Guy Carpenter reports reinsurance pricing fell at the January 1, 2015 renewals in many segments, affecting almost all lines of business and geographies, continuing recent renewal trends.
According to Guy Carpenter’s 2015 global renewals report, Shaping the Future: Positive Results, Excess Capital and Diversification, a major factor driving market conditions at the renewals was the lack of costly catastrophes that resulted in global insured cat losses for 2014 of approximately USD34 billion, the lowest total in four years and 25 percent lower than 2013.
Another major driver, third party capital, continued to flow into the reinsurance market as institutional investors such as pension funds and hedge funds sought higher yields amid a persistent low interest rate environment. As convergence capital has expanded, utilization within catastrophe products grew to 18 percent of total catastrophe limit or USD60 billion, up from 15 percent at year-end 2013. This was a contributing factor to the moderate expansion of overall catastrophe limit purchased as pricing came down and buyers were able to secure more limit at lesser cost.
Alternative capital continues to access the reinsurance market in a variety of forms. Industry loss warranties (ILWs) decreased through 2014 as price reductions made indemnity protections more attractive but this was more than offset by growth in collateralized reinsurance, sidecars and catastrophe bonds. This was well illustrated by the growth in catastrophe bond issuance through 2014, a record setting year with 144A property and catastrophe bond issuance of approximately USD8.03 billion and risk capital outstanding at nearly USD23 billion as of December 31, 2014.
These factors led, in turn, to surplus capacity across most business segments as competition spilled beyond property catastrophe lines.
The Guy Carpenter Global Property Catastrophe Reinsurance Rate-on-Line (ROL) Index fell by 11 percent at the renewals. Renewals continued to be characterized by lower rates, excess capacity and broader terms and conditions.
“Market conditions that continue to bring downward pressure on pricing are being met with tremendous, client-focused innovation,” said Lara Mowery, Global Head of Property Specialty at Guy Carpenter. “The result has been a customized approach with expanded product offerings and terms and conditions that benefit our clients.”
Rate reductions also occurred in most other lines throughout 2014 as reinsurers continued to look for opportunities to utilize excess capacity, increasing competition across all lines. Specific loss experience did have an impact on programs; however, even the results in these cases were moderated by excess supply.
The continued expansion of accessible capital came from both favorable company results, due, in part, to light catastrophe losses in 2014 and new capital coming into the reinsurance sector. Guy Carpenter estimates dedicated sector capital remained at near record levels having risen to approximately USD400 billion at year-end 2014 from traditional rated markets and all sources of alternative capital including sidecars, collateralized reinsurance vehicles and catastrophe bonds.
“The sustained influx of capital from new entrants and growth from traditional sources continues to reshape the reinsurance landscape’s capital structure and drive innovation in the form of insurance-linked securities (ILS) and collateralized aggregate solutions,” said David Priebe, Vice Chairman of Guy Carpenter. “We are also seeing reinsurers execute strategic decisions through the utilization of third party capital facilities and M&A activity in response to new market realities; which is further blurring the lines between ‘alternative’ and ‘traditional’ markets.”
While some companies took advantage of the significant price decreases and coverage improvements to increase protection for the same or decreased total spend, there was a counter-trend dampening the potential for greater expansion in limit purchased. The continued centralization of reinsurance purchasing by larger groups in all regions has led to increased retentions and more focused spending with a smaller number of reinsurers. “However, the lower rates, broader terms and conditions, and excess capacity available across the EMEA region have meant that creative opportunities can still be found for a wide range of clients,” said Nick Frankland, CEO of EMEA Operations at Guy Carpenter.
A Client-Driven Approach
As the marketplace continues to evolve and capital model adjustments occur, companies are being challenged to rethink their overall capital management. Lower underwriting returns are causing insurers to seek ways to reduce their costs of capital and look for enhanced asset returns that are now being provided through alternative and secondary markets. In addition to expense management and synergies, the search for greater scale and diversification has also become more critical to some companies as a way to increase or maintain profitability.
The current market environment has provided abundant opportunity to push risk management solutions in new directions. Advances have developed through new technologies, increasing sophistication in measuring risk and the application of abundant capital to pursue tailored strategies. Guy Carpenter’s client-focused approach and deep industry relationships have helped clients pursue specific coverage and pricing goals by maximizing the use of both traditional reinsurance and diversified capital market products.
During this year’s renewals, the focus on tailoring solutions to fit client needs continued and many clients were able to achieve broader coverage. Among the wide range of options clients most commonly sought were extended hours clauses, improved reinstatement terms, addition of non-modeled lines and expanded coverage for terror exposures. This was achieved on a case-by-case basis, with clients weighing the benefits specific to the composition of their portfolios and corporate goals against the relative cost savings. In the US, terrorism coverage became a significant topic in the last two weeks of the renewals as Congress failed to renew the “Terrorism Risk Insurance Program Reauthorization Act” or TRIPRA and companies evaluated potential options to address this unexpected development.
Guy Carpenter’s commitment to deliver innovative solutions while closely collaborating with markets was demonstrated in 2014 with the implementation of several products and specialty practices. Guy Carpenter launched a new satellite-based catastrophe evaluation service, GC CAT-VIEW℠, to provide clients affected by the recent UK floods with initial insured loss estimates. Additionally, Guy Carpenter developed a leading-edge probabilistic hail model for Europe, the G-CAT® Hail Model, which features a unique approach to producing historic hail tracks using a lightning detection system. Guy Carpenter also started a new Cyber Solutions Specialty Practice to deliver cyber reinsurance solutions at the leading edge of developments taking place in this evolving space. Also initiated was a new, combined US Healthcare & Life Specialty Practice to focus exclusively on the unique needs of healthcare providers and insurers as the US healthcare insurance environment undergoes changes stemming from the implementation of the Affordable Care Act.
In the area of capital markets solutions last year, Guy Carpenter’s GC Securities* completed several transactions distinguished as the first of their kind. This included the first catastrophe bond issued by the World Bank on behalf of the Caribbean Catastrophe Risk Insurance Facility, a risk-pooling facility designed to limit the financial impact on its 16 Caribbean member governments resulting from catastrophic earthquakes and hurricanes. The unit also completed the first yen-denominated cat bond and an Italian-sponsored cat bond, which was also the first 144A cat bond to provide indemnity protection against European windstorm risks.
In 2015, the demand for more state-of-the-art, client-focused strategies will only increase. Clients will seek assistance with the structuring of alternative reinsurance vehicles, entry into new markets and the creation of new distribution channels and new products to address emerging risks.
Excess capacity marked by the influx of traditional and alternative sources of capital along with low investment returns and less costly catastrophic events in recent years will continue to make the reinsurance marketplace a challenging landscape. Guy Carpenter’s expertise and business relationships with all sources of capital have helped many clients successfully raise, manage and optimize capital.
As a new breed of risks emerge and competitive market conditions persist, Guy Carpenter will continue to deliver innovative solutions, advanced analytics and market intelligence to help our clients achieve profitable growth.
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.