Reinsurance prices fall further at renewal but pace of decline slows

Reinsurance buyers saw further price reductions at the January 2017 renewal, although the rate of reductions slowed, according to brokers.

Willis Re said that many insurers managed to achieve improved terms when buying reinsurance programmes at the January renewal. Sizeable reductions were obtained on international business, although there was more stability in the US.

“While there are signs that reinsurers are not prepared to be as flexible as in earlier years, many buyers have yet again managed to achieve improved terms,” said Willis Re.

While abundant capital continues to drive the soft market in the US, price reductions were significantly less at the January 2017 renewal than the same period of 2016, the broker continued.

Loss free US property catastrophe reinsurance rates were flat to down 5% during the January 2017 renewal. Loss hit programmes saw increases of 5% to 15%, according to data from Willis Re. Loss free non-catastrophe rates were flat to down 5%, while loss affected business saw increases of 5%.

In Europe, the renewal showed “clear signs of a softening market”, reported Willis Re. Benign catastrophe losses saw reinsurance cat rates continue to soften in the UK. In Germany softening eased compared with the previous renewal, added Willis Re.

Reductions for loss free Europe-wide property catastrophe business were in single digits – down 4% to 6% for loss free property catastrophe cover. Price declines were as high as 7.5% in the UK, France, Nordics and Italy. In the Netherlands they fell by 10%.

Willis Re said casualty rates were stable in Europe with “clear signs” that the downward pressure on pricing is abating. Major European leading reinsurers are becoming stricter on pricing requirements, while loss affected programmes have seen rate increases, Willis Re said.

According to JLT Re, rates at the January renewal were near historic lows. Global property-catastrophe pricing is now 33% below 2013 levels and approaching the previous cyclical low of the late 1990s, the reinsurance broker said.

“It is becoming clearer that the scope for further price reductions is limited for some classes of business as rates near technical minimums, i.e. the point where expected returns on capital fall below costs of capital,” said David Flandro, global head of analytics, JLT Re.

Guy Carpenter, the reinsurance broking arm of Marsh & McLennan Co, noted that price reductions at the 1 January, 2017 renewal across most classes of business and geographies moderated compared to the past three renewal seasons.

The broker’s rate-on-line index showed that global property catastrophe reinsurance pricing fell 3.7% this year compared to almost 9% a year ago.

JLT Re also identified a price moderation trend during the January 2017 renewal. While rate decreases slowed in the US last year, this trend is now being seen in international property-catastrophe reinsurance, it said.

“Increased underwriting discipline was evident across non-catastrophe lines, which also exhibited moderating rate reductions at 1 January 2017,” said Mike Reynolds, chief executive at JLT Re.

“Rates for most casualty classes were flat to moderately down. Specialty classes once again generally saw more substantial rate reductions. Nevertheless, rate declines in certain specialty lines saw moderations compared to last year,” he said.

Guy Carpenter and Willis Re both noted that reinsurance prices fell at the January renewal despite increased losses in some sectors. Insured catastrophe losses were $50bn in 2016, above the ten-year average of $45bn, according to figures published by Munich Re last week.

The general downwards trend in reinsurance pricing reflects the high levels of capital in both the traditional reinsurance and alternative capital markets. Guy Carpenter estimated that dedicated reinsurance capital increased by 5% from 1 January, 2016 to 1 January, 2017, while alternative capital increased by 10%.

The reinsurance market is “awash” with capacity, which is preventing any meaningful upturn in pricing, according to JLT Re. The broker estimated that reinsurance capital at the end of 2016 was at an all-time high of $320bn, while premiums were just $255bn.

“The challenging operating environment confronting reinsurers is starting to have a discernible impact as they face the reality of deteriorating results and margin compression,” JLT Re said.

Reinsurers wanted to see prices stabilise at the January renewal, but these hopes were dashed, Willis Re said in its recent January renewal report.

“Despite the pressures the global reinsurance market is facing, the ability to produce yet another profitable year, somewhat against the underlying pricing models, has meant that the pain threshold to force a market pricing stabilisation has not yet been reached,” said John Cavanagh, Global CEO Willis Re.

“With the 1 January renewal season setting the tone for 2017, reinsurers can only look forward to another demanding year where luck will play an even larger role in determining their final results.

“At the same time, buyers can anticipate that the period of time where reinsurers reluctantly accommodate their requests will be extended,” he said.

The attractive reinsurance market had led some buyers to purchase additional cover, although many were happy to bank savings. Brokers said that market conditions were encouraging buyers and reinsurers to consider broader and more innovative forms of cover in areas such as terrorism and cyber.

According to Guy Carpenter, product innovation and coverage customisation remain a key focus for reinsurance buyers. New advances have included the expansion of cover for historically difficult and under reinsured risks such as flood, the broker said.

“Although current renewals indicate that the decline in reinsurance pricing is slowing, this moderation was not surprising and the more interesting development may be the continued evolution of coverage and solutions to meet changing client needs,” said Peter Hearn, CEO of Guy Carpenter.