As competition remains plentiful in the reinsurance market and capital remains abundant, reinsurance pricing pressures are widely expected to carry into 2015, but Kevin Lee of Moody’s explains that we’re still some way from a truly soft market.
During the ratings agency’s annual Insurance Conference in New York last month, Moody’s Vice President and Senior Credit Officer, Lee was a panelist for the events discussion on the reinsurance sector, “Reinsurance at a Crossroad.”
He explained that; “By strict definition we’re in a softening market, but not quite a soft market.” A true soft market is when returns drop below the actual cost of capital, and Lee feels that the majority of reinsurance firms will still earn their cost of capital come 2014’s year-end, likewise in 2015.
Property catastrophe reinsurance prices have fallen throughout the year and this has been accelerated somewhat by the absence of a major loss, which some industry experts believe would go someway towards providing much-needed stability.
However, since the growth of alternative capital within the traditional reinsurance space accelerated, while traditional capital grew alongside it, the market hasn’t witnessed a large loss, so no one is entirely sure how the market will fare post a major catastrophe.
“I think as an industry, we tend to forget some of the issues that we’ve had with losses. A very large quake in the U.S. with a lot of homeowners and commercial damage I think would change the game,” said fellow panelist and Guy Carpenter & Company Managing Director Stephen Breen, adding, “I don’t think as an industry we understand the physical damage of a long term claim.”
A further element to the evolving, softening reinsurance space that panelist discussed during the event, is the burgeoning popularity of merger, acquisition and collaborative deals. A recent example of this is the proposed XL Group and Catlin merger/acquisition deal, as reported by Artemis.
As traditional reinsurers battle alternative capital providers for market share, joint ventures become a far more viable option for gaining a competitive edge. Whether this be a merger of smaller traditional reinsurers or a collaboration between traditional and non-traditional reinsurance players, these type of deals can ensure a company remains relevant and competitive during testing times.
Dan Serrao, Managing Director at J.P. Morgan noted that alternative capital’s stake in the roughly $575 billion global reinsurance space is approximately 15%, increasing by 18% in the last year alone. “The new transactions we’re seeing are much more a joint venture from which established reinsurance companies are getting a decent amount of economic benefits.”
So it’s apparent that there are ways to mitigate the negative impact some traditional reinsurers are faced with in the current, softening market.
And while for now, technically the market is still at a softening stage, Lee predicts “it will take another 15% cumulative decline in property cat prices to result in a soft market.” Concluding that; “Our best guess is that prices will fall 10% on average next year and a more modest amount in 2016. It could be 2016 before we officially hit a soft market.”