Appetite for reinsurance brings moment for creativity. NA cat rates 20-25%+ down: Gallagher Re

The appetite of reinsurance capital to deploy has brought around a moment for creativity, broker Gallagher Re has said. Demand for reinsurance opportunities outstripped demand for protection at the July renewals, resulting in softening prices and North American property catastrophe rates tumbling 20% to 25% or more in some cases.

In its First View report for the July 1 reinsurance renewals, broker Gallagher Re paints a picture of a market with abundant capital and an inexorable appetite to deploy it.

“Strong reinsurer performance and record capital levels are driving pricing improvements while enabling a renewed focus on more creative and efficient risk transfer solutions,” the broker explains.

Citing “risk-adjusted rate reductions across many classes and geographies,” Gallagher Re says that more important from the buyer side was the opportunity to “reshape programs and improve long-term portfolio resilience,” all of which was supported by greater “reinsurer flexibility on structure as well as price.”

As a result, more innovative and creative approaches for protection have returned to reinsurance, with soft market features now abundant.

These included multi-line, multi-year and aggregate reinsurance structures, which are all available at more attractive price points now, Gallagher Re explained.

“Cedants are increasingly implementing tailored solutions to manage earnings volatility and optimize capital efficiency, using improved market conditions to enhance structure alongside achieving rate reductions,” the broker continued.

Nowhere has this been more evident at the mid-year renewal season than in property reinsurance.

Programs attracted significant capacity and reinsurance capital providers competed on both price and terms, Gallagher Re said.

Property catastrophe risks saw the biggest declines in pricing, with North American cat accounts seeing reductions of 20% to 25% or more for the best performing, while the broker said similar trends were seen in other regions.

Reinsurer catastrophe budgets remain healthy after a below-average first-half of major losses, while alternative capital has continued to build, in particular in catastrophe bonds.

Tom Wakefield, Global CEO of Gallagher Re, said, “The data shows a market defined by strong capital, healthy returns and increasing competition, all of which are improving outcomes for clients.

“Importantly, this is not only about price. The same forces are enabling clients to access more tailored and efficient reinsurance solutions, often at price points that would not have been achievable in recent years.

“The focus now is on how effectively clients use these conditions to optimize their programs and build more resilient portfolios for the future.”

Wakefield further stated that what differentiated the July 1 renewals was the speed at which conditions have advanced.

Reinsurance capital continued to expand, while “while demand barely moved,” Wakefield said.

He added, “That widening gap between supply and demand has become the defining feature of the market: one we identified at January and April, and which intensified through the mid-year renewals rather than eased.

“As long as this imbalance continues, capital management will be a prominent question for reinsurers — who remain keen to write business if the economics are acceptable, but will look to other options if not.”

The capital availability and the industry’s problem solving skills have brought around this moment of creativity in reinsurance, allowing buyers to secure much needed structural improvements.

One question remains unanswered, while price is declining at pace how much more in risk adjusted rate adequacy equivalent is now being given away through these more creative structures?

If property cat rates are down 20% to 25% or more, what would those figures really be if you accurately measured and valued the additional exposure being assumed through this moment of creativity?

Ominously, Wakefield said that while the picture may seem one of a very soft reinsurance market he does not believe we are at the bottom yet, as discipline remains for now.

Even with the pace of change that has been seen in price and terms Wakefield said, “we are not seeing the excesses of prior soft cycles.”

“We are mid-cycle, not at the bottom — which is precisely why cedants’ actions now could matter for years to come, and why reinsurers continue to seek access to attractive partnerships at acceptable terms.”

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