April reinsurance renewal sees more rate declines, broader terms: Willis

The reinsurance pricing trend has continued at the April renewals, with loss free accounts largely down in terms of pricing, and terms and conditions seen to be continuing to broaden, according to insurance and reinsurance broker Willis Group.

Willis Re, the brokers reinsurance arm, published its latest 1st View report, titled ‘Change fast forwards’ this morning. In it the broker discusses the pricing trends witnessed at the April renewal which, while not the biggest reinsurance renewal period, provides a good indication of the pricing environment and how that will carry on into the mid-year renewals if conditions remain the same.

Willis Re says that the 1st April 2015 renewal season saw a continuation and reinforcement of recent trends, with the reinsurance market continuing to favour the buyers.

“There are no signs the tide of falling rates and widening terms and conditions will be reversed,” the report says, painting a gloomy outlook of the market environment reinsurers can expect to experience for the foreseeable future while major losses remain absent from it.

Willis Re reports that catastrophe loss free earthquake account renewals in Japan have seen price declines of -10% to -15%, for Japan combined perils between -10% to -12.5% and in the U.S. nationwide accounts the same -10% to -15% decline was seen for loss free renewals. Korea also saw a decline of -5% to -10% for loss free accounts, while India witnessed -20% to -25% declines.

That’s definitely not the rate picture that reinsurers had been hoping for and Willis Re’s report shows that in 2015 pricing is on a decline at a similar rate to that seen in 2014 so far. It will be interesting and very telling for reinsurers whether the June and July key U.S. property catastrophe renewals come under similar pressure.

The abundance of capacity was once again evident at the April renewals. In Japan Willis Re cites the example that a number of reinsurers have been willing to take on new areas of the risk spectrum which have previously been outside of their appetite.

Broadening of terms and conditions continued to be evident in the Japanese renewals, with hours clause extensions and event definitions being the most clear examples. This remains a concern, but one that will only become apparent after major losses when some reinsurers may suffer outsize, or above market, losses.

Some buyers explored pre-paid reinstatements in Japan, Willis continues, but there was no discernible move towards them across the market. Most buyers have been focused on achieving price reductions, which is similar to prior renewals in other regions of the world.

There has been some evidence of additional traditional limit being purchased by non-life and mutual insurers in Japan, which will be pleasing for the reinsurers seeking to deploy capacity. Panels of reinsurers continue to be adjusted, both due to the ongoing M&A and also increased tiering.

In Korea, another key reinsurance market at the April renewal, another year free of catastrophe events put pressure on pricing. However here contract conditions remained largely unchanged with structures the same as previous renewals.

In the United States nationwide accounts the continued abundant availability of capacity drove further competition in terms of both pricing and conditions. Some cedents are now investigation buying more cover while pricing remains attractive, however, so there is some evidence of demand increasing.

Most of the national accounts now have fully diversified panels of reinsurance capital, including collateralized reinsurers, sidecars, ILS funds, and other non-traditional vehicles, as well as traditional reinsurance capital.

The penetration of the large ILS players and third-party capital vehicles into the majority of reinsurance programmes continues. The next phase will be to secure larger lines in these programmes, to allow managers to take on more inflows of investor capital.

As well as the growing acceptance of ILS capital in these renewals, the structures used continue to move towards alternative or non-standard terms. Aggregate protection and shared limit covers are becoming more widely accepted Willis Re said.

Reinsurers are faced with the reality that “the historic market cycle continues to come under extreme strain” the report continues, adding that reinsurers are displaying a clear sense of urgency, as they increasingly try to implement major changes to their strategies and business models.

As more of the partnership strategies of large primary insurers become clear the sense of urgency among reinsurers is rising. These core partner strategies (such as the ACE and Blackrock ABR Reinsurance Capital Holdings initiative) and insurers reluctance to deal with smaller following reinsurance markets, mean that the pressure on reinsurers is set to ramp up.

“ACE’s recent announcement of its innovative ABR Re joint venture with Blackstone is a clear example of this trend, although the act of a major primary company directly accessing the lower cost capital currently available via the capital markets has ramifications across the entire global reinsurance market,” Willis Re explains in the report.

We would add that the ABR Re initiative seems a clear attempt to extract as much of the risk premia out of the business ACE underwrites as the firm can. So while reducing the need for ACE to use as much reinsurance in the short-term, if it’s a successful strategy it could grow quickly and become something much more impactful to the reinsurance market over a longer horizon.

The report goes into some detail on the M&A trend in reinsurance, a trend which saw the next deal announced yesterday in Endurance and Montpelier Re. The key to a successful M&A is demonstrating that the combination of two re/insurers is greater than the sum of its parts, Willis say, something that as yet needs to be demonstrated from recent deals and only time will tell there.

“The lure of diversification is growing ever stronger and speed of execution is becoming a key competitive advantage,” the report explains.

The April renewals provide further evidence of the changes happening in reinsurance. A key point made by Willis Re is the continued penetration into U.S. nationwide accounts of ILS. Once these larger ILS and third-party capital vehicles get onto those programmes, at the expense of traditional players, it is hard to see them being pushed back out.

On the disruptive business models that are emerging, such as the ABR Re and perhaps the Fidelis Insurance models, it’s important to understand that while these will be hugely disruptive they are the early iterations of an evolution of the reinsurance business model.

As new models are tried and tested and other start-ups or partnerships emerge, we are likely to see the range of ways that the traditional reinsurance market gets disrupted widen significantly. It may be a case of watching these as they develop but being very aware that something even more disruptive may follow shortly on their heels.

“While the first quarter of 2015 has clearly demonstrated the urgency and diversity of change across the industry, this can only increase in the short-to-medium term as the global reinsurance market evolves and re-forms to a new paradigm,” the report concludes.

The April reinsurance renewal clearly shows that there has been no respite for reinsurers as yet and suggests that June and July will witness similar. Expect this to increase the noise around M&A and disruptive business models.

The continued broadening of terms has, at some point, got to become a concern, as expanding coverage offered over a number of consecutive renewal seasons does mean that more risk is being taken on at ever-lower rates. That will come back to bite anyone that hasn’t been extremely disciplined in their underwriting.

But at the same time, it seems that some are carrying on regardless, following their strategies of gaining deeper market penetration and acceptance (yes, we’re referring to certain ILS players), it will be interesting to see how broad that acceptance can get over future renewals.

Read more of our reinsurance renewal coverage here.