Reinsurance market at an “inflection point” – Newman, Willis Re

Insurance and reinsurance market headwinds continue to hinder the profitability of market players and after a decade of “wonderful results,” the industry is more than likely at an inflection point, according to Andrew Newman, President of Willis Re.

International reinsurance companies have benefitted from ten years of impressive results, and continue to report profitable quarterly and full-year operating results during the current softening landscape.

Aided by benign catastrophe loss years and reserve releases, reinsurers are generally continuing to report sound RoEs and combined ratios in testing market times, but change could be just round the corner.

Newman, President of reinsurance broker Willis Re, told ratings agency A.M. Best at the 2016 Meeting of Reinsurance Officials, that the reinsurance sector is “probably at an inflection point,” following ten years of “wonderful results.”

Earlier this year Artemis reported how Willis Re claimed that the reinsurance industry’s reported RoE of 10.2% 2015, for companies within the Willis Reinsurance Index that report catastrophe loss and reserve information would decline to 3.4%, based on a more typical cat loss year.

And now, Newman told international ratings agency A.M. Best that underlying results, so with normalised cat losses and absent an above normal volume of reserve releases, “RoEs of 3.4% in theory, suggests that things should be beginning to change in terms of pricing.”

Alternative and traditional reinsurance providers continue to enter the space and flood the market with capacity, a trend that has perhaps received more negative attention owing to the lack of sufficient demand in the marketplace.

Newman claims that the market remains “robust, resilient, with great capital ratios,” but stressed that ongoing market headwinds that have ultimately culminated in consecutive rate declines, suggests the market is “poised for change.”

Managing all the excess capacity in the marketplace is a challenge for reinsurers, which are trying to achieve desirable margins at times of heightened competition, which ultimately sees buyers of reinsurance have more control over pricing and terms.

Efficiency and discipline have become vital to those that wish to successfully navigate the softening landscape, but when profits are low on the underwriting side and near impossible to find on the investment side of the balance sheet, some have been seen to accept business at dangerously low rates and riskier terms.

Noise from July renewals implied that the much-anticipated and discussed pricing floor in the U.S. property catastrophe space could be edging ever nearer, with more and more reinsurers and insurance-linked securities (ILS) players feeling that rates are no longer always compensating them for the risk assumed.

Despite this, the market headwinds are set to continue, and absent any major industry event that causes a substantial industry loss, the range pressures being felt by all in the re/insurance market are expected to continue.

Newman noted that in theory the normalised RoE of 3.4% should suggest that change is near, but with the supply/demand imbalance remaining, the benign large loss environment continuing and reserves dwindling, it’s possible that the challenging landscape will persist for some time more.

“I think in the immediate term the priority is about managing performance. In the longer term I think we are seeing all sorts of looming challenges around the digitisation of the insurance industry, changes in distribution, changes in manufacturing, supply chain, the emergence of cyber threats, so enormous challenges for everyone, in every aspect of the business.” said Newman.