Reinsurance rates down again at April renewal, but demand up: Willis Re

Reinsurance rates were seen to soften further at the April 1st 2016 renewals, the fourth consecutive year of price declines, but there are encouraging signs of increasing demand, which help to offset the gloom to a degree, according to Willis Re.

Reinsurance broker Willis Re explained its optimism in its latest renewals report, saying that although cedents continue to look for price reductions and expansion of terms and conditions from reinsurers, the overall picture at the April 1 2016 renewal was of marginally more stability, with price declines lower than seen the prior year.

Loss free property rates were seen to decline by as much as -12.5% in Japan, -20% in Korea and -7.5% for U.S. nationwide accounts. Meanwhile Japanese casualty rates were down -5% for third party liability and -10% for personal accident.

In specialty reinsurance lines, aviation rates were down once again as much as -15%, while non-marine retrocession rates declined -10% for loss free accounts, but loss hit accounts saw rate increases of +15% to +20%, reflecting the nearing of the retro pricing floor perhaps.

While lower than the prior year the declines seen at April 1 2016 renewals have still been significant, especially so in Japanese property catastrophe programs where memories of the tragic Tohoku earthquake losses seem to have all but been forgotten by the reinsurance market.

This is evidence of the aggressive diversification benefit wielded by traditional reinsurers on perils in Japan, as well as the increasing efficiency of reinsurance capital as ILS augments the market.

Meanwhile on terms and conditions, Willis Re explained that “Any broadening of terms and conditions also remained largely stable,” which suggests they did broaden, but not noticeably.

Other factors Willis Re deems positive included some increases in reinsurance limits purchased, always a positive and perhaps reflecting trends seen in other regions of the world where cedents have rationalised their cover and are now optimising with some additional spend.

Modest losses, including deterioration of prior year losses, have also had an impact on the reinsurance market at April 1st, Willis Re explained.

But perhaps the most positive factor noted is the increased demand, especially from some larger cedents. With Willis Re describing that some insurers that had been strategically retaining more risk, have now been looking to “selectively reverse their thinking.”

The broker notes that this has resulted in some increased cessions to some reinsurers (likely the majors), both on traditional reinsurance structures, as well as loss portfolio transfer products and adverse development covers.

Some increase in the use of these products had also been noted at the January reinsurance renewal. Given the types of products being bought, it is perhaps a reaction to the soft market as some re/insurers look to shore up their protection in light of having underwritten at much reduced rates.

John Cavanagh, Global CEO of Willis Re, commented on this trend; “The underlying reasons for the reversal in reinsurance buying strategies are distinctive to each client. But increased regulation, which has promoted a more holistic view of risk and reward, allied with shareholder pressure to improve ROE’s by reducing the equity element of the calculation, are clearly two overall drivers.

“Ultimately, buyers are still reaping the rewards of competitive conditions and reinsurers will need another below average loss year to produce acceptable results in the face of a tough 2016. But the apparent uptick in demand is certainly a positive sign.”

Cavanagh said that two reasons for the increasing demand are increased regulation and shareholder pressure to improves returns on equity, although the full motivations for buying more reinsurance remain company specific.

Another factor noted by Willis Re at the April renewal is an increasing reluctance at some reinsurance companies to underwrite risks at the lowest pricing levels.

“While most reinsurers are accommodating client requests, many are now at the point where they are no longer prepared to grant any further concessions, irrespective of relationship considerations,” Cavanagh explained.

This suggests that discipline is increasing, however it is important to note that some reinsurers have been actively pulling-back from certain risks, perils, regions and lines for over three years now, so any discipline is not really new-found.

Also important to note is that “most reinsurers are accommodating client requests” according to Cavanagh. That suggests that any increase in discipline is limited to few players and the market is still largely supportive of cedents price and terms ambitions.

Also telling is another comment from Cavanagh, that; “For reinsurers, relationship management and portfolio underwriting is evident as companies seek ways to maintain relationships with longstanding clients, which may be difficult to rebuild at a later stage.”

This approach has its risks, underwriting in order to maintain a relationship, or keep a stake in a reinsurance program, even if the pricing is lower than perhaps would normally be deemed acceptable. Similarly, underwriting a risk and adding additional diversification weighting, again just to keep the position, is definitely a sign of a soft market.

Reserve releases and the lack of recent major losses remain the drivers of reinsurance company profitability, Cavanagh explained. While any top-line growth is largely due to expansion into specialty or other lines.

But the benefit of all these market forces and the steady, but continuing, decline in reinsurance pricing is reaped by the customer or cedent, Cavanagh said.

“Ultimately, buyers continue to reap the rewards of competitive conditions and reinsurers will be hoping for yet another below average large loss year to produce acceptable results in the face of a tough 2016,” he commented.

Looking ahead to the rest of the year, it seems further pressure on pricing is likely at the mid-year June and July reinsurance renewal, unless there is some major market-turning loss event.

“It is premature to conclude that the current market cycle is bottoming out,” Cavanagh said. “The underlying imbalance of capital supply and muted demand allied to reinsurers’ largely satisfactory 2015 results continues to hang over the market.”

This imbalance of reinsurance capital continues to weigh on pricing and with Willis Capital Markets & Advisory also reporting that some ILS fund managers have been accepting new investor inflows in recent weeks, this imbalance may only get more pronounced as we approach the mid-year renewal.

Keep up with all our reinsurance renewal news and analysis here.