Reinsurance softening slows, but not widespread, capacity withdraws: Willis Re

The reinsurance softening trend continues to slow down, according to the latest renewal insight from broker Willis Re, but the slow down in rate declines is not yet widespread and there remains evidence of capacity withdrawing, where reinsurers find pricing inadequate.

In its latest edition of the Willis Re 1st View reinsurance renewals report, the broker describes the state of the market as “Bumping along the Bottom” which is an accurate description of a market where pricing is nearing acceptable lows, but still with some pockets or lines where further declines are being seen.

The global reinsurance market remains extremely well-capitalised, thanks to the low levels of major catastrophic losses which helps to ensure traditional industry capacity has stayed high, while the entry of non-traditional, alternative or ILS capacity continues as well.

A “slowing in the magnitude of rate reductions is increasingly apparent” the report states, and this is now being evidenced by “capacity withdrawals” where reinsurers no longer find pricing adequate or meeting their return requirements.

As a result, “considerable pricing variation by class and territory persists” and indications of widespread price stabilisation remain “elusive” Willis Re explains.

John Cavanagh, Global CEO of Willis Re, the reinsurance broking arm of Willis Towers Watson, explained; “Capacity remains abundant and continues to overhang the market in virtually all classes and regions. With no material impact from catastrophe loss activity now for the last few years, rating pressure persists. So far in 2016, only one major catastrophe loss – the Fort McMurray fires – will produce any meaningful catastrophe claims for reinsurers.”

Despite the increased number of more minor catastrophe and weather losses, such as the Japanese earthquakes, Texan flooding and southern or mid-west U.S. convective storms, as well as the recent European flooding and storms, this is not seen as sufficient to cause any significant move in pricing at this time.

However these attritional losses are having some effect, which will be welcome news for many, with Willis Re explaining in its report that these losses are “beginning to feed through into pricing, with a bifurcation in rate movements between the lower level and higher layers of programs.”

“Any relief that pricing may be nearing the bottom of the cycle is counterbalanced by concern over how and when rates might start to increase, even modestly, on a wider basis. The alternative is a market that faces a number of years bumping along at current levels earning very modest returns,” Cavanagh continued.

Modest returns is a concern for the traditional players, and also for insurance-linked securities (ILS) markets, with the focus on efficiency and finding ways to access new sources of risk growing across the marketplace.

With continued pricing pressure expected and interest rates remaining depressed, cost control is an increasing priority for reinsurers.

“The drive to achieve market efficiencies and cost reductions is picking up pace, particularly in the London market,” Cavanagh said, adding that “The UK’s decision to leave the EU provides an additional dynamic, with the exact implications for future policy and regulation unknown.”

With underwriting turns at or near minimum levels for many markets, reserve releases have been playing an increasing factor in reinsurers results over recent quarters, but this leads to concerns over “how much longer prior year reserve releases can sustain reinsurers’ results and how differences in individual companies’ historic reserving practices will be exposed,” Willis Re says.

“In the current environment, the balance of risk retention versus return is more acute than ever. The ability of individual reinsurers to manage this crucial dynamic will have a profound impact on the shape of the market to emerge, if or when the rating environment finally offers some relief,” Cavanagh concluded.

Willis Re notes in the report that the erosion of reserves could bring forth a market dynamic where differences in reserving practices between individual companies may become more evident, as conditions change as a result.

So the news is for much of the same at the June/July reinsurance renewals, with pricing pressure remaining but the market perhaps increasingly pushing back on reductions.

Discipline will remain key through the rest of 2016 and if no major losses occur the next major renewal season in January could be extremely interesting and telling for reinsurers and ILS managers appetites to continue assuming risk at the current softened rates

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