Capital, convergence, competition = reinsurance renewal rates fall

Reinsurance rates-on-line have fallen at the January 1st 2014 renewals in nearly all classes of business and geographic regions, as strong capital levels, convergence capital and competition put downward pressure on pricing, said reinsurance broker Guy Carpenter today.

Strong balance sheets among reinsurers and alternative reinsurance capital or insurance-linked securities (ILS) players, due to a relatively low loss experience and an “Unprecedented influx of convergence capital” have spurred competition and innovation at renewal time, according to Guy Carpenter’s 2014 global renewal report.

The result of this high capitalisation and strong competition for signings has been surplus capital across most business segments, said Guy Carpenter, with competition spilling beyond property catastrophe lines into other areas of the global reinsurance market.

Guy Carpenter’s Global Property Catastrophe Reinsurance Rate-on-Line, which provides a proxy for the direction of reinsurance renewal pricing across the market, fell by 11% at the renewal. Much of this decline was driven, once again, by a further slide in U.S. property catastrophe rates, which dropped by 15%. However Europe and the UK have also seen steep declines in pricing, with falls of 10% across Continental Europe and 15% in the UK witnessed and risk adjusted reductions in pricing of as much as 20% achievable in some cases.

The report notes that this is the first reinsurance renewal in over a decade where all major territories saw pricing move in the same direction, with some isolated exceptions. Loss affected areas such as Germany, some parts of the Nordic region and Canada have seen pricing increase due to higher levels of catastrophe losses suffered during the year.

The result of these declines and high levels of competition has been a buyers market, with greater flexibility on terms and greatly reduced pricing available. As the reinsurance market softens further primary insurers have been able to secure increasingly better terms and brokers and reinsurers have been forced to innovate faster to make offerings more attractive given the intense competition.

“It is difficult to think of another time in recent history where multiple factors have come together to support a market so focused on individual client need. There is tremendous innovation driving tailored solutions at reduced pricing to the benefit of our clients,” commented Lara Mowery, Global Head of Property Specialty at Guy Carpenter.

The softening market conditions have spread beyond property catastrophe, said Guy Carpenter, with prices declining in many other reinsurance lines. The impact of this is less dramatic outside of property cat, but non-catastrophe business showed a general trend of decline as reinsurers deployed more capacity into these segments of the market.

Guy Carpenter reports that casualty pricing was generally flat to down, despite factors such as low investment yields and adverse developments for some U.S. workers compensation writers.

With record levels of new capital entering the market in 2013, Guy Carpenter said that it has helped its clients achieve specific coverage and pricing goals through the use of both traditional reinsurance and diversified capital market products. U.S. property catastrophe was the sector where this was most evident, with clients seeking an extension of hours clauses, improved reinstatement provisions and expanded coverage for terror exposures

Multi-year coverage was also more available at this renewal, with enhanced features such as price adjustment caps, said the broker, with many of its clients taking advantage of the greater flexibility and coverage on offer. Guy Carpenter believes that the reinsurance market is becoming less standardised and coverage has become more tailored, thanks to the greater innovation and competition stimulated by capital inflows and market conditions.

Reinsurance sector capital levels remain at near record highs, said Guy Carpenter, with the broker recording a marginal rise to $322 billion at the end of 2013. Insured losses were below average, with just $40 billion recorded compared to a ten-year average loss of $60 billion. This contributed to ample capital available at the January 2014 reinsurance renewals, meaning the reinsurance supply has often outstripped demand from insurers.

This could result in some interesting financial updates from reinsurers as we move through 2014, if they have not been able to deploy all of their capacity, and could put more pressure on reinsurers to return capital to investors through share buybacks. It is also going to exacerbate any expense ratio issues that come to light later in 2014.

“We have seen a surge in capital, through both alternative and traditional vehicles, over the last two years, which has transformed the nature of the reinsurance sector’s capital structure,” said David Flandro, Head of Business Intelligence at Guy Carpenter. “Today’s market conditions present both challenges and opportunities for all market constituents.”

Most traditional reinsurers have embraced the need to innovate to meet clients needs in this competitive market, said Guy Carpenter. Offerings of more tailored coverage using options such as aggregate and quota share cover, multi-year arrangements and early signings at reduced prices were seen, while new product offerings for terror and cyber risks have also been developed.

Guy Carpenter said that this shows that the traditional reinsurance market is willing to accommodate client needs and is willing to adapt to changing circumstances. Insurers, meanwhile, continue to appreciate the understanding that traditional reinsurers bring to the transaction as well as their ability to pay claims swiftly. The attraction of reinstatement provisions offered by traditional reinsurers, something not typically provided by convergence players, has also been well received.

The result of all of this is that reinsurance buyers largely retained the bulk of their traditional coverage at January 1 2014, said Guy Carpenter. Some large reinsurance buyers focused their programs on a smaller, key group of partners, while carriers outside these groups were forced to fight aggressively to secure shares through offering more competitive pricing as well as additional coverages and products.

“Buyers continue to place a high value on historical relationships with traditional reinsurers,” added Nick Frankland, CEO of EMEA at Guy Carpenter. “With pricing significantly lower in most lines, reinsurers are offering increased flexibility on reinstatement provisions and other terms and conditions, which is helping clients to obtain more from core partners.”

It is these smaller reinsurers who have struggled, in some cases, to get onto larger programs and as a result have dropped their pricing and increased their offerings, who may find these renewals begin to stretch their profitability. Giving away too much for too little will put pressure on these reinsurers and if pricing stays low, perhaps going even lower at the mid-year renewals, we could see pressure on smaller reinsurers to grow through mergers and acquisition in order to compete.

Guy Carpenter says that the excess capacity in the reinsurance market, combined with subdued economic and premium growth, persistently low investment returns, statistically higher long-term catastrophe loss trends and reduced reserve releases, have forced reinsurers to adapt and innovate in order to find new opportunities.

Looking ahead, the broker sees the potential emergence of reserve deficiencies as likely to be an important factor over the next five years and Guy Carpenter said that we are approaching a point where accident year deficiencies may become more common than redundancies. With longer tail lines particularly displaying this trend, Guy Carpenter says that it emphasises the need to explore new and prudent avenues for growth.

So the January renewals look like they will set the stage for a year of softer reinsurance rates, greater competition and increased innovation as reinsurers adapt to hold onto business. Much the same trend we have seen through 2013. The influence of insurance-linked securities (ILS) and third-party reinsurance capital continuing to converge with the reinsurance market will keep the pressure on as we move through the year ahead.

As long as this trend continues we are set for a very interesting 2014, with some traditional reinsurance players destined to come under pressure at earnings time. For the ILS players the issue likely to come to light is just how much more cost-effective, or efficient, is ILS and alternative reinsurance capital? The fact that ILS has a lower cost-of-capital is now clear. But, at what point does it become less attractive for ILS players to participate in reinsurance business if prices keep falling?

Read our other January 2014 reinsurance renewal coverage:

– Aon Benfield: Buyers market at January reinsurance renewals

– Willis Re: Reinsurance price softening broadens, overcapacity continues