August 25th, 2015

Mid-Year Report: Executive Summary, Part I

Posted at 1:00 AM ET

The (re)insurance industry continues to evolve and adapt to a changing market on many fronts. Recent areas of focus include heightened cyber security risk, increased regulation, political and economic uncertainty, low interest rates and slow economic growth. At the same time, (re)insurers are managing new capital inflows, excess capacity and few catastrophe losses.

Changing regulatory and rating agency requirements are leading (re)insurers to implement sophisticated capital models and enterprise risk management practices. The emergence of increasingly complex global risks is challenging the way we evaluate and mitigate their potential impacts at the same time that digitization and big data analytics offer new insights for underwriting.

Investors seeking non-correlation and returns similar to or better than comparable debt instruments continue to be attracted to the (re)insurance industry. The ongoing entry of new capital has led to changes in the sector’s capital structure, further spurring innovation. One outcome impacting the industry as (re)insurers evaluate the most effective path forward is the several large mergers in recent months. Merger activity will continue to reshape the landscape on both sides of the reinsurance transaction moving forward and we examine these developments later in this report.

In addition, in the past 18 months, approximately 18 billion of new capital has entered the market through investments in insurance-linked securities (ILS) funds such as pension and sovereign wealth funds; sidecars; hedge fund-backed reinsurance companies and collateralized reinsurance vehicles. While ILS activity is traditionally high ahead of the U.S. wind season, the first quarter of 2015 was the most active quarter in history.

Among these factors, the combination of capital inflows, excess capacity and lack of costly catastrophes have led to falling prices in the last 24 months. Rate declines on most lines of business have persisted through mid-year renewals. However, average decreases have mitigated somewhat on U.S. catastrophe reinsurance, where declines were the largest over the previous two renewals and over-capacity was not as prevalent, most notably on new or expanded layers. Industry loss warranties have seen perhaps the most significant shift as active placement activity since the end of the first quarter has reversed the trend of decreasing prices.

Link to Part II>>

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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.

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