Re/insurers continue disciplined response to market conditions

by Artemis on November 22, 2016

Global insurers and reinsurers continue to walk way from business that is priced too low, as discipline remains paramount in the softening market cycle, and competition in the property catastrophe space and elsewhere persists.

Insurers and reinsurers continue to report their third-quarter 2016 results, and a number of companies have noted the ongoing challenges in the softening market cycle, which is causing re/insurers to adjust their business mix and pullback in certain areas.

Global reinsurer Swiss Re reported net income of $1.2 billion for the third-quarter, but noted a need to reduce peak natural catastrophe exposure as certain portions of the book failed to meet economic profitability requirements. As a result of this reduction the firm’s loss ratio increased in the quarter.

The reinsurer also revealed that it reduced property business that is exposed to natural catastrophes within its Corporate Solutions unit, as again it failed to meet economic hurdles. As a result of the softening market, which the reinsurer says has accelerated faster than it had expected, the firm’s combined ratio on the corporate solutions side and reinsurance side year-to-date are 103.7% and 100.4%, respectively.

The majority of reinsurance business lines remain under pressure from a series of headwinds, including the inflow of alternative reinsurance capital, the benign loss experience, and investment market turmoil. But property catastrophe lines continue to experience the steepest rate declines, generally, and the majority of alternative capital is focused here also, further intensifying competition.

As a result, and in response to the need for underwriting discipline in order to limit any potential overexposure or nasty surprises when losses start to mount, which is bound to happen at some point, re/insurers have pulled back from competitive lines and looked to deploy capital elsewhere, resisting the temptation to write business just for the sake of it.

Validus Holdings, in its third-quarter earnings call noted that its reinsurance arm, Validus Re, continues to show discipline in the challenging marketplace, “letting weakly priced business go elsewhere.”

Validus Re’s third-quarter results reveal a 10% decline in net premiums despite an underwriting income of $67 million, which the company says reflects both “rate reductions and nonrenewal of underpriced business.”

Bermudian reinsurer RenaissanceRe, covered at the time by Artemis, was also a firm that wrote fewer managed catastrophe premiums in the third-quarter, reflecting tough market conditions.

The message of a competitive marketplace and rate declines was echoed by a number of insurers and reinsurers during their third-quarter earnings releases. But importantly, a number also noted that they decreased the volume of business underwritten in those segments, emphasising that underwriting teams are practicing a disciplined approach to the softening market and attempting to reduce rate reductions where possible.

Arch Capital Group’s President and Chief Operating Officer (COO), Marc Grandisson, revealed that the company witnessed “continued softening rate positions across the P&C world.”

The firm’s reinsurance sector focused on specialty areas such as agriculture and motor to offset declines in property, cat, and marine, which experienced significant rate decreases. As a result Arch Capital “accordingly decreased” its underwriting in those areas, explained Grandisson.

Rates in the reinsurance sector are expected to remain pressured as the marketplace approaches the key January 1st renewals, and without the removal of a substantial amount of capacity it’s expected that rates will fall further, albeit at a slower pace than previously.

It’s possible that the volume of property catastrophe risk on reinsurers’ balance sheets continues to fall and the business mix shifts further to other lines such as casualty, and specialty lines where relationships and expertise can provide firms with opportunities outside of the highly competitive property catastrophe space.

As pressures mount, reserves thin and with the possibility of an increase in losses, as highlighted by the recent impact of hurricane Matthew and what could have been, discipline is set to remain a key focus for reinsurers and walking away from unattractively priced business could well continue to be part of the business mix so long as the softening cycle persists.

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