European reinsurance rates expected down in January: Willis Re

Reinsurance rates in Europe, at the key forthcoming January reinsurance industry renewals, are expected to be down 5% to 10% on loss-free lines of business, according to reinsurance broker Willis Re. Conversely, loss hit lines may see some rate increases according to reinsurer Munich Re.

The increased amount of available reinsurance capacity, supplemented by insurance-linked securities and alternative reinsurance capital, along with competition and changing market dynamics have turned Europe into a buyers market for reinsurance cedants. These market conditions alongside changing buying patterns are serving to drive reinsurers to offer increased flexibility and tailored solutions, according to Willis Re.

Tony Melia, CEO of Willis Re International, commented; “With large parts of Europe so far experiencing another year of exceptionally low natural peril loss activity, reinsurers are facing significant rating pressure on catastrophe programmes in loss free territories on the back of the excellent 2012 and 2013 results. Absent of a major loss event, we expect risk adjusted reductions of 5% to 10% for straight forward loss free property catastrophe business with the reductions on individual programmes being influenced by programme history and perceived profitability.”

After a year which has seen some catastrophe losses in Europe, from flooding and most recently severe hailstorms, reinsurers are assessing their view of risk on loss affected programmes. This may lead to some price increases on certain lines, regions and programmes. However reinsurers are also looking at the history of a placement programme alongside individual loss experience, factors which will also influence pricing trajectory in January.

Melia added; “Even loss affected programmes will benefit from the current soft market conditions and will receive more modest adjustments than during previous pricing cycles. Above all though, the current market environment enables cedants to consider buying the reinsurance that they want, in addition to what they need.

“Cedants should take advantage of reinsurers’ flexibility and their willingness to provide company wide solutions to protect against earnings volatility alongside capital protections. These, together with the use of reinsurance structures to consolidate risk appetites, are the underlying drivers of changing reinsurance strategies in the industry.”

The world’s largest reinsurer Munich Re said that it sees largely stable pricing ahead at the January renewals, but warned that loss affected lines may not.

Natural hazards will play a major role in influencing pricing decisions, particularly in the German market, after the flood and hail events which impacted the region this year. The reinsurer said that special circumstances may apply to the German market after high levels of economic and insured losses.

Rate trajectory is a key factor of discussion as we approach January reinsurance renewals and while largely stable rates are expected an increasing understanding of natural catastrophe exposures will help reinsurers to lift rates in certain lines and regions of the world. This will please traditional players who feel squeezed by alternative reinsurance capital and will allow them to focus on more profitable opportunities.

Alternative reinsurance capital providers and the ILS markets will be comfortable with stable to slightly down rates in European property catastrophe renewals, with the lower cost of capital allowing the alternative and ILS markets to increase share where available. The suggestion that alternative capital, from investors such as pension funds, is stuck in the U.S. markets due to rates and availability of opportunities may not prove accurate come renewal time as ILS markets seek to expand their scope.