Rate increases in the North American and International reinsurance markets are due to modest losses and poor results– not a hardening market, finds a report by Willis Re, the reinsurance arm of Willis Group Holdings, the global insurance broker.
The 1st View mid-year renewals report, entitled "Looks can be Deceiving", finds that despite headline figures forecasting rate increases, there is plentiful capacity in the market. The targeted underwriting approach taken by most reinsurers to manage, analyze and, in some cases, de-risk their portfolios, has been rewarded with differential pricing, the report finds. This approach has been welcomed by cedents, but does not support a generalized market hardening.
“The reinsurance market is stable and orderly, but the reality is that it is not hardening,” says Peter Hearn, chairman of Willis Re. “In fact, some buyers with loss-free programmes, even in areas of peak exposure, have managed to obtain risk-adjusted rate reductions at the 1st June 1 and 1st July renewals.”
Although the report identifies model change and macro-economic factors as playing an “increasingly muted role”, Hearn acknowledges changing regulatory requirements and the challenges around investment income as significant industry trends.
“The impact of changes to vendor catastrophe models is becoming increasingly muted as the industry becomes more sophisticated,” he says. “Companies and Regulators realise that they cannot be too reliant on one model, and are instead blending models to show realistic possible outcomes.”
According to the report, most reinsurers’ satisfactory investment returns in 2011 were derived from capital gains arising from falling interest rates. There are concerns however, that once interest rates begin to rise, falling values of bond portfolios could result in potential investment losses for reinsurers.
Hearn comments that it is the impact of external economic factors that could eventually result in a hardening market. He says “Curiously, despite the fact this scenario is well known and widely discussed in industry circles, pricing on longer tail classes remains soft despite these warning signs to reinsurers’ balance sheets. The eventual increase in interest rates, coupled with an increase in inflation, could potentially trigger a hard market ahead of significant loss events.”
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