Despite the signs of some pricing stabilization in property catastrophe during the June/July 2015 renewals, hopeful forecasts for a “softening in the softening” in reinsurance pricing have proved elusive, according to Willis Re’s 1st View Report.
“The January renewals have unfortunately confounded the hopes of commentators that the market was reaching a pricing floor,” said John Cavanagh, global CEO of Willis Re.
“However, as reinsurers look to close their 2015 accounts, most will likely report reasonable headline results. But looks flatter to deceive. As the Willis Reinsurance Index for the first half of 2015 demonstrated, underlying RoEs of reinsurers are at an extremely low 5.1 percent after adjusting for reserve releases and abnormally low catastrophe losses. 2015’s full year analysis is likely to show further reductions as under-reserving issues start to appear at both a primary company and reinsurer level,” he said.
Other report findings include:
- ILS markets, which have played a major role in driving down pricing in the peak zones, have taken a more disciplined approach to pricing because their “business models do not allow the same degree of flexibility through diversification as traditional reinsurers.” This increased discipline from the insurance linked securities sector has led to “a notable slowdown” in rate reductions for higher layer U.S. property catastrophe coverage.
- Global specialty markets – especially within the aviation and energy sectors – have provided difficult renewal dynamics because “large losses and reductions in original rates have yet to dissuade the inflow of additional capacity.”
- Casualty markets also have not offered reinsurers any relief from further rate reductions, despite an increase in adverse results across a number of non-motor classes.
- Some larger insurers continue to increase their reinsurance retentions. While improved risk management is largely driving this trend, Willis warns that increased retentions could also be the “result of some potentially misplaced optimism around underwriting results as primary rates continue to reduce.”
Negative Outlook for Sector
The current challenging outlook has led rating agencies “to reinforce their negative outlook on the entire reinsurance sector.”
The negative outlook for investment income is also a factor affecting the industry. “As interest rates rise, some commentators are voicing concern that dislocation in the high yield bond market might be seen as a precursor of further turmoil,” the report said.
Fortunately, most reinsurers have “modest and manageable” exposure to high yield bonds, “but in any significant market event, there are bound to be outliers.”
Mergers & Acquisitions
Despite these negative trends, the report said, the M&A trend also continues unabated. “Asian-sourced capital is helping to drive valuations, as are buyers looking to buy scale and market relevance as deals drive yet more deals.”
Willis noted that the current high valuations are increasing the inherent risk in M&A transactions, which should give potential acquirers without clear strategies “even more reason to proceed carefully…”
“But amidst the challenging environment, two positive developments stand out. First, the recent announcement by Lloyd’s that it plans to launch a trading index to help stimulate the development of a secondary trading market and ‘attract the interest of the wider capital markets,” Cavanagh said.
“Second, the announcement by Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board, of an industry led task force. Chaired by former New York City Mayor, Michael Bloomberg, it will develop company disclosures for investors to assess physical, liability and transitional risks from climate change and related policies,” he continued.
“Quantification and disclosure of insurance risk has helped drive reinsurance demand for the last 25 years. These new initiatives are primed to do the same for the global business community: drive demand,” Cavanagh said.
The full Willis Re 1st View report, which contains commentary on key trends in major reinsurance classes and regions, is available on the company’s website.
Source: Willis Re