The reinsurance sector is seeing significant rate reductions as the excess capital supply in the market continues to chase muted demand, according to the 1st View Renewals Report from Willis Re.
Continued benign loss activity throughout the first half of 2014 has compounded the softening market. Inflows from capital markets have continued to add to the excess supply of capital, although much of the competition has also been driven by the traditional reinsurance markets. Continuing the trends seen at reinsurance renewal points in January and in April, buyers are reaping the savings offered by the market and are not generally seeking to recycle the saved premium spend back in to increased reinsurance purchase.
John Cavanagh, ceo of Willis Re, comments “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.”
Buyers’ tiering of their reinsurance capacity suppliers, in traditional, collateralized and ILS markets, is adding to competitive pressure. Reinsurers and fund managers trading through this challenging period are therefore being forced to examine their strategies carefully. Against this backdrop, the report notes that this could lead to more M&A, capital restructuring and formations of sidecars with ILS investors.
As major ratings agencies have moved their outlook on the global reinsurance sector to negative in recent months, they have focused on the role of the insurance-linked securities (ILS) markets in driving down pricing in the high margin US catastrophe market, which has produced the lion’s share of reinsurers’ overall returns in recent years. Additionally, the emergence of ILS capacity in other non-catastrophe lines of business has been highlighted by ratings agencies as an area of concern.
Addressing the emergence of ILS capacity, the report highlights the continued growth of the catastrophe bond market. New bond issuance has reached $5.7bn to date in 2014, with the total outstanding amount reaching an all-time high of $21bn. Despite this growth, there are some signs that sophisticated investors are starting to flex their investment downwards. The report concludes that this style of logical, considered investment bodes well for the long term sustainability of ILS capital and should help address some of the persistent market concerns about the long term commitment of ILS investors.
Peter Hearn, chairman of Willis Re, concluded “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, which is available to download at www.willisre.com, includes detailed commentary on trends in the world’s major reinsurance classes and markets.
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