As the (super)abundance of alternative reinsurance and insurance-linked securities (ILS) capital continues to impact pricing and distort the dynamics of the reinsurance space, Lloyd’s and London players are set for a “tougher but manageable” 2015, according to analysts.
On January 6th 2014 analysts from RBC Capital Markets held a London Market trip that included meeting with senior executives from Beazley, Hiscox, Lancashire and Lloyd’s of London, to discuss the January 1st reinsurance renewals and look forward into 2015.
On the back of the discussion RBC recently published a report outlining the views, concerns and predictions offered by themselves and the management staff they met with. “Despite muted commentary on pricing, we continue to see several reasons to continue to like the sector,” commented RBC.
The report notes that property catastrophe pricing fell between 7.5%-15% at 1/1 renewals, acknowledging that this was in line with what many reinsurance brokers had prepared for, and predicted.
As pricing continues to soften, potentially leading to a truly soft market in 2015, the influence of lower-cost alternative or third-party reinsurance capital, and insurance-linked securities (ILS) as a growing part of the market highlights the importance of a company remaining relevant and efficient.
RBC’s discussion picked up on this point and states that brokers feel companies need to be of a certain size in order to remain relevant, and increase value to products in the current challenging market.
The capital market analysts claim that examples set by Lloyd’s companies regarding leading business positions ensures an element of relevance during tough times, RBC said; “We heard during the course of the day that the Lloyd’s companies hold many leading positions in their main classes of business, some examples given during the day were Energy business at Lancashire and Specialty lines at Beazley.”
Concluding that they “believe that holding lead positions on core business will allow the Lloyd’s companies to remain relevant to both brokers and clients.”
The report itself fails to mention consolidation and merger & acquisition (M&A) deals, something that has been subject to a lot of talk within the space lately, including here on Artemis.
However, as brokers and RBC alike feel company size is vital in the battle to remain relevant, M&A and consolidation deals are potentially a way for smaller-medium sized organisations to stay in the game. Although in certain cases, it remains to be seen just how effective this approach really is.
While competition remains rife and shows no immediate sign of diminishing, an organisations efficiency and ability to provide low expenses could prove vital in the coming months, and the entirety of 2015.
An emphasis on new, niche business lines can help a reinsurer to remain efficient, while serving as an avenue to raise capital and client base, another topic discussed during the RBC London Market Trip.
“Cyber insurance was one of the classes discussed in the meeting with Beazley. Beazley has now built up sufficient claims data in its cyber business that allows the company to price more accurately than ever before,” said RBC.
RBC continued to praise the rational market cycle shift away from senseless pricing, highlighting a welcomed move towards a focus on bottom line results, over top line growth. Adding that “during the course of the day, there were no examples given of irrational pricing in any line of business.”
So while RBC’s outlook on the reinsurance sector provides no surprises, it does stress that despite 2015 shaping up to be a difficult time for reinsurers globally, company efficiency and relevance is going to be increasingly key to survival.