The April 1st reinsurance renewals are approaching rapidly and this year it is expected that the key Asia-Pacific region renewals will provide a demonstration of the expanding reach and influence of alternative reinsurance capital and insurance linked securities.
The April reinsurance renewals are a key date in the Asia-Pacific reinsurance calendar with many of the regions large reinsurance programs coming up for renewal. As such market participants and observers will be watching the renewals closely to see just how much reinsurance rates are softening and just how far the influence of new capital can reach.
In recent years the Asian market has suffered its fair share of reinsurance losses which have helped to keep rates moving upwards, even when other regions of the world have been softening. Property catastrophe reinsurance renewals in 2012 saw some steep rate rises in Asia-Pacific markets, as the insurance sector struggled with losses from 2011’s heavy catastrophe year.
Last year, the 2013 April reinsurance renewals saw largely flat rates across much of Asia-Pacific with most reports saying that the growth of reinsurance capital was largely responsible for the flattening of prices across the region. Alternative reinsurance capital and ILS began to make their presence felt in the region, with collateralized reinsurance playing a growing part of the large reinsurance programs which renewed.
Global catastrophe losses remained relatively low throughout the rest of 2013 while traditional reinsurers built up stores of capital and inflows of alternative capital from third-party investors such as pension funds remained high.
The reinsurance market now approaches the April 1st Asia-Pacific renewal season with record levels of traditional reinsurance capital on-hand and abundant interest from the capital markets in participating in an ever wider spectrum of risks and geographies. This should make the April renewal season a real benchmark for just how soft the reinsurance market has become as well as how far-reaching the influence of alternative reinsurance capital and ILS has become.
This years April renewals will give the market a chance to see year-on-year pricing changes in the Asia-Pacific market perhaps for the first time since ILS and alternative reinsurance capital really came of age. The ILS market has grown considerably and the amount of alternative capital in the reinsurance market in ILS and collateralized forms has grown significantly since before the 2011 catastrophe year, so we could really see how this growing segment of capital markets participation can make its presence felt.
Of course the Asia-Pacific renewals are not always the easiest for the collateralized reinsurance markets to participate in. Some Japanese reinsurance buyers, for example, still place considerable weight on traditional reinsurer relationships, ratings and the perceived permanence of traditional reinsurance capital. This can make penetrating Asian markets a slower process for ILS.
Despite this some sign of the expanding reach and growing influence of ILS and alternative capital is expected to be visible in the April renewals, particularly in property catastrophe reinsurance renewals, with year-on-year pricing looking set to be down as much as 15% according to observers.
Reinsurer Swiss Re said that it expects pricing at the upcoming April reinsurance renewals will not see as steep a decline in rates as was seen in January this year. The reinsurer said in its results; “The next major renewal dates are in April and July, when Swiss Re expects less margin erosion in natural catastrophe business than experienced in January and stable rates in casualty lines.”
Other observers and market participants are not so bullish. Some Artemis has spoken to suggest rate declines in Asian reinsurance markets could be steeper than January, due to the fact that this is the first renewal after a low catastrophe loss year with the well-capitalised market and high levels of competition between reinsurers and alternative capital likely to influence pricing.
The world’s largest reinsurer Munich Re acknowledged that April may be challenging, when it announced its fourth-quarter results earlier this year. Munich Re said price pressure in April may be even greater than seen in January, as the Asia-Pacific renewals include more of its non-proportional catastrophe reinsurance renewals. Munich Re is expecting that competition from alternative reinsurance capital will be high at the remaining renewal periods in 2014.
Another observer which forecasts pricing pressure is the world’s largest asset management firm Blackrock, which said earlier this year that it expects to see a broadening of the price pressure applied by alternative reinsurance capital in the remaining 2014 reinsurance contract negotiations.
Finally, rating agency Moody’s Investor Services said that it believes that the January reinsurance renewal pricing set the tone for the rest of the major renewal periods through 2014, suggesting that the April Asia-Pacific renewals would see further price reductions available.
The April 1st reinsurance renewals are not only limited to Asia-Pacific programs, a number of U.S. reinsurance renewals and others around the world also occur at this juncture. Those as well should give the market a better idea of where rates are headed for the key June and July renewals, when many of the key U.S. property catastrophe reinsurance programs, which are likely to be most influenced by ILS and alternative capital, will be renewed.
It’s going to be interesting to see just how far rates decline at the April reinsurance renewals and also any anecdotal evidence from brokers reports on whether collateralized reinsurance capacity has made further inroads into Asia-Pacific reinsurance programs in 2014.
With the influence of insurance-linked securities (ILS), collateralized reinsurance and alternative reinsurance capital considerably greater than it was a year ago, we could see the inroads made in Asia-Pacific markets become much deeper and more meaningful than ever seen before.