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.
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