Reinsurers feeling the squeeze as P&C rates drop 25%


Global reinsurers are having to offer improved pricing, terms and lines sizes in order to respond to increasing pressure from the capital markets, says Willis Re.

In its recent report on the 1 July renewals, appropriately entitled Supply Chases Demand, Willis Re found that in spite of the $30 billion of losses associated with Superstorm Sandy, rates declined at the mid-year renewals—and most markedly in the US—with rising interest from the capital markets flooding the market with additional capacity.

ILS issuance for 2013 is set to break the previous record set in 2007, while reinsurers have been active in the sidecar and collateralised space, delivering still further capacity to market. Much of this capacity has sought out US business, with Willis Re stating that the “the key battleground is in US property catastrophe where capital markets have been most active so far”.

Reinsurers have been obliged to respond to the increasing pressure on pricing and business. John Cavanagh, Global CEO of Willis Re, indicated that “traditional reinsurers’ defensive actions 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. As most programs are well over-placed, buyers are facing the challenge of signing down reinsurers’ shares.”

Reinsurers’ desire to maintain market position—particularly on key US lines—is helping to drive down rates, with some Florida property catastrophe accounts renewing down 25 percent as a result of pressures.

Reinsurers are increasingly exploring strategies to maximise their returns in what appears likely to be an extended soft cycle.

Bermuda Re asked James Vickers, chairman of Willis Re International about implications for the reinsurance sector:

What strategies are reinsurers exploring to pep up their returns?

One way is by taking more investment risk, which means they have to allocate some more capital to support their increased investment risk. Reinsurers are looking to find ways of gaining more yield, particularly as their current investments mature, which may have been made a couple of years ago when yields were more attractive.

Some are exploring the idea of becoming involved in third party capital management, acting as fund managers where they can earn fees and profit commissions.

These are the two main macro themes. The usual techniques of capital management, share buy backs and M&A are also constantly going on.

Do reinsurers now have to participate in the management of third party capital?

It is not clear that all reinsurers have to be involved in third party capital management, but I think it is helpful for those who have a well-defined underwriting and distribution platform, as well as a brand they can utilise. Strategically several reinsurers have recognised that if capital markets investors wish to be exposed to insurance event risk, then they should do it through them, rather than by giving capacity to a third party manager, who will be in competition with them.

Is there an expectation now that capital markets interest will be sustained?

This is the question of the moment. I think that there is a general expectation that it will be maintained. If it will be at a constant level, nobody is quite sure. The time it has taken for some of the more serious, long-term players to be interested in the class bodes well ultimately for their continuity.

I suspect that over time, the amount of capital coming into reinsurance from the capital markets will wax and wane, but it is now very unlikely that it will actually ever go away completely.

Willis Re, rates, property, casualty, reinsurance

Bermuda Re