A benign catastrophe year in 2013 and an influx of capital are just two reasons behind a drop in reinsurance rates that has continued at April 1, according to the chairman of Willis Re.
During a telephone interview, James Vickers confirmed that the slide in reinsurance rates that began last year was followed by more reductions for January 1 renewals and hasn’t let up for April reinsurance deals.
Primary carriers, especially the larger companies, are also “more sophisticated, employing more accurate models,” Vickers said, giving a third reason for the trend. This also results in those companies perceiving that they have less reason to reinsure certain risks.
Alternative capital remains ready and willing to make investments in reinsurance risks, mainly collateralized reinsurance, catastrophe bonds and sidecars, which reduces the role of traditional reinsurers.
A combination of these factors and others is changing the face of the reinsurance market, but so far it hasn’t greatly affected the bottom line. “Underwriting results in 2013 were excellent,” Vickers said; “mainly because of the low catastrophe losses.” There’s no guarantee, however that 2014 will be as benign as 2013.
He suggested that if it does continue, there will be less of a demand for reinsurers’ capital, which could lead companies to initiate share buybacks or to increase dividends. It is also encouraging reinsurers to look beyond the saturated property-catastrophe coverage market. “They’re being pushed towards tail risks,” said Vickers, which at least partially explains the renewed interest in the casualty side of reinsurance.
In a briefing note, published in February, Willis Re said: “There has been quite a bit of discussion over the effect that insurance-linked securities (ILS) and the euphemistically labeled “alternative capital” have had on the property-catastrophe reinsurance market. Less has been said about what is happening in the casualty market, where several traditional reinsurance carriers, seeing both premium volume and margins compressed on property-catastrophe accounts, have begun to re-deploy their capital more towards casualty.
“This new capacity has resulted in a much wider choice of reinsurers for cedents, with increased supply also creating more competition in terms of coverage, structure and pricing.”
Branching out from property reinsurance, particularly in the U.S. market, is a definite change of direction. “Reinsurers are going into non-catastrophe and international markets,” Vickers said. “They’re writing business and accessing [reinsurance] buyers, who don’t need alternative capital.”
It’s a departure from traditional norms in more ways than one. The long-tail nature of casualty liability coverage, and the difficulty of creating models for it, has limited some reinsurers’ appetites in the past. Vickers suggests this might be changing, and that companies could make use of parametric triggers to try and gauge their exposures.
There’s been a similar reluctance to tap into international markets, which are frequently in developing countries, where the highly sophisticated models common to U.S. property cat are either primitive, or don’t even exist. Given the devastation that many of those countries experience year after year, with little or no insurance coverage, they could constitute a promising area for growth, possibly in conjunction with their governments.
Vickers cautioned, however, that “big investments” might be required, and that the need for highly specialized knowledge and experience is necessary.
The entire reinsurance industry, however, may eventually have to deal with a more threatening “elephant in the room”—the impact of climate change. Vickers said that the IPCC report, released Monday, wouldn’t have an “immediate effect,” but he acknowledged that it is an “important document” that will lead “to a wider discussion of climate change.”
Both insurers and reinsurers have been active in climate change research. Munich Re, Swiss Re and several others have had entire departments dedicated to researching it for more than 15 years. In a publication on Tuesday, Munich Re outlined remedial measures that have been taken to reduce the losses from floods.
(This article was originally published on Insurance Journal’s website. Reporter Charles E. Boyle is the international editor of Insurance Journal.)