Reinsurance outlook–how low can you go?

All of which is likely to be good news for risk managers when it comes to their global insurance programmes. Whilst it is true that large global insurers are buying less reinsurance cover, consolidating and increasing their net retentions considerably, nevertheless the overpowering trend in the market continues to be soft pricing conditions. And with the reinsurance market showing no sign of hardening, insurers may find it hard to push through any sort of meaningful increases.hideThe three leading reinsurance brokers were crystal clear in their message. As Nick Frankland, CEO of EMEA Operations at Guy Carpenter put it: "Pretty well every programme was over-subscribed either significantly or to a large degree, and every single programme was firm ordered at less than the lowest quoted terms - and sometimes considerably less than lowest quoted terms." He went on: "We witnessed greater centralisation, greater consolidation of entities, and greater retention at all levels amongst most buyers. The reinsurance buying pool has reduced every year for the last 10 years, and continues to do so." However, he was keen that the price reductions witnessed at the renewals be viewed in perspective. "Since 2009, we have seen an overall reduction of just 25% - this in our view is the more meaningful figure, particularly given that 2009 was a profitable period for the industry. The market is still way ahead of historical lows." Block coverages He said that the main trend in terms of buying strategies in the casualty sector has been to combine programmes - putting all casualty lines, such as liability, motor and personal accident, into the same coverage. He said buyers are trying to block longer tail coverages together to achieve economies of scale, broadening of coverage and to maximise overall value. Guy Carpenter said that a major factor driving market conditions at the renewals was the absence of costly catastrophes. That resulted in global insured losses for 2014 of around $30bn, the lowest total in four years and 25% lower than 2013. On the supply side, third party capital continues to flow into the reinsurance market as institutional investors such as pension funds and hedge funds seek higher yields amid a persistent low interest rate environment. Aon Benfield noted that alternative capital representing only 12% percent of traditional reinsurer capital is substantially deployed in property catastrophe risks, however. "Fears of its disruptive impact to other sectors of the reinsurance market are overblown," said the broker. "Our view is alternative capital's next most likely disruptive move will be in property insurance and business interruption rather than casualty reinsurance." Aon added: "Insurers have the widest selection high quality offers of accretive underwriting capital choices we can recall. Growth and consolidation plans for leading insurers have found complementary support from partners in the reinsurance market - more to come." Relentless rate reductions Willis Re took a similar line to its peers. "Relentless rate reductions, low investment returns and the continued influx of alternative capital have offered no respite for reinsurers at the January 1, 2015 renewal season with a reshaping of the global reinsurance industry now starting in earnest," said Willis Re. It explained that, as expected, downward pressure on reinsurance rates continued across nearly all lines and geographies along with improved terms and conditions, with abundant oversupply of capital continuing to outstrip demand following yet another year of benign loss activity. However, Willis did add that not all reinsurers are accepting wider terms and conditions in addition to reduced rates, and a number of buyers have given firm order prices above the best market terms to maintain their relationships with key partners. Looking to 2015, Willis Re CEO John Cavanagh said: "Yet again, buyers have held sway. Also adding to reinsurer woes are the predictions that the global reinsurance market is only just managing to cover its cost of capital in 2014 and may fail to do so in 2015. Arguably, the continued lack of demand and oversupply of capital can only keep driving pricing down: unlike other financial markets, the reinsurance market lacks inherent depth, with no structured secondary trading market to help absorb the excess capacity. As a sector, we need to create depth." There's no market correction in sight, according to raters. Moody's Investors Service, which is maintaining its negative outlook for the global reinsurance sector as competitive pressures mount, explained: "We don't think the market is going to turn anytime soon, barring some kind of large natural disaster or unexpected loss that changes buyers' and sellers' perception of risk."

Reinsurance outlook–how low can you go?

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