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The reinsurance sector saw significant rate reductions at the mid-year renewals as excess capital continues to chase muted demand.
Willis Re says that continued benign loss activity throughout the first half of 2014 has compounded the softening market.
A further inflow of capital from alternative markets has added to the surplus capital, though Willis Re notes that much of the competition has also been driven by the traditional reinsurance markets. Buyers continue to reap the benefits.
John Cavanagh, CEO of Willis Re, says: “The tentacles of the softening market are spreading far and wide, with no immediate signs of relief. We’ve seen muted demand throughout 2014 and market dynamics are unlikely to change for some time to come. The current market position is increasingly challenging for reinsurers.”
He continues, “Below average loss ratios in the first half of 2014 and reasonably adequate reserving positions mean that, barring any major underwriting or investment losses in the coming months, we will see another year of reasonable returns. This places further pressure on rating levels for 2015.”
The tiering of reinsurance capacity suppliers by buyers, into traditional, collateralised and ILS markets, is adding to the competitive pressure.
The broker believes that reinsurers and fund managers trading through this challenging period are being forced to examine their strategies carefully. Against this backdrop, the report notes that this could lead to more M&A activity, capital restructuring and formations of sidecars with ILS investors.
The report also notes that as major rating agencies downgrade their outlook on the global reinsurance sector to negative, there is further concern for the reinsurance industry. The rating agencies have focused on the role of the ILS markets in driving down pricing in the high margin US catastrophe market, which has produced the lion’s share of reinsurers’ overall returns in recent years.
“Additionally, the emergence of ILS capacity in other non-catastrophe lines of business has been highlighted by ratings agencies as an area of concern,” says the report.
The report also highlights the continued growth of the catastrophe market. New bond issuance has reached $5.7 billion to date in 2014, with the total outstanding amount reaching an all-time high of $21 billion.
Willis Re adds that despite this, there are signs that sophisticated investors are starting to reduce their investments. The report concludes that this style of logical, measured investment bodes well for the long term sustainability of ILS capital and should help address some of the persistent market concerns about the long term commitment of ILS investors.
Peter Hearn, chairman of Willis Re, says: “For primary insurance companies, the ability to recognise primary rate increases while reducing reinsurance cost may be coming to an end. Rate reductions are being seen in most territories on primary insurance classes, although in many cases the reductions are not directly linked to reinsurance savings.”
Mid year renewals, soft rates, Willis Re, John Cavanagh