In light of the recent January 1st 2015 renewal season, greater ‘client relevant’ reinsurers stood to benefit as competition and excess capital persisted, according to multinational financial services corporation, Morgan Stanley.
A recent report by the firm, titled “Reinsurance Renewals: Weakness Exposed,” explores the advantages and disadvantages that current market conditions posed for reinsurers during the important January renewals.
“We believe the more established, higher quality and client relevant reinsurers were most successful in defending themselves against the worst of the market excess,” explained Morgan Stanley.
Typically, more than 50% of total annual premiums are up for renewal at this time and Morgan Stanley feels that while rate declines were somewhat worse than predicted, reinsurers actually “held the line better than expected on contract terms and conditions.”
Throughout the report Morgan Stanley discusses who stands to benefit from the current market environment, and according to them it’s the larger European names, established London market players and some Bermuda reinsurance market participants.
The competitive advantage gained by the bigger, more established players is “driven by better access to the most lucrative reinsurance panels, less impact from ‘signing down’ and stronger risk adjusted pricing,” explains Morgan Stanley.
On the other end of the spectrum fall the companies less likely to benefit from the current market environment at renewals, which includes firms with a smaller line size, less focus on long-term client value, a lack of diversification and less depth and breadth of client interaction, compared with the more established players.
When discussing risk adjusted pricing, which can offer the more established firms a foothold at renewals, Morgan Stanley said; “Whilst all reinsurers have to accept similar price movements, differentiated terms and conditions for preferred names may mean that on a risk adjusted basis they are better positioned compared to less favoured peers.”
And the terms and conditions are a key aspect of Morgan Stanley’s study, stressing that larger, established firms are better positioned going into renewals to defend themselves from significant loosening of terms, which in the view of Morgan Stanley “opens the door for increasingly divergent underwriting performance between stronger and weaker placed reinsurers.”
The potential for a divergence of underwriting performance among reinsurers should catastrophe losses return to normal, or above normal, levels, is something Artemis has discussed. There is likely to be a different degree of exposure to future loss events for reinsurers that have relaxed their terms and broadened the cover they offer. This may show up in a divergence of results in the future.
The most prominent loosening with terms and conditions that Morgan Stanley mentions is with further relaxation of the Hours Clause, something that has been a key trend in previous renewal seasons.
“The net effect of looser terms and conditions is to effectively morph the reinsurance protection into something more akin to an aggregate stop loss cover,” said Morgan Stanley.
This, combined with opportunities provided by a growing demand for cyber coverage, uncertainties surrounding terror coverage, a growing focus on multi-year contracts and conditions of reinstatement provisions are all key elements during the 2015 renewal period, notes Morgan Stanley.
And the better equipped a company is to successfully navigate these business areas, remain firm on terms and deliver continuity to clients, the better positioned and more relevant it remains.
So clearly Morgan Stanley feels that company relevance is as important as ever for reinsurers at January renewals and throughout the year ahead. Refreshingly the firm does not simply equate scale with relevance either, focusing on other factors that make a reinsurer more relevant to its clients.
As reinsurance buyers and brokers continue to stand firm in their ambitions with the backing of lower rates, reinsurers’ ability to navigate the worst of the market excesses becomes key.
Since Morgan Stanley published its report several reinsurers, including Hannover Re and Munich Re have reported the results of their renewal period, with both firms citing continued market pressures, including overcapacity and competition.
Munich Re actually pulled back on business written by almost 10%, the firm reported, while Hannover Re declared it sees no sign of current market conditions changing.
Cited by the two large reinsurers, and noted by Morgan Stanley is the impact expanding and lasting alternative capital is having on the sector, something Artemis recently explored following a report by Guy Carpenter.
Morgan Stanley advises that organisations that will fare better at future renewals are those that can diversify their reinsurance capital offering, by utilising both traditional and alternative sources, highlighting the opportunity provided by the abundance of third-party and traditional capital, for those who use it wisely, and appropriately.
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