Supply demand imbalance to lead reinsurance prices down in 2016: S&P

The continued imbalance between supply and demand for reinsurance capital will lead pricing down by up to -5% in 2016, according to Standard & Poor’s and the rating agency does not expect the imbalance to level out over the next year.

S&P estimates that reinsurance rates will be down, on average, from 0% to -5% through the next year, so a less rapid although continued softening of the market as capacity continues to weigh on pricing.

Capital levels in reinsurance remain at all-time highs, with both excess traditional and the continued interest and ambition to grow seen among third-party or alternative capital providers helping to ensure the overall industry capital levels grows.

S&P notes that despite all this supply the industries demand for reinsurance capital has declined somewhat, as large global insurance cedents adjusted their buying strategies, looking to buy less reinsurance from fewer counterparties, in many cases.

Softening is not just seen and expected to continue on price alone in reinsurance, terms and conditions continue to widen, S&P notes. However, the market consensus is that widening of terms is moderate and generally discipline is seen as terms and conditions are widened largely for risks that reinsurers can understand.

There is some concern that as terms broaden any loss events could result in some reinsurers facing an outsized share of the exposure, due to expansion of factors such as the hours clause, or the bundling of risks within one cover.

S&P expects that reinsurers’ strong enterprise risk management practices will continue to protect industry capital through 2016, however, but at the same time the pressure that underwriters have been facing is set to continue.

Meanwhile the competitive forces that a soft market engenders will continue to push reinsurers towards M&A, with an expectation that more deals will come to light. However S&P notes that the list of attractive targets is already shrinking, making decisions to enter into a transaction more difficult.

At the same time, despite the softening and pressure, external parties are expected to continue to want to enter reinsurance to benefit from diversification of their operations.

But the M&A is not expected to alleviate any pressures from reinsurance, and instead of removing capital is actually understood to add more in most cases.

So the outlook is moderating and S&P call for a soft-landing to the soft market, but more pressure is ahead making discipline increasingly important over the key January reinsurance renewals season.