Reinsurance rates fall again in Europe, but moderate in the US

In the lead-up to the renewal, when many European insurers purchase their reinsurance cover, reinsurers were hopeful that rate reductions seen in recent years would slow. While this appears to have been the case in the US, Europe and Asia continued to see significant price reductions. According to reinsurance broker Guy Carpenter, reinsurance pricing at the January renewal declined for most lines of business and geographies. Globally, reinsurance rates fell by an average of 7-10%, although rate reductions for US property catastrophe business moderated, while catastrophe bond pricing also flattened. “The continued scarcity of costly catastrophe losses and more than adequate capacity led to reinsurance pricing reductions, although there are signs the rate of descent is slowing as compared to 2015,” said the reinsurance broking firm. In Europe, early expectations of a more moderate reinsurance market vanished early in the renewal season, according to Willis Re. The implementation of Solvency II in January 2016 led to some insurers buying additional reinsurance cover. Some French and Italian insurers have been buying higher limits of catastrophe reinsurance. But an abundance of capacity has led to continued softening for European reinsurance, said the broker. Willis reported property rate reductions for loss free business in Europe of between 5% and 15%, while casualty rates were between 5% lower and 2.5% higher for pro-rata, and flat for excess of loss. Specialty classes also saw the cost of reinsurance fall. Large losses and falling primary insurance rates have not dissuaded capacity from entering the aviation or energy markets, leading to prolonged softening of rates, Willis Re said.hideRates also fell in the US, but at a lower rate than previous years, according to the broker. Loss free property reinsurance rates declined by 2.5% to 7.5% at the renewal, while casualty rates have stabilised, as motor losses have increased with the uptick in the US economy. The slowdown in US rate reductions at the January renewal, which follows a similar stabilisation at the June and July 2015 renewals, is a noteworthy change for the reinsurance market, explained David Flandro, Global Head of Analytics at JLT Re. He believes that, while European and Asian reinsurance rates could still have room to fall further, the adjusted rate-on-line for US property reinsurance is now approaching levels last seen in the 1990s. “The January property/casualty renewal saw a wide range of rate reductions in the mid-single digits in the US and a wide range of reductions—including some in the double digits—outside the US. This bifurcation of the market could be an early sign that we are approaching some sort of trough,” said Mr Flandro. A number of trends appear to have taken hold in the US insurance and reinsurance market, explained Mr Flandro. “The rate of entry for alternative capital has slowed, mergers and acquisitions are having an effect at the margin, while demand has picked up a little as government catastrophe pools and certain cedants have purchased more cover,” he said. In terms of macroeconomic trends that could effect a change in the market, Mr Flandro said: “If US interest rate increases persist, particularly if the yield curve shifts unexpectedly and if this is accompanied by similar unexpected inflation—it will change the value of assets and reserves on balance sheets. And if mergers and acquisitions continue, this may likewise help create conditions for an eventual market bottom.” According to Aon Benfield, insurance companies enjoyed ‘modestly better’ pricing, terms and conditions at 1 January, 2016, and its outlook for the next renewal in April is also positive. “Insurers are likely to find improvements in pricing terms and conditions that are similar to what we achieved for clients at 1 January, 2016,” Aon Benfield said in its report. The reinsurance market continues to be shaped by the same trends of the past two years, most notably high levels of capacity as the insurance industry continues to attract capital market investors in a low yield environment. According to Aon Benfield, unrealised investment losses and adverse foreign exchange rates saw global reinsurance capital end the year 2% lower than the year-end 2014. However, at $565bn, reinsurance capital remains unchanged since the second quarter of 2015. Despite a slight decline in capital from catastrophe bonds, alternative capital at $69bn increased 8% in 2015, essentially doubling the property catastrophe reinsurance capacity of the market, according to Aon Benfield. It now represents 12% of reinsurance capital. Reinsurers are expected to make healthy profits on the back of ongoing favourable reserve developments and low catastrophe losses—at just $32bn, insured catastrophe losses in 2015 were below the ten-year annual average of $55bn, according to figures from Swiss Re. However, reinsurers earnings are expected to come under increasing pressure—all the major ratings agencies have the sector on a negative outlook. Competition, low interest rates, less favourable reserve developments and a return to normal catastrophe losses are likely to have an increasingly negative effect on profits going forward. According to Aon Benfield, leading reinsurers have responded to changing market conditions, seeking operating efficiencies and investing heavily in skills and processes to allow more risks to be managed in the reinsurance market. For example, Aon Benfield sees opportunities for reinsurers to write emerging insurance risks such as cyber, corporate casualty catastrophe cover and flood exposures, as well as US mortgage credit risk, life and annuity, and government-held catastrophe risk. The reinsurance broker also sees demand for reinsurance increasing as insurers re-evaluate their buying strategies in recognition that new capital entering the market from pension funds potentially provides cheaper risk capital. Aon analysis of US property casualty premium as a percentage of GDP over the past fifty years shows that the industry has experienced an unusual period of stability since 2010. While it is too early to bring down the curtain on the industry’s traditional cyclical pricing—by which wild upward swings in premiums typically follow large losses—Aon noted that today’s lower cost of underwriting capital may be permanent. In particular, the long-term perspective of pension fund capital being incorporated into the market may be a more efficient risk engine, it said.

Reinsurance rates fall again in Europe, but moderate in the US

Want to read this article?

Read Next

Intact offering US builders risk product

Aon’s Jennifer Bell to retire as North America chief

Risk managers taking centre stage in ESG

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate rather than exclude emerging risks: BIBA

Intact offering US builders risk product

Aon’s Jennifer Bell to retire as North America chief

Risk managers taking centre stage in ESG

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate rather than exclude emerging risks: BIBA

Want to read this article?

Read Next

Intact offering US builders risk product

Aon’s Jennifer Bell to retire as North America chief

Risk managers taking centre stage in ESG

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate rather than exclude emerging risks: BIBA

Related Articles