“Rate increases in the North American and International reinsurance markets are due to modest losses and poor results – not a hardening market,” according to a newly release report from Willis Re, the reinsurance arm of Willis Group Holdings.
The 1st View mid-year renewals report, entitled ‘Looks can be Deceiving’, concluded that “despite headline figures forecasting rate increases, there is plentiful capacity in the market. The targeted underwriting approach taken by most reinsurers to manage, analyze and, in some cases, de-risk their portfolios, has been rewarded with differential pricing.” This approach “has been welcomed by cedents, but does not support a generalized market hardening,” Willis Re added.
“The reinsurance market is stable and orderly, but the reality is that it is not hardening,” explained Willis Re Chairman Peter Hearn. “In fact, some buyers with loss-free programs, even in areas of peak exposure, have managed to obtain risk-adjusted rate reductions at the June 1 and July 1 renewals.”
Although the report identifies model change and macro-economic factors as playing an “increasingly muted role”, Hearn acknowledged that the changing regulatory requirements and the challenges around investment income constitute significant industry trends.
He stated that the “impact of changes to vendor catastrophe models is becoming increasingly muted as the industry becomes more sophisticated. Companies and Regulators realize that they cannot be too reliant on one model, and are instead blending models to show realistic possible outcomes.”
According to the report, most reinsurers’ satisfactory investment returns in 2011 were derived from capital gains arising from falling interest rates. There are concerns however, that once interest rates begin to rise, falling values of bond portfolios could result in potential investment losses for reinsurers.
Hearn did indicate that the impact of external economic factors could eventually result in a hardening market. He stated: “Curiously, despite the fact this scenario is well known and widely discussed in industry circles, pricing on longer tail classes remains soft despite these warning signs to reinsurers’ balance sheets. The eventual increase in interest rates, coupled with an increase in inflation, could potentially trigger a hard market ahead of significant loss events.”
Other key findings in the report include the following:
• A marked increase in the flow of capital into non-traditional vehicles, with investors attracted to the non-correlated returns available in reinsurance risk
• The growing sophistication of the catastrophe bond and Insurance-Linked Securities (ILS) sector means they will increasingly compete with traditional reinsurance to cover risk
• The political risks market continues to be impacted by the credit crunch and resultant global recession, with the ever-changing euro zone crisis of concern to both clients and reinsurers
• In the US Healthcare market, reinsurance market conditions for Medical Professional Liability business remain favorable with pricing flat to falling, reflective of moderated loss trends and stable underlying rates.
Reinsurance markets in general, however, are receptive to supporting required limit capacity.
Source: Willis Re