There is evidence that the rate of descent in reinsurance pricing is slowing, helped by signs of discipline, particularly in insurance-linked securities (ILS) markets, which could have the effect of attracting more capital, according to broker Guy Carpenter.
In its reinsurance renewals report, broker Guy Carpenter is in agreement with its competitors, that the general trajectory of reinsurance rates and pricing at the key January 1st 2016 renewal was downwards.
However, Guy Carpenter notes that the speed of descent is visibly slowing, helped by low levels of catastrophe losses and evidence of discipline across the market, particularly among ILS capital providers, although traditional capital has also showed discipline.
The rate of capital inflow into reinsurance slowed in time for the renewal, with traditional reinsurers assessing other opportunities and ways to deploy capacity, such as primary lines of business, while ILS managers were disciplined in terms of accepting new inflows.
However, despite the discipline, capital in reinsurance remains at highs resulting in ongoing downward pressure on pricing.
“The continued scarcity of costly catastrophe losses and more than adequate capacity led to reinsurance pricing reductions, although there are signs the rate of descent is slowing as compared to 2015,” the broker explained.
Pricing declined across most lines of business and geographies, but the rate of decline moderated, Guy Carpenter explained. Similarly to the other major brokers, Guy Carpenter also notes that the declines slowed the fastest in U.S. property catastrophe risks, again providing further evidence of the disciplined approach to pricing in that key market for the ILS players.
“Pricing also flattened in the insurance-linked securities space as protection buyers and sellers assessed adequate compensation for risk,” Guy Carpenter continued, explaining that as the ILS market was at the leading edge of bringing new capital into reinsurance, while the market was experiencing steep price declines, it is “notable that rates have currently reached an equilibrium.”
Guy Carpenter explains that this evidence of underwriting discipline in ILS markets, that the managers are mature and experienced enough to know when to pull-back, stop taking new inflows and applying pressure to rates, “May eventually lead to a greater increase in capital attracted to the space, particularly if growth in demand continues.”
This is a very good point, as investors that have been watching the ILS market and how the influence of inflows of efficient capital markets money has pressured rates, will be pleased to see ILS managers seeking to install a floor in pricing where their minimum return requirements sit.
For large global pension funds which have not yet allocated to ILS and reinsurance linked investments, the signs of ILS market discipline may provide a boost to the investment case internally, resulting in future inflows as new opportunities allow and demand for more efficient capital in re/insurance grows, which it no doubt will.
Further evidence of discipline in ILS comes from the slowdown in the growth of alternative capital in reinsurance, Guy Carpenter says.
While the capital markets commitment to reinsurance grew in 2015, it was at a slower rate and was also offset by a decline in dedicated capital from rated reinsurance carriers, which led to overall dedicated reinsurance capital remaining flat at $400 billion.
However, with capital levels remaining high and pricing down some reinsurance buyers have begun to take advantage of these conditions, with increased limits purchased over the last year.
Interestingly, some of the increased limits came from new purchasers, Guy Carpenter said, who have now been attracted to the reinsurance market by the pricing a supply dynamics, which they now see as having “Evolved into a mechanism to manage risk they previously viewed as better addressed elsewhere.”
“As reinsurance providers continue to evaluate how to compete in a market flush with capacity, an environment of innovation, responsiveness and customization has become the norm,” commented Lara Mowery, Global Head of Property Specialty at Guy Carpenter. “Solution-oriented dialogue has elevated significantly and insurers are increasingly able to focus on improvements in the structure and efficiency of their programs to incorporate more refined capital management goals.”
During the fourth-quarter of 2015, Guy Carpenter notes that insurance-linked securities (ILS) and catastrophe bonds saw pricing conditions holding steady, while investors spent time on portfolio management.
Throughout 2015 pricing stabilisation was evident across the ILS and cat bond market, Guy Carpenter continued, adding that ample capital remains available but that managers are growing pragmatically, as they continue to remain disciplined in terms of accepting new inflows by ensuring they have opportunities to deploy it that provide sufficient return.
With the reinsurance pricing environment showing signs of stabilising, and rate declines evidently slowing across both the ILS and traditional markets, cedents are focused on accessing multi-year capacity at pre-agreed static rates, Guy Carpenter said.
“A significant and growing number of property programs were placed at least partially on a multi-year basis at January 1 and notably, multi-year options are beginning to emerge in some casualty sectors, where they have not been available in the past,” the broker explained of the 1/1 renewal dynamics.
The capital markets remain in a strong position to provide multi-year capacity and Guy Carpenter expects that 2016 will bring opportunities in ILS for public sector entities, corporates, insurers and reinsurers, which bodes well for the cat bond and ILS pipeline.
While U.S. peak perils will likely remain the focus for the ILS market, Guy Carpenter forecasts a continued expansion of the ILS market into new perils, new geographies, new types of protection structures and new sponsors.
Looking ahead, David Priebe, Vice Chairman of Guy Carpenter, explained that the market dynamics continue to force companies to adapt; “The reinsurance market has been challenged by a persistent low interest rate environment, the continued inflow of new sources of capital, benefited from an extraordinarily long period of few major natural catastrophes, and record levels of merger and acquisition activity in 2015. As a result, (re)insurance companies are evolving their operating strategies to embrace this complex environment.”
Priebe also said that the ILS and alternative capital side of the market is expected to see further growth in 2016, explaining; “We believe that alternative capital will be a consistent source of risk capital for (re)insurance and corporates and we expect to see sustained high growth to continue in this sector.”
With further high growth for ILS forecast, the opportunities to accept new capital inflows should increase for the ILS fund managers, providing new opportunities for the investor base. The signs of discipline and the establishment of a clear minimum return pricing floor bode well for the ILS sector. It is exactly what the large institutional investors on the outside have been hoping to see.