According to the latest report from reinsurance broker Willis Re the June 1 and July 1 mid-year renewals have seen significant reinsurance rate reductions as excess capital continues to chase muted demand, with the competitive market dynamic continuing.
Reinsurance rates remain under considerable pressure, according to Willis Re, as the excess capital in the market, both traditional and non-traditional or alternative, continues to chase what business is available. Demand for reinsurance remains muted, with insufficient growth to soak up the capital which the industry is awash in.
The softening market environment has been compounded by the low levels of loss activity through the first-half of 2014. Further inflows of capital from alternative market sources and insurance-linked securities (ILS) keep the pressure on, although Willis Re notes that much of the competition is being driven by traditional reinsurance markets, not ILS investors.
Buyers continue to reap the rewards of the soft market, with increasingly better and more relaxed terms and lower reinsurance pricing, however they are not recycling the savings back into more demand, which again further compounds this softening cycle.
“The tentacles of the softening market are spreading far and wide, with no immediate signs of relief. We’ve seen muted demand throughout 2014 and market dynamics are unlikely to change for some time to come. The current market position is increasingly challenging for reinsurers. Below average loss ratios in the first half of 2014 and reasonably adequate reserving positions mean that, barring any major underwriting or investment losses in the coming months, we will see another year of reasonable returns. This places further pressure on rating levels for 2015,” commented John Cavanagh, CEO of Willis Re.
The tiering of reinsurance markets by buyers, into traditional, collateralized reinsurance and ILS markets, is also upping the competition. Both reinsurers and fund managers trading through the competitive market environment are being forced to carefully examine their strategies, Willis Re notes.
The upshot of this competitive market and tiered capacity provider paradigm is that reinsurers have to accelerate their plans, making mergers & acquisitions, capital restructuring and the formation of reinsurance sidecars with ILS investors become more likely, says the report.
Peter Hearn, Chairman of Willis Re, stated; “For primary insurance companies, the ability to recognize primary rate increases while reducing reinsurance cost may be coming to an end. Rate reductions are being seen in most territories on primary insurance classes, although in many cases the reductions are not directly linked to reinsurance savings.”
The report notes that the increasingly negative outlook of the major credit rating agencies, who now all have the reinsurance sector on a negative rating outlook, adds further cause for concern to reinsurers. The impact of ILS and its influence on pricing, as well as the spill-over effect of ILS capital moving into new lines of business, increases these concerns.
The reinsurance market is broadly softening across almost all property lines and now more widely into casualty and other areas. Alternative market involvement continues to increase, with property renewals seeing increasing proportions of risk ceded to alternative or collateralized reinsurance markets, ILS and catastrophe bonds.
Looking ahead to 2015, Willis Re says that the current soft market will pose an increasing challenge to most reinsurers. However, below average loss activity combined with reasonably adequate reserve positions are likely to lead to another year of ok returns for reinsurers, as long as the second-half of the year also remains benign.
Willis Re also notes that primary insurers may have reached the end of their abilities to increase primary rates while also benefiting from cheaper reinsurance. Primary insurance rates are now in decline across many territories and classes of business, though the reductions are not always directly linked to the reinsurance savings.
The tentacles of the softening market are spreading, Willis Re says, with effects being felt across the reinsurance, ILS and now primary insurance market. This does leave one to wonder whether this is a soft market or a structural change driven by a desire and need for capital efficiency.
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