Jan. 1 Renewal Results: Some Price Stabilization, Record Capital, Demand Uptick

January 24, 2017 by L.S. Howard

The challenging operating environment confronting reinsurers has led to some price stabilization at the Jan. 1, 2017 renewals, as they face the reality of deteriorating results and margin compression, according to JLT Re in a newly published report.

Twelve months ago, single-digit pricing declines were the norm in the US, while the rest of the world regularly saw double-digit price declines, JLT Re said. On the other hand, during the Jan. 1, 2017 renewals, “there was a broader trend towards moderating price declines,” noted the report titled “Renewal Retrospective – in the Balance.”

“As a result, programs across a number of different territories and lines of business generally renewed closer to expiring levels, although some continued to experience more significant downward pricing pressures,” it continued.

“Near-record levels of capital currently remain the dominant force in determining the direction of reinsurance pricing, as excess supply chases relatively muted demand,” said David Flandro, global head of Analytics, JLT Re.

“Nevertheless, moderating capital inflows, increasing cessions at the margin, the prospect of higher insured catastrophe losses, reserving volatility, inflationary and interest rate concerns and declining forward reinsurer returns are coalescing to push back against downward pricing pressures,” he added.

“[S]trategic reinsurance purchasing by some buyers has led to a subtle but notable uptick in demand in recent years,” said Mike Reynolds, global CEO, JLT Re.

“Reinsurers have produced returns well in excess of expectations over the last three years, due in large part to favorable reserve development and a sustained period of good fortune with low insured catastrophe losses; 2016 was a reminder that these tailwinds cannot be guaranteed in future years,” he added.

Market Dynamics

The JLT Re report cited the market dynamics that affected reinsurance pricing stabilization during the recent renewals:

Over-Capitalized Sector

However, these factors continue to be offset by near-record levels of dedicated reinsurance sector capital, although 2016 was the first year since 2008 in which dedicated reinsurance capital did not grow meaningfully, the report affirmed.

At the end of 2016, JLT Re estimated sector capital to be approximately US$320 billion (compared to premiums of US$255 billion).

“The result is a continued supply and demand imbalance and a market awash with capacity. This abundance of capacity is preventing any meaningful pricing upturn at present.”

The JLT Re report provided an overview of selected markets and products during the January 2017 renewal. A summary of several of these sections is provided here:

Several cedents had losses from Hurricane Matthew which affected the first (and occasionally second) layers, but this did not have a major impact on pricing for 2017 programs. Non-loss-affected layers mostly saw moderate rate reductions, whilst pricing generally held firm for loss-affected layers without registering significant price increases.

There was also a marked increase in demand, with several cedents purchasing new top layers to take advantage of historically low pricing levels. Proposed changes to A.M. Best’s Capital Adequacy Ratio (BCAR) also positively impacted demand at Jan. 1, 2017.

Renewals for other lines, including motor and general third-party liability, were dependent on historical performance. Renewals ranged from flat to down 5 percent for these lines of business, JLT Re said.

Any changes to premium incomes, risk exposures, loss experiences and the structure of programs were key to the outcome of renewals in 2017. First layer retentions generally remained unchanged where exposures were flat. The trend for increased self-retention levels experienced in 2016 slowed.

D&F risk excess business saw some loss activity in lower layers in 2016 due to events such as the Gap warehouse fire in the US. Rates at Jan. 1, 2017 were experience driven for first layers., while concessions were seen on loss-free middle layers, and top-layer pricing was considered by most markets to be at, or close to, minimum ROL levels.

Recent notifications put considerable pressure on immature programs at Jan. 1, 2017, particularly those that had previously benefited from heavy experience discounts. “As a result, markets took tailored approaches to each program,” the report added.

The full report is available via JLT Re’s publications portal, where a PDF of the report is published.

Source: JLT Re

*This story was published previously in our sister publication Insurance Journal.