April renewals revealed that reinsurers recovered well from the 2011 catastrophe shocks in Asia and last year's big U.S. losses, but capacity continues to flow into the global market, boosting securitized covers and dampening rates.
In its April reinsurance market outlook, reinsurance broker Aon Benfield said traditional reinsurance capital rose 11% in 2012, to US$505 billion. "Reinsurance demand was flat," the broker said. "The traditional reinsurance market is beginning to respond to the competition from the alternative markets. Relationships and continuity continue to be highly valued by cedents and leading reinsurers are taking positive actions to lower their costs of managing assumed volatility."
Outside the U.S. market, "substantially all of the Japanese market renews at April 1 where an orderly market prevailed," said Aon Benfield. "Programs in India and Korea also found adequate capacity despite multiple 2012 storm losses in Korea."
Reinsurance broker Guy Carpenter & Co. had also said the global reinsurance market is characterized by excess capital, over capacity and easing prices for loss-free business this year. Edward Fenton, managing director with reinsurance broker Guy Carpenter & Co., said this environment "will come as a welcome change to Japanese buyers, who fought their way through the last two renewals against adverse market conditions caused by a series of significant losses in the Asia-Pacific region."
According to Aon Benfield, new capital coming into the insurance-linked securities and the collateralized reinsurance market "materially altered the course of April renewals for peak U.S. perils and are expected to have a continuing material benefit for clients as we look forward to the June and July renewals."
The broker said clients renewing significant capacity in the ILS market saw risk-adjusted pricing fall by 25% to 70% for peak U.S. hurricane and earthquake-exposed transactions. "The ILS market is now offering the lowest cost of reinsurance for peak perils witnessed since Hurricane Andrew," said Aon Benfield.
Broker Willis Re also noted new capital continues to flow into the reinsurance market about $35 billion of fresh capital through "a variety of sources" in "a clear acceleration in the volume of fresh capital seeking appropriate opportunities."
"Faced with this wave of new capital, traditional reinsurers have begun to recognize the scale of the challenge to their current portfolios that the new capital represents," said Willis Re in its report on April renewals. "While some reinsurers are considering how to respond, others are developing third-party capital management propositions to offer their own skills and platforms as fund managers."
Willis Re said the advent of this new capital is likely to have a "significant impact" on any post-event response that may occur after a major loss. The traditional model of fresh capital coming in through the formation of new companies is being overtaken by a new model of fast capital flowing in through less permanent structures, the broker said. "For an industry where primary insurance companies value sustainability, this emerging model brings many challenges."
According to Willis Re, April 1 market rate movements "have not yet fully reflected the changing market sentiment." Major Japanese buyers, following difficult renewals in 2011 and 2012, this year saw offers of substantial increases in capacity.
"Treaties that were very challenging to complete 12 months ago are now heavily oversubscribed, with no change in the underlying risk/reward dynamic," said Willis Re. "However, we are seeing early indications for renewals over the next few months which may be a more accurate reflection of market sentiment."
The broker pointed to the renewal of the Citizens Everglades Re 2013 natural catastrophe bond at a "significantly reduced price" and U.S. insurer Allstate's decision to reduce their traditional placement and increase their use of catastrophe bonds and alternative markets as driving more aggressive pricing.
"Against this background, the outlook for many reinsurers is challenging with profit margins coming under pressure during 2013. In contrast, some primary markets are able to achieve underlying rate increases," said Willis Re. "This may very well lead to the recent gap in underwriting profitability between primary companies and reinsurers being narrowed."
Aon Benfield noted reinsurer capital continued to increase through the fourth quarter of 2012, although it slowed a bit from earlier in the year. Even with the losses from Hurricane Sandy, U.S. catastrophe activity was "substantially less" in 2012 than the previous year.
"Reinsurance supply continues to exceed demand in all major global catastrophe regions, leaving the reinsurance industry in a continued position to provide the desired reinsurance capacity to insurers," said Aon Benfield.