Reinsurance renewal prices fall by as much as 20% across sector

The just-completed April reinsurance renewals saw a continuation of recent trends, with pricing down as much as 20% across most lines of reinsurance business, as the effects of record traditional and alternative reinsurance capital continue to be felt.

Further price declines had been expected to manifest at the April 1st reinsurance renewals, with the pressure from capital markets and non-traditional investors continuing (as forecast by Artemis) and the traditional reinsurance market continuing to be well-capitalised. However, the latest renewals report from reinsurance broker Willis Re states that price declines have been seen across the board, showing that the impact of this abundent reinsurance capital is spreading.

Willis Re said that reinsurance rates have softened across all lines of business, with rate reductions of as much as 20% seen on some lines of business and in some regions. This confirms the fears of many traditional reinsurers, that the market continues to soften and we are likely to see further year-on-year declines on the U.S. reinsurance renewals in July.

The trends observed at the January renewals have continued and show clear signs of accelerating, said the reinsurance broker. One of the key factors keeping up the pressure on rates is the ‘seemingly unabated supply’ of capital from third-party investors, said Willis Re.

The addition of continued inflows of third-party capital on top of the well-capitalised traditional reinsurance capital, combined with muted new demand for reinsurance capacity, is creating a perfect storm of too much capital and capacity chasing a pool with too little supply. Hence the continuing acceleration of reinsurance rate declines.

John Cavanagh, CEO of Willis Re, commented on market conditions; “The 1 April renewals have seen a softening of rates across nearly all classes and geographies which, in turn, has allowed buyers to achieve substantial savings in the cost of their reinsurance protections. Some buyers took the opportunity to buy more cover and some renewals saw an expansion in terms and conditions.”

The expansion of reinsurance contract terms and conditions is an issue which could come back to bite the market in future. Some reinsurers have reportedly relaxed terms quite considerably, which some market sources claim is at the advice of their brokers. This could leave certain elements of the market more exposed than we’ve witnessed in recent years. How that will pan out should the market suffer a series of major losses remains to be seen.

“The overriding target for most buyers, however, was to achieve price reductions or an increase in ceding commissions. Restructuring and consolidation of covers by some of the larger buyers continues to be a trend along with M&A consolidation causing further compression in price in favor of the buyer,” explained Cavanagh, suggesting that the relaxation of terms is not the main target of buyers.

Interestingly, Willis Re say that many primary insurance company buyers, particularly international and regional U.S. companies, remain cautious about accessing third-party capital for reinsurance cover through the insurance-linked securities (ILS) and collateralized markets.

Despite this the insurance linked securities and catastrophe bond market has just ended a record first-quarter, with $1.585 billion of risk capital issued and a number of new sponsors came to market helping to boost issuance. It is no surprise that brokers see clients which are still not comfortable with collateralized covers and this does hold promise for future years when these insurers may begin to tap the capital markets as well.

Willis Re notes that; “Increased investor demand for catastrophe bonds allowed some primary buyers to sponsor new bond offerings and, much like the traditional placements, the new issuances provided improved terms for buyers with savings on price and broader coverage.”

Willis Re said that traditional reinsurers continue to work hard to leverage their client relationships, capacity and technical underwriting capabilities in order to protect, and in some cases grow, their market shares to help withstand the challenges of competing with the ILS and collateralized reinsurance markets.

Willis Re notes that capital management at traditional reinsurers has also been stepped up, with an increase in share buy-backs, special dividends and other ways of returning capital to shareholders or better managing their capital base.

What’s interesting here is the fact that reinsurers cannot utilise their excess capital in order to grow their businesses currently. Despite the stated desire to expand to new and developing regions of the world, develop new products and provide broader risk transfer, reinsurers cannot seem to achieve this at a pace which allows them to utilise excess capital efficiently.

In spite of the softening reinsurance rate outlooks, Willis Re highlights that quoted reinsurer stock valuations remain attractively high and a number of companies have taken advantage through public share offerings, which provide existing investors with an exit strategy.

Alongside the primary reinsurance market, the retrocessional reinsurance market has also been a key area of activity for the ILS and collateralized markets and Willis Re said that they continue to dominate this space. This has enabled retrocession buyers to embrace the competitively priced capacity from ILS and collateralized players, allowing them to manage the risk they retain or cede more aggressively.

Perhaps most telling of where recent reinsurance market trends are heading, Willis Re said that as demand for property catastrophe reinsurance is not keeping up with the supply of capacity, capital markets investors are taking concrete steps to expand into new classes of business. In most cases, Willis Re says, the ventures looking to expand third-party capital into non-catastrophe risk are aligned with or managed by traditional reinsurers.

Willis Re explained; “The returns investors are seeking, aligned with the low expense ratio of a sidecar and, most critically, the investment arbitrage that is being taken, result in new vehicles targeting business at loss ratio picks higher than typically supported or sustained by traditional reinsurers”

This is adding a new competitive dynamic to non-catastrophe reinsurance markets, said Willis Re, as the long-anticipated arrival of alternative reinsurance capital into markets such as casualty begins. With reinsurance rate softening now clearly moving beyond the U.S. property catastrophe market, into other catastrophe zones and now new lines of business, the pressure looks set to increase on reinsurers as we move through the rest of 2014.

Peter Hearn, Chairman of Willis Re, commented; “The current reinsurance market clearly favors the buyer. The cost of reinsurance is falling much faster than original rates in many classes and territories. Comfortable though this situation may be for many buyers, the nagging concern remains as to timing. When will a lower cost of reinsurance feed through in lower original rates and put primary companies’ margins back under pressure?”

Willis Re’s renewal report cites rate declines of up to -20% on U.S. nationwide property rates for non-loss affected lines, up to -20% decline on Indian non-loss affected property rates, Japan earthquake rates down by as much as -17.5% and Korean loss-free property rates down up to -15%.

Also read our article from March: April’s reinsurance renewals to show alternative capitals influence.

Visit Willis Re’s website to download a full copy of its reinsurance renewal report, Willis Re 1st View April 2014.