January renewals: brokers agree that stability comes at a price

Some of the largest re/insurance brokers are starting to see evidence of rates beginning to stabilise in the property-catastrophe market, despite nearing the historic lows of the late 1990s.

When reinsurance programmes were renewed on January 1 a number of the bigger brokers, which see enough such transactions to know, have suggested that the rate of softening has slowed – but this varies by market and depending on who you ask.

The likes of Willis Re, Guy Carpenter and JLT Re, for example, all agreed they have started to see a moderation in the declining rates reported in this renewals season, although vary in their interpretations of whether this will lead to stabilisation.

“Whilst renewals 12 months ago were mostly bifurcated between the US, where single-digit pricing declines were the norm, and the rest of the world, where double-digit falls were common, there was a more universal trend towards moderating price declines in 2017,” said JLT Re in a report.

And while there were slightly differing accounts of what this may mean in terms of profitability, there was a shared consensus among brokers that the operating environment would prove challenging in 2017.

Some of the big challenges that have helped set the tone for 2017 include the increased competition from existing reinsurers and new players with low cost, innovative business models; the significant lack of natural catastrophe losses; and the overcapitalisation of the market.

Aon Benfield suggests that the global reinsurance supply of capital has also reached new peaks, rising 5.3 percent to a new high of $595 billion over the nine months to September 30, 2016.

Capacity continues to outpace the growth of reinsurance demand, Aon Benfield says, despite insurers’ efforts to utilise this capital to expand into growing lines of business and new innovations.

Property-cat rates: decreases slow

January reinsurance renewals, along with the mid-year renewals, see a large focus on the US property-catastrophe market.

This year, a universal trend in the continued softening of the property-catastrophe market has been observed by several market players.

Willis Re, in its 1st View report published at key reinsurance renewal seasons, broke down the reductions by region, and observed similar factors driving the softening.

And although rates continue to decline Willis Re suggests they are reducing at a slower rate, as the market struggles to stabilise.

While sizeable reductions have been obtained on international business, the US showed more significant signs of stabilisation, which Willis Re suggests is driven by the capital intensive nature of some US classes and significant improvements in terms in recent years.

Reinsurance broker JLT Re is quite positive about the pricing declines in pricing, suggesting the moderation could signal stabilisation.

JLT Re’s risk-adjust global property-catastrophe rate-on-line (ROL) index had fallen by 5.7 percent at the time of January 1, 2017.

This is compared to a decline of 8.2 percent at January 1, 2016; an 11 percent decline in 2015 and a 12 percent decline in 2014.

David Flandro, global head of analytics at JLT Re, suggests that much of the moderation in the decline was driven be relatively stable property-catastrophe renewals in the US.

While magnitude of the reductions has gradually decreased year-on-year, it is still approaching the previous cyclical low of the late 1990s, and is already 33 percent below 2013 levels, Flandro explains.

Flandro says: “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.”

A similar trend can be seen in Guy Carpenter’s global property catastrophe ROL index, with pricing having fallen 3.7 percent as of January 1, 2017, compared to close to a 9 percent decline for January 2016.

This is a further example of reinsurance pricing moderating, in comparison with the past three renewal seasons, according to Peter Hearn, CEO of Guy Carpenter.

Hearn says: “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.

“An abundance of available capital and improving analytics tools are essential components to create support for notable advances. An innovative mind-set is the key to success in today’s marketplace as the increasing complexity of risk brings new levels of uncertainty.”

In terms of whether this moderation will lead to stabilisation in pricing, John Cavanagh, global CEO of Willis Re, suggests that the market is not quite there.

Cavanagh says: “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.”

ILS: competition triggers decreases

In contrast to the falling property catastrophe prices that saw reduced movement, the insurance-linked securities (ILS) market has seen much more substantial declines.

In the fourth quarter of 2016, Guy Carpenter reported decreases in ILS pricing as much as 30 percent.

This is in stark contrast to the first quarter of 2016, where catastrophe bond issuance made it the most active quarter in the market’s history.

The report highlighted that catastrophe bond issuance fell to its lowest quarterly level since 2011 in the second quarter of 2016, however.

“In response to this diminished pipeline, catastrophe bond providers responded with greater flexibility in coverage and significant decreases in price,” the report said.
“While it is too early to judge the broader impact of these changes, the last round of market-wide reinsurance price decreases were triggered in part by catastrophe bond competition.”

Guy Carpenter suggests that this fall in in ILS pricing has in turn contributed to the softening of the reinsurance market.

Willis Re saw a similar trend, stating that spread for liquid insurance-linked securities (ILS) such as cat bonds had declined by 10 percent or more in the second half of 2016.

A Willis Re report noted: “Capital markets have been active, leading to a further compression in margins, particularly on recent catastrophe bond issuances but also on a wider range of collateralized placements. Investor appetite continues to expand, most recently in motor, where issuers now have demonstrable access to alternative sources of capital.”

Challenges and opportunities of 2017

“With the January 1 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,” says John Cavanagh, global CEO of Willis Re.

As Cavanagh suggests, the current state of pricing is likely to present the global reinsurance market with numerous challenges in 2017.

“While reinsurers are still able to report profitable results, despite the underlying issues they face, the situation for many primary companies is much tougher,” he says.
“Rising combined ratios in many markets, driven by competition both from existing peers as well as from new style competitors utilising innovative low cost distribution and cost models, is a growing concern.”

Furthermore, the record levels of capacity are continuing to outpace the growth of reinsurance demand, claims Aon Benfield, in a report reflecting on the January renewals.

Breaking down the increase of reinsurance capital to $595 billion, traditional reinsurance capital increased 4.7 percent during this nine month period 2016, whereas alternative capital increased by only 9.6 percent, the smallest growth it has reported in five years.

“This result further suggest that traditional capacity is using all the tools at its disposal in order to stave off market share growth from alternative capital,” the report says.

JLT Re also observed a growing demand for reinsurance, suggesting that cedents are recognising opportunities to support growth goals, decrease costs of capital and increase franchise value based on current pricing levels.

Looking forward, one of the challenges the re/insurance market faces in 2017, according to David Priebe, vice chairman of Guy Carpenter and head of GC Securities, will be how it utilise this overabundance of capital in what he calls a ‘complex landscape’.

Preibe says: “We’re continually adapting to evolving markets to ensure our clients are provided with the product offerings that best meet their needs and the needs of their constituents to adequately insure a vast range of problems.

“With the current abundance of capacity and low interest rate environment, the complexity of the industry’s issues will make for a challenging yet impactful year ahead.”
He also cites many areas of focus for product expansion in 2017, such as the current political climate increasing the needs for terrorism cover, for example.

“Terrorism coverage needs will require a high level of vigilance. In keeping up with insurer needs, reinsurance is adapting to the evolving nature of terrorism and striving to close gaps in existing coverage.”

Other areas that may see expansion in the coming year include new technologies, big data and predictive analytics, along with the sharing economy, which Priebe suggests will create both challenges and opportunities for insurers.

Flandro of JLT Re also see the political climate, as long with the developing macroeconomic climate, will act as additional factors in shaping the re/insurance market throughout 2017.

Flandro says: “The new US political landscape, the anticipated triggering of Article 50 in the UK, unpredictable European elections and a still rapidly developing Asia will all have important implications for interest rates and inflation next year, with sector capital and pricing potentially affected.”