Reinsurers dealing with Jan. 1, 2016 renewals are seeing continued pricing declines in most cases, with no end in sight to the years-long trend, Willis Re asserted in a new report.
The situation is so dire that rating agencies have continued their negative outlook for the whole reinsurance sector, Willis Re said in its latest 1st View Renewals report.
“Despite signs of price stabilization in peak property catastrophe zones during the June/July 2015 renewals, the hopeful forecasts for a “softening in the softening” at the January 2016 renewal season have proven illusory in all but a few cases,” Willis Re Global CEO John Cavanagh noted in the report’s introductory letter.
Cavanagh added that buyers are again seeking reduced prices and broader coverage from their reinsurer partners “to help manage their portfolios as original rates have fallen across most markets and classes.”
Reinsurers are dealing with particular pricing problems in global specialty markets such as the aviation and energy sectors, as “large losses and reductions in original rates have yet to dissuade the inflow of additional capacity,” Cavanagh wrote. As well, reinsurers aren’t seeing any rate reduction relief in casualty markets, even as there have been spikes in adverse events in various non-motor classes.
Property catastrophe pricing is also seeing continued risk adjusted rate reductions, Willis Re said. There is a caveat, however: rate drops have slowed for higher layer U.S. property catastrophe covers where insurance linked securities markets (which have helped drive down pricing in peak zones), have taken a more disciplined approach.
Even as some insurers are using rate reductions to buy more reinsurance, some larger companies are still increasing their retentions.
Willis Re noted that the trend stems from improved risk management, but that “misplaced optimism” around underwriting results is also a factor as original rates decline.
Willis Re’s other conclusions based on Jan. 1 rate renewals:
- Reinsurers included within the Willis Reinsurance index for the first half of 2015 are seeing just a 5.1 percent return on equity after adjusting for reserve releases and “abnormally low” catastrophe losses. There will likely be more reductions for the full year.
- M&A will continue, with investors from Asia and other locales looking to boost scale and market relevance.
One high note: Willis Re pointed two initiatives that could impact reinsurers.
Lloyd’s will launch a trading index to help stimulate the development of a secondary trading market and spur interest from wider capital markets. As well, the Financial Stability Board announced in December that it would launch an industry-led disclosure task force on climate-related financial risks. Former New York Mayor Michael R. Bloomberg will chair the entity—the Task Force on Climate-related Financial Disclosures, which will develop voluntary, consistent climate-related financial risk disclosures companies can use to provide information to lenders, insurers, investors and other stakeholders.
Cavanaugh sees the last development as a potential driver of reinsurance demand. “Quantification and disclosure of insurance risk has helped to drive reinsurance demand for the last 25 years,” he wrote.
Willis Re is the reinsurance division of Willis Group Holdings plc, a global risk advisory, insurance/reinsurance broking and human capital and benefits firm.
Source: Willis Re