Reinsurance prices could fall double-digits in January: Guy Carpenter

At the upcoming key January reinsurance renewal period, where many of the world’s major reinsurance program terms, conditions and prices are renegotiated and renewed, prices may decline by more than -10%, according to broker Guy Carpenter.

In the last few months most observers have opted for forecasting a more moderate mid-single digit price decline, with many pointing towards an expected -5% to -7.5% decline across the market. However, comments from reinsurance broker Guy Carpenter suggest that steeper declines are possible.

With traditional reinsurance capital at a high and no major industry losses having occurred to drain some of the capacity from the space, there is an expectation that price competition will continue to be prevalent at the January renewals.

At the same time, alternative or third-party reinsurance capital, largely wielded by dedicated insurance-linked securities (ILS) fund managers, while not growing rapidly, remains at a high level, ensuring that competition across peak catastrophe reinsurance zones will remain high.

With nothing affecting the market to reduce the excess capacity in the space, the expectation is for the pressured market environment to continue, both in terms of pricing as well as terms and conditions.

Nick Frankland, CEO of EMEA at Guy Carpenter, commented at the Reinsurance Symposium in Baden-Baden yesterday; “Capacity remains bountiful and buyers will continue to enjoy choice. This will weigh on the discussions that take place during the coming week and we expect some interesting manoeuvers as reinsurers seek to hold or grow their share of signings.”

“Interesting manoeuvers” sound ominous. It is to be hoped that reinsurers do not continue to compete so strongly that prices are driven down below technical levels, or that terms and conditions get so broad that effectively reinsurers are taking on more risk at ever decreasing levels of profitability.

As we’ve written before, the biggest reinsurance firms are already putting their risk management to the test, underwriting at ever lower levels of technical profitability. It’s vital that this trend does not escalate into one of underwriting to deploy capacity at any cost.

A number of the largest ILS managers we have spoken to in recent weeks insist that they are keen to maintain their current levels of capital and deployment, hence we do not expect to see large amounts of new capital raised. That should release some pressure, but ILS managers do want to see their current capital bases fully utilised, which means being selective is going to be vital at the renewals.

Frankland said that the signs are pointing towards a much steeper price decline than had been expected; “The early signs are that there may be greater savings available to buyers than were perhaps being envisaged at Monte Carlo, and the trend towards combining coverages and multi-year placements will undoubtedly continue.”

Speaking to Bloomberg in an interview yesterday, Frankland said; “In Monte Carlo, we were certainly suggesting that rate reductions will be in the region of between 5 to 7.5 percent to maybe 10 percent. They may be more than that. The market is struggling to understand how to quote in this environment.”

That’s a key statement. If quoting discipline goes out the window in January the reinsurers or ILS managers that support this could be putting themselves at great risk. At this point in the reinsurance market cycle, after consecutive years of price declines and expanding terms, taking on even more risk for lower return could be seen as downright dangerous.

As returns continue to decline it could only take one impactful loss event, or a series of smaller aggregated events, to make some companies underwriting look very suspect indeed, if they are chasing prices down just to guarantee signings and to get their capacity deployed.

The expectation is that reinsurer returns on equity (ROE’s), which are already becoming increasingly thin, will diminish further in months to come and with an expectation that reserves may no longer prop up every companies ROE’s it could leave some companies walking a treacherous knife-edge, where any meaningful losses could trip them over it.

Frankland also told Bloomberg that the merger & acquisition activity that is being seen in the reinsurance market is not reducing the excess capital in the space. Capacity remains abundant, he said, adding that he expects this to have an impact on pricing in January.

With so much capital in the reinsurance sector Frankland expects the M&A wave and the pressure on the sector will continue. “We don’t anticipate an early end to the latest wave of M&A activity, nor the current pricing environment,” he commented in Baden-Baden yesterday.

In fact he hinted to Bloomberg that there are now no size-limits when it comes to M&A in reinsurance, perhaps suggesting that we could see some of the biggest firms looking at smaller reinsurers as attractive targets that they could swallow up.

Ever since the first-quarter of 2015 commentators, brokers and reinsurers themselves have been citing a moderating price environment. The mid-year renewals saw prices fall much less steeply, while pricing of catastrophe bonds and some other insurance-linked securities (ILS) seemed to have hit a floor.

But Guy Carpenter feels that the competitive nature of the reinsurance market, where excess capital needs to be deployed and only so much can be handed back to shareholders, could result in greater pressure once again in January.

It looks like discipline will be the all important reinsurer trait to look out for over the next few months. Those growing their premiums written significantly in existing lines, or chasing prices down by double-digits again, may be the companies that are taking on more risk than is advisable in such as soft market.

It looks like the January reinsurance renewal could be a key moment in the current cycle, where discipline is key and the temptation to relax it is great. That makes for interesting dynamics and we’re sure much to talk about when it’s all over.

Read all our reinsurance renewal season coverage here.