January renewals reflect influx of new capital
The Guy Carpenter Global Property Catastrophe Reinsurance Rate-on-Line Index fell by 11 percent in 2012. The plunge is driven largely by the US and UK, where the composite index has fallen by 15 percent. According to Nick Frankland, CEO of EMEA at Guy Carpenter, the falling rates are a trend that began at mid-year renewals and continued through to the New Year.
Guy Carpenter’s analysis indicates that rates are falling across every territory—the only exceptions being loss affected countries like Canada and Germany—and almost every line. 65 percent of reinsurers were quoting around or below the -15 percent mark, according to Farland.
David Flandro, head of business intelligence, said: “this is the most downward renewal that I have seen in my time in the sector. This is the first time I’ve ever seen all four regions experience falling property catastrophe rates at the same time. There are many factors converging now to drive prices down.”
2012 was a below-average year for catastrophe losses, Flandro said, and capital is abundant. Guy Carpenter, in conjunction with AM Best, calculates that the reinsurance sector has $311 billion of dedicated sector capital. $10 billion of new third party capital came into the market in 2012, a record year for cat bond issuance.
Flandro said: “we ended the year with $322 billion. Despite factors that in a normal year would cause capital to decrease-- there were share repurchases, dividends and an interest rate spike-- capital increased. There was more supply and less demand. But it's important to see the influx for what it really is. Compared to the total dedicated capital, the influx is relatively small.”
He continued: “with low cat losses in an environment where earnings were strong and capital was flowing in, it was natural for there to be pressure on rates. It’s a simple question of supply and demand.”
While reinsurers will likely take a margin cut as rates decline, Frankland believes that traditional players remain in a strong position. He said: “traditional players can offer all lines, and they have reverted to relationship management in its widest sense to defend themselves. The large traditional reinsurers can write multiple lines and in areas that the capital markets can’t touch. If you’re a skilled traditional reinsurer you can undoubtedly defend your position.”
He concluded: “the question for convergence capital is where it goes next. Those that are in it for the long term will find ways of moving into different classes. But whether they can manage their relationships skilfully and trade on the same historic expertise that the professional firms have is still a big debate.”
