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Xactanalysis Insights and PCS

Shift noted in reinsurance buying habits in Q1


Global reinsurance companies have been reporting their first-quarter results over the last few weeks with many noting continued reinsurance market pressures. However, firm’s highlighted that a shift in the buying habits of some cedents led to an increase in demand for reinsurance capital.

The reinsurance marketplace has been under significant pressure in recent times, with an oversupply of capacity from traditional and increasingly alternative sources adding to the turmoil, contributing to persistent rate declines.

Today’s highly competitive market has created a supply/demand imbalance that’s been favourable to buyers for some time now, leaving reinsurers to fight for a seemingly shrinking market share, resulting in ill discipline and the relaxation of terms and conditions by some.

In recent, past quarters cedents were seen to be retaining greater portions of risk, or centralising their reinsurance purchasing, and shrinking reinsurance panels, ultimately leading to a reduction in reinsurance demand.

Furthermore, the pressures from the maturing insurance-linked securities (ILS) space increasing its share of the overall reinsurance market pie, offering diversified and possibly more efficient capacity, exacerbates the situation reinsurers find themselves in.

However, some firms revealed during their first-quarter 2016 earnings calls how certain cedents were seen to move away from the recent trend of increased retention, returning to the reinsurance market to secure protection.

Albert Benchimol, President and Chief Executive Officer (CEO) of AXIS Capital Holdings Limited, said; “The market remained competitive, but there was resistance to irrational rate reductions. Reinsurance demand has increased with a number of cedants buying more cover.”

A view shared by reinsurer Everest Re’s Reinsurance Operations Executive Vice President, President, and CEO John Doucette.

“While several areas remain challenged, we are seeing robust submission flow, reflected increased demand including the following: Solvency II surplus relief treaties, facultative casualty particularly in loss affected auto departments, increased lines on existing treaties with several global clients and new layers for global clients. Some of them are reversing the trend of holding larger net retentions,” said Doucette.

Reinsurance brokerage Willis Re noted an uptick in reinsurance demand at April renewals, something that was predicted by some analysts owing to Solvency II capital adequacy frameworks, but also due to the changing habits of buyers.

Robert Berkley, President and CEO of W.R. Berkley, also highlighted the challenging market conditions in the reinsurance industry, stating that the industry “deserves a break.”

W.R. Berkley also witnessed increased demand for reinsurance from cedents during the first-quarter, stating that “loss activity has come through and as a result of that it would seem as though they are yet again changing their habits and they are re-entering the marketplace as customers.”

“I don’t think that that is a silver bullet for the reinsurance market, but may be helpful in the balance between a supply and demand,” he added.

Only time will tell if the increase in demand continues as the market heads towards the mid-year renewal period, but it is promising to see cedents reverse the trend of retention somewhat in the more recent months.

The ability for reinsurers to enter new risks and regions is also a way to increase demand and remove some of the capable, and willing capacity that’s currently struggling to find a home in the sector.

Continued innovation, Solvency II and the uptick in demand from cedents does provide some light on what’s been a fairly gloomy time for firms, but as noted by Berkley, it’s likely not enough to turn the market and rates are expected to continue to decline for the foreseeable future.

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