Recent Renewals Show Evidence of Changing State of Reinsurance Market
As large-scale multi-line insurers enter a period of consolidation following the significant drive to rationalize long-term strategic reinsurance purchasing, recent renewal activity suggests reinsurers are now increasingly resisting shorter-term aggressive buying strategies, according to Nick Frankland, CEO of EMEA Operations and Chris Klein, Head of EMEA Strategy Management at Guy Carpenter.
“In January 2015 we saw the first major wave of centralized reinsurance purchasing,” says Mr. Frankland. “The buying decision has now been elevated to the executive level, with reinsurance viewed as part of longer-term, strategic decision making. Large-scale insurers are now consolidating their positions, operating much leaner reinsurance panels geared towards improving counterparty credit risk and developing more expansive trading partnerships with key reinsurers.”
This rationalization has in part led to a continuing reduction in reinsurance buying, despite the current low rate levels. “Given where rates currently are, you would expect insurers to take full advantage,” Mr. Frankland explains. “However, we are dealing with conflicting forces and while pricing is highly attractive at present, insurers are facing difficult market conditions and chronically weak investment returns, putting immense pressure on earnings.”
An example of this was seen during the recent Asia Pacific renewals, Mr. Klein added. “On property cat, clients responded to the ongoing challenging direct market by continuing to focus on reducing overall reinsurance spend, with a trend towards further treaty consolidation and deductible increases for programs with significant exposure growth or losses.”
From a buying perspective, while recent years have been characterized by double-digit rate reductions and continual pressure on terms and conditions, there are now clear signs that reinsurers are more willing to stand firm in the face of aggressive buying tactics.
“The mid-year U.S. renewals,” Mr. Klein states, “experienced a notable moderation in property price decreases, with falls in risk-adjusted rates in the mid- to low-single digit range, as well as a reduction in capacity authorization. Reinsurers, particularly on the catastrophe side, were more willing to reduce or even decline participation where they deemed buyer demands too great.”
Surplus capacity was also on the decline. According to Mr. Klein: “In 2014, at the July 1 U.S. property reinsurance renewals, authorized capacity was 26 percent more than the capacity which was eventually signed. In 2015, this fell to 17 percent and down to 16 percent in 2016. This again reflects a willingness on the part of reinsurers to resist buyer pressure.”
Multi-year policies were subject to an even firmer stance. “There was a decline in the amount of multi-year coverage reinsurers were willing to provide,” Mr. Klein adds, “particularly for new offerings, as perceptions increase that the market is nearing the bottom and prices will stabilize in the near future. There simply isn’t a willingness to lock in current rates for a number of years.”
Another factor influencing buying dynamics is the range of potential capital sources now available. “The capital landscape is ever-changing,” Mr. Frankland explains, “with new forms and sources of capital rapidly expanding the range of options available to the buyer. This very much places the onus on the reinsurer to ensure that it is offering the most effective form of capital at the lowest possible cost.”
“Such capital diversity also elevates the position of the broker,” Mr. Frankland asserts. “At Guy Carpenter, we fully recognize that our role is central to matching buyers and sellers through the most efficient channel possible. We are in the strongest position to provide access to all forms of capital and so secure the more beneficial rates and terms and conditions.”