might find more opportunities to deploy capacity as demand spikes, it’s vital players remain disciplined and know when to walk from underpriced, or poorly understood business.

Conditions in the marketplace are challenging enough for the majority of firms, so it’s wise to remain sensible and maintain underwriting discipline now more than ever, to avoid being in an even more difficult position when losses start to normalise and the market begins to turn.

Also read:

– Broad range of structures helped ILS market grow in 2015: Aon Benfield.

– Reinsurance expenses up, returns down, but profits continue: Aon.

– Alternative reinsurance capital grew 12% to $72bn in 2015: Aon.