Reinsurance rates slide but yet to filter down to primary market

According to broker Willis Re, reinsurance rates were under pressure in most markets at the June and July renewal that accounts for around half of the US reinsurance renewals. The contract negotiations saw prices fall by 15%-25% for loss free cat business in Florida, and nationwide by 10%-15%. The reductions were largely the result of increasing competition in the US reinsurance segment from capital market players, a trend first highlighted at the April 2013 renewal. According to Willis Re, capital market investors in collateralised reinsurance, catastrophe bonds and Industry Loss Warranties (ILWs) will have an estimated $42bn of limit in force by the end of this year.hideHowever, reinsurers are unprepared to see their market positions eroded by new capital entrants, said Willis Re in its latest report. Defensive measures include offering price reductions, larger line sizes and, in some cases, broadening of cover by offering options such as multi-year agreements, extended hours clauses and additional reinstatements. Capacity for aggregate cover is also more widely available, it said. While soft market conditions are good news for corporate insurance buyers, lower US reinsurance rates are not necessarily filtering down to primary insurance prices, said James Vickers, Chairman of Willis Re International. There is currently a disconnect between US insurance prices, which have been going up in recent quarters, and US reinsurance rates, which have been falling, he said. This is the first time since 2001 that increases in US primary rates are outpacing reinsurance rating movements, Willis Re noted in its report. Insurance rates are playing catch up to those of reinsurance, explained Mr Vickers. US primary rates have been declining in recent years, while reinsurance rates have been stable, he said. Rate reductions will, however, offer some relief to US primary insurers, who are dealing with issues of their own, including low bond yields, said Mr Vickers. So far the effect of increased capital market appetite for insurance has been limited to the US property catastrophe market, explained Mr Vickers. Margins for US catastrophe business are larger than those of other lines and regions, and capital market players have yet to show that they will look to compete for reinsurance business in non-US markets, he said. "There have been a few signs of competition from capital markets outside the US, but it is not yet clear if, or in what way, this [trend] might develop. Some in the market believe it is only a matter of time, but this has to be balanced with the lower margins for natural catastrophe reinsurance business outside the US," said Mr Vickers. Other markets also experienced a general trend towards softening at the June and July renewals. UK catastrophe excess of loss rates were under downward pressure-with loss free accounts seeing reductions of 5%-8%. In Australia, which has experienced severe flood and storm losses in recent years, significant reinsurance capacity was available and rates reduced by an average 0-5% across the market for non-loss affected programmes. Even in earthquake-affected New Zealand appetite and confidence has been returning after a recent absence of seismic activity. According to Willis, the softening of property catastrophe rates has been spilling over into other classes. For example, casualty markets are seeing substantial increases in capacity and rate softening around the world, and this is despite reinsurers' concerns about the current low interest rate environment, the broker said in its report. Abundant capacity means it is difficult for reinsurers to raise general liability and professional liability rates, according to Willis. Casualty reinsurance prices reduced in most regions-as much as 15% down for US professional liability. Reinsurance for speciality lines are also seeing competition. For example, an abundance of reinsurance capacity for political risks saw the softening of rates seen at 1 January continue, with prices down by an average 5% to 10% compared to 2012. There are still pockets where rates are holding. For example, capacity for financial institution professional liability is available but continues to be constrained by accumulation and systemic concerns. Systemic concerns also remain in other areas, such as cyber, but are becoming less pronounced, the broker said.

Reinsurance rates slide but yet to filter down to primary market

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