The competitive nature of the current global reinsurance market is often blamed on the recent influx of additional capital from third-party and institutional investors, like pension funds, but it’s worth remembering that other factors are at play.
With reinsurance quarterly and half-yearly results season upon us we’re likely to cover a lot of topics on the influence that alternative reinsurance capital, insurance-linked securities (ILS) and the capital markets are having on reinsurers businesses. But it’s becoming clearer that other factors, largely excess capital, are perhaps more to blame for the market environment.
In a report on the global property casualty reinsurance sectors industry and country risk, ratings agency Standard & Poor’s says that even without the surge of third-party capital the global reinsurance market would be seeing fierce competition between incumbent traditional players.
The levels of excess capacity in the reinsurance market continue to reach new highs, as overall catastrophe and large losses remain manageable and reinsurers continue to accumulate capital which they are struggling to put to work. Competition is already rife as reinsurers try to put this excess capital to work.
In addition, large ceding insurance companies are rationalising their reinsurance spend, in some cases buying less or moving their buying further up the tower, which brings with it lower returns. Also insurance groups are bringing reinsurance purchasing decisions to the group level, so consolidating their buying and often buying less. This is streamlining the reinsurance buying process and reducing the number of participating reinsurers on programmes.
The competition from third-party reinsurance capital is therefore only adding fuel to the fire which is already burning in the global reinsurance industry, explains S&P. As a result, S&P believes that competition would still be fierce even if we hadn’t seen a recent influx of alternative capital into ILS and collateralized reinsurance.
The effects of third-party capital remain most acutely felt in U.S. property catastrophe reinsurance and to a lesser degree in international property catastrophe reinsurance markets, said S&P. However, the competition in reinsurance is actually intense across much broader areas of the market, in most other lines of business, as rates decrease on many excess-of-loss covers and ceding commissions continue to rise on pro-rata treaties.
This is important to remember. Before you blame third-party reinsurance and ILS capital for decimating reinsurance pricing take some time to assess the impact that competitive, hungry traditional reinsurers are having on their own business. This market would be competitive wherever capital was coming from right now. Hence the importance of being innovative and looking to new opportunities, instead of fighting ever harder on price and terms for business that no longer meets your margin targets.