Reinsurance rates stabilising at renewal, ILS discipline contributes: Willis Re

Discipline in the insurance-linked securities (ILS) and collateralized reinsurance market at the recent June and July 1st renewals has helped reinsurance rates begin to stabilise, as supply and demand equalises in peak property catastrophe zones, according to Willis Re.

The reinsurance broker says that pricing stabilisation continued to become more apparent at the July 1st renewals, with pricing slowdowns in peak property catastrophe zones noticeable. After the relentless pace of price declines, any sign of a slowdown in rate decreases will be welcomed by the market.

In its latest Willis Re 1st View reinsurance renewal report, the broker explains that competition remains fierce for access to catastrophe risks, but even under competitive conditions discipline is evident and that is helping to stem the tide of price decline.

“Signs of reinsurance pricing stabilization are starting to emerge in peak property catastrophe zones as supply and demand begins to equalize,” Willis Re explains.

The trend towards stabilisation of reinsurance pricing is down to a number of factors, Willis Re explains.

Firstly, the “significant increase” in demand for catastrophe reinsurance capacity in Florida is seen as helping to soak up some of the excess capital in the marketplace.

Secondly, Willis Re notes that the “recent swell in capacity from collateralized reinsurance markets” appears to have slowed down. The broker also notes that a number of the ILS markets are “showing pricing discipline” by reducing the amount of capacity they are willing to offer to cedents.

Evidence from the catastrophe bond and industry loss warranty (ILW) market would seem to support this claim, as cat bond spreads have actually increased in recent months suggesting ILS investors have found their lowest point for return appetite, while ILW pricing seems to have bottomed out as well.

It seems rude not to mention that a number of large traditional reinsurers have also been reducing the capacity on offer to certain peak peril regions, as they also seek to remain disciplined on price and appear to have reached, or at least neared, a floor.

Willis Re also notes that the pull-back on availability of some collateralized reinsurance capacity limits has also affected traditional reinsurers who have relied on this for retrocession.

John Cavanagh, Global CEO of Willis Re, commented; “The June 1 and July 1 2015 renewal season offers reinsurers some hope. With the North Atlantic Hurricane season now underway, even if the predicted low-level of hurricane activity is realized, the outlook for 2016 might not be quite as bleak as may have been inferred from the January and April 2015 renewals.”

There are further pockets of increased demand, the broker explains, with some reinsurers offering “sufficiently attractive terms for some buyers to expand their proportional reinsurance buying.”

Additionally, the report notes that the insurance and reinsurance “M&A frenzy” continues, something we’ve seen evidence of in the last two days with the Willis-Towers Watson and ACE-Chubb deals.

Willis Re notes that; “Despite the unappealing short-term outlook for nearly all companies across the sector, such activity is helping to maintain current high valuations.”

And despite the unappealing outlook investor interest in accessing the returns of reinsurance businesses remains high, Willis Re says.

“Despite the diminishing underwriting and investment returns being delivered by the reinsurance industry, investor capital continues to be attracted to the sector, with some of the insurance-linked securities (ILS) funds backing collateralized re, catastrophe bonds, and other solutions showing strong year-on-year growth of their assets under management,” Cavanagh wrote in the report.

And it’s not just ILS managers and funds seeing increases in capital, Cavanagh explained, investors are also increasingly involved in direct investments and acquisitions.

“In addition to investing in ILS funds, fresh non-industry capital has also been making its presence felt through direct investment or acquisitions,” he wrote.

But despite the interest to throw more capital into the space from investors, companies operating in reinsurance are still finding that deploying this additional capital in a profitable way is challenging.

Despite these challenges, Cavanagh notes that “most managers remain encouraged that reinsurance retains an attraction for investment capital.”

Increasingly, this interest in investing in reinsurance is being seen at the risk-level rather than at the operating company equity level, which bodes well for continued growth of ILS activity but perhaps at a steadier rate, given the evident discipline on pricing.

Also of note from the Willis Re reinsurance renewals report is the fact that the broker noticed increased ILS capacity being put to work in Australia at July 1st, on low-level risks where the broker said the pricing appears acceptable.

In Florida reinsurance buyers used savings made, due to the steep price declines over the last few renewals, to purchase more protection at July 1st. Willis Re measures the overall increase in Florida reinsurance capacity demand at around $4 billion.

Interestingly reinsurer demand for quota share treaties led to some improvement in terms for cedents. Perhaps showing that while pricing may be bottoming out cedents still have power over terms and conditions on in-demand contract structures.

Across the rest of the United States, risk adjusted rate reductions were seen to be slowing as well, as the dynamics of supply and demand became more balanced. However coverage enhancements, such as the expansion of the hours clause and including terror cover continue to be supported.

It may be worth watching how terms and conditions move at future renewals as with little room to push pricing down much further, and if the market remains largely loss free, we could see terms coming under increasing pressure as buyers look to get more value out of their reinsurance purchases.

Willis Re reports that property reinsurance rates for loss free accounts were down -10% to-20% in Florida, -5% to -10% across the wider U.S., down -5% to -12.5% in Australia, -15% to -20% in China, flat to down -15% in Latin America, down -10% in the Middle East and the UK.

So overall, while the price declines are thought to be slowing, the market has still dropped another 5% to 10% in price (approximately) at these latest renewals it would seem.

Willis Re also notes that casualty catastrophe coverage seems to be gaining increased interest, as cedents look to become better covered. If the ILS market can find ways to structure casualty catastrophe covers this could provide an opportunity in future.

Casualty reinsurance was seen to be down roughly -5% to -10% across all loss free lines, Willis Re said, as the pressure from abundant capacity continues to spread.

Other areas of note for the ILS and alternative reinsurance capital markets include the Gulf of Mexico offshore wind renewals, which saw “further softening of rates due to severely depressed oil prices, shrinking demand and extreme overcapacity although conditions have held,” Willis Re said.

In personal accident and life reinsurance Willis Re noted limited appetite from ILS markets for risk at lower rate-on-line levels, but that ILS continues to pose a threat to the traditional market here.

So overall it is a picture of declining rates in many areas of the reinsurance market where the ILS players operate, although anecdotally moderating and helped by increasing discipline.

This discipline that Willis Re notes seems more like a lack of willingness to continue deploying capacity at any cost, which some might term common sense rather than a change of tack.

It will be particularly interesting to see how both traditional and alternative or ILS markets continue to operate and react to pricing in future renewals. Will some players pull-back from the market, if there remains some pressure on pricing, will they try to force a floor on pricing but perhaps let more go on terms? If the market remains loss free the renewal negotiations ahead will be increasingly interesting and hotly negotiated, we’d imagine.