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Guy Carpenter, Willis Re: Reinsurance Market Rates Face Downward Pressure

Source: BestWire


Posted on 10 Jul 2013 by Neilson

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Reinsurance rates downly 1 renewals show reinsurance market rates are sliding downward, according to new reports from Guy Carpenter and Willis Re.

The Guy Carpenter briefing indicates that barring major catastrophic losses, the rate trend is expected to continue through the remainder of 2013 despite $20 billion in catastrophe losses during the first half of 2013, in part because July 1 renewals were being driven by capital from third-party investors. Heavy catastrophe bond, sidecar and collateralized reinsurance activity has for the first time pushed pricing in capital markets to depart from levels set by the traditional market, creating downward pressure on traditional market prices, the Guy Carpenter report said.

Convergence capital accounts for an estimated $45 billion of the global property catastrophe limit, about 14% of the total market. The excess capital helped ease the impact of catastrophic losses resulting from tornadoes in the United States and flooding in Europe, India and Canada during the second quarter of 2013.

At July 1, we saw continued significant decreases in U.S. property catastrophe program pricing. Although the impact of convergence was less dramatic elsewhere, general downward pressure on rates was observed for property business in several other regions and across some casualty lines, said David Flandro, global head of business intelligence at Guy Carpenter. Without further significant catastrophe losses in the remainder of 2013, we expect that this downward pricing trend will likely continue through the remainder of the year and into the Jan. 1, 2014 renewals.

The excess capital in the market and the behavior of that capital has encouraged a shift that triggered downward pricing in order to remain competitive, said Lara Mowery, global head of property specialty at Guy Carpenter. This behavior is contrary to the markets historical precedent, as the factors that typically impact the mid-year renewals are normally driven by those already present in January, she said.

A July 1 renewal report by Willis Re made similar observations. Willis Re said traditional reinsurers are trying to maintain market positions that have been eroded by new entrants into capital markets. The report found despite the $30 billion impact of Hurricane Sandy, U.S. property catastrophe remains the key battleground because capital markets are most active there. Traditional reinsurers defensive actions include offering price reductions, larger line sizes and, in some cases, broadening of cover by offering options such as multi-year agreements, extended hours clauses and additional reinstatements, said Willis Re Global Chief Executive Officer John Cavanagh in a written statement.

Primary buyers are using collateralized market offerings, which have continued to evolve and provide those buyers with more cover and a means to lower their basis risk. The trend for traditional reinsurers to set up sidecar-type structures, providing third-party capital access to the risk they are accepting, continues to expand, said Cavanagh and Willis Re Chairman Peter Hearn in a joint introduction to the report. Similarly, the catastrophe bond market continues to grow rapidly and is on track to surpass the previous record high issuance of 2007 of $7.2 billion. With the strong inflow of new funds, the challenge for insurance-linked securities fund managers is how to source enough demand to satisfy investor demand for ILS products.

Softening property catastrophe rates and the desire of traditional reinsurers to keep their market position is spilling over into other classes, according to Willis Re. Casualty markets are seeing substantial increases in capacity around the world, and consequently, prices are softening, despite persistent concerns about the low interest rate environment, the reports introduction said.

Rates have fallen by as much as 25% on some Florida property catastrophe accounts and the losses caused by U.S. tornadoes and European floods in the second quarter of 2013 will have a modest impact on global reinsurance markets. As it stands, it is not easy to see any end to the continuing softening of the global reinsurance market, Willis Re said in a news release. With the outlook for growth and underwriting profitability modest, reinsurers are re-examining capital management to improve overall results.

After the first quarter of 2013, Edward Fenton, Guy Carpenter and Co. managing director, told Bests News Service the global reinsurance market was characterized by excess capital, overcapacity and easing of prices for loss-free businesses. Willis Re noted at that time that overseas losses mainly catastrophe with some large domestic single-risk fire losses had created a challenging backdrop for renewals, but that buyers and reinsurers managed the losses in a successful manner.


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