Guy Carpenter & Company, LLC, the leading global risk and reinsurance specialist and member of Marsh & McLennan Companies (NYSE: MMC), reports that reinsurance market rates on line (ROLs) continued to be driven by an influx of capital from third-party investors at the July 1 renewals, in spite of catastrophe losses reaching approximately USD20 billion during the first six months of 2013 (above the ten-year average for the period). In a briefing released today, Guy Carpenter comments that robust catastrophe bond, sidecar and collateralized reinsurance activity throughout the year has for the first time pushed pricing in the capital markets to “decouple” or breakaway from levels set by the traditional market. This has in turn prompted downward pressure on overall traditional market pricing.
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While most renewal activity in this segment occurs at January 1, subsequent placements confirm that a highly competitive market exists for medical reinsurance. Capacity was rational but ample, with incumbents often renewing aggressively to avoid losing the business. Beyond competitive pricing, reinsurers looked to add greater value through their claims expertise or specialty network access.
July 1 Reinsurance Renewals Reveal Plentiful Capacity amid Benign Catastrophe Activity, According to Guy Carpenter
Reinsurance rates were flat at the January 1, 2012, renewal for the international accident reinsurance market. This is expected to continue through 2012, coupled with continued steady performance and the possibility of increased M&A activity. Subject base exposure increased 5 percent year over year, driven by underlying sales growth and price inflation on a macro level. As pricing becomes more favorable - especially at higher levels, for example, ROLs of 1 percent to 1.5 percent - the trend is to buy more. Vertical retentions are gaining popularity as a way to maximize the use of capacity at minimum ROL.
Slower growth in primary medical insurance rates had implications through the reinsurance sector at the January 1, 2012, renewal. Loss-free life and accident catastrophe programs sustained risk-adjusted price decreases of 5 percent to 8 percent on average, and rates for medical per member excess of loss working layer programs were down around 5 percent.
Medical insurance reform remains the strongest driver is this space, with insurers still grappling with concerns around unlimited lifetime maximums and minimum loss ratios. Reinsurers have responded by offering unlimited lifetime excess of loss coverages that have proved popular with some insurers. Pricing for these very high layers, such as unlimited excess of USD10 million per person, is capacity and market-based, as the layers are so far out-of-the money that there is no credible experience. Further, in the short term, many insurers will maintain annual maximums where possible, which will limit observable experience at the highest amounts. Claims and rate-making for the very high reinsurance coverages will be interesting to watch over the next couple of years as the different elements in the healthcare delivery value chain adapt to the new incentives in health care reform.