New capital to usher in more aggressive reinsurance pricing and boost primary cat market

Pricing in April, which sees mainly Japanese and some US insurers renew their reinsurance arrangements, was flat overall, and slightly down on loss-free lines of business, according to reinsurance broker Willis Re. The renewal was marked by significant amounts of new capital entering the market, the broker said. Some $35bn of new capital has already entered the reinsurance market from a variety of sources this year, up 30% on 2012, said Willis Re in its April Renewals Report. In particular, capital market investors are expanding the scope of their activities in the reinsurance sector through catastrophe bonds, collateralised reinsurers, sidecars and reinsurer operated third-party funds. Willis also notes that there has been a 'clear acceleration' of third party capital entering the market in recent months.hideAon Benfield, the world's largest reinsurance broker, also noted the positive effect of new capital for its insurer clients. "New capital flowing into the insurance-linked securities (ILS) and collateralised reinsurance market materially altered the course of April renewals for peak US perils and are expected to have a continuing material benefit for clients as we look forward to the June and July renewals," it said in its 1 April Reinsurance Market Outlook. Traditional reinsurance capital grew 11% in 2012 to $505bn, however demand for reinsurance is flat, Aon said. Renewing cat bonds saw prices decrease by 25% to 70% for peak US hurricane and earthquake-exposed transactions. The cat bond market now offers the lowest cost of reinsurance for peak perils since it was established after Hurricane Andrew in 1992, according to Aon. "If the new price points available from the ILS and collateralised markets persist then the strategic options for property insurers expand greatly. If the financial management of severe catastrophe outcomes can be attained at multiple year terms well inside the cost of equity capital, then at the extreme, primary property growth in active zones could resume for companies previously restricting supply," Aon said in its report. Many traditional reinsurers now see the flow of capital coming into the reinsurance market as a 'direct threat' to their business models, said Willis Re. "While some reinsurers are considering how to respond, others are moving ahead with the development of third party capital management propositions to offer their own skills and platforms as fund managers," said Peter Hearn, Chairman of Willis Re. This influx of new capital could also have a significant impact on post-event response from the global reinsurance market, said Mr Hearn. Although yet to be tested, third party capital has continued despite near-record catastrophe losses in 2011 and Superstorm Sandy in 2012. "To date, the traditional model of fresh capital coming into the market has been through the formation of new companies but it is being overtaken by a new model of fast capital flowing in through less permanent structures," he said. The April renewal in Japan was generally flat, although loss free wind, flood and earthquake reinsurance contracts saw up to 2.5% reductions. Japan personal accident reinsurance was particularly soft with rate decreases of up to 10%. Just two years on from the devastating Tohoku Earthquake there was plentiful capacity available in the Japanese renewal. Many existing reinsurers were looking to deploy more capacity for Japan earthquake while a few new reinsurers and funds were looking to enter Japan for the first time, said Willis Re. Windstorm capacity exceeded demand and prices were flat. Wind treaties that were very challenging to complete 12 months ago are now heavily oversubscribed, with no change in the underlying risk, said the broker. Despite losses from Superstorm Sandy, new capital and competition from capital markets saw continued pressure on US reinsurance pricing in April. Loss free contracts enjoyed reductions of 5% to 10% while increases for loss-affected business were 10% to 15%. The effect of the new capital flowing into the market has not yet been fully felt in the April renewal, but is likely to become more of a factor in future renewals. Early indications for the 1 June, 2013 Florida market renewals are for more aggressive pricing, Willis Re said in the report. "The renewal of the Citizens Everglades Re 2013 natural catastrophe bond at a significantly reduced price and Allstate's decision to reduce their traditional placement and increase their use of catastrophe bonds and alternative markets are driving more aggressive pricing," said Mr Hearn. Despite low interest rates and losses from Superstorm Sandy, reinsurers produced good profits in 2012, reflecting a combination of overall lower catastrophes, reserve releases and rate increases in the early part of 2012. However, reinsurers' revenues and profits are expected to come under increasing pressure. Overall global reinsurance premium volume is being squeezed by a combination of mergers and acquisitions among insurers and higher retentions by large primary carriers. At the same time, sluggish growth in mature markets is not yet being offset by growth in emerging markets, said Willis Re.

New capital to usher in more aggressive reinsurance pricing and boost primary cat market

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