Reinsurance capital levels stabilized during the Jan. 1, 2016 renewals – showing no growth for the first time in several years – and prices continued to soften, according to Guy Carpenter & Co.’s global January renewal report.
The scarcity of costly catastrophes and abundant capacity led to reinsurance pricing reductions for most lines of business and geographies, said the report titled “The Reinsurance Market 2016: Innovation and Customization.”
However, there are signs the rate of descent is slowing, compared to 2015 – particularly in U.S. property catastrophe lines.
“This trend was largely influenced by two prior years of steep declines and a larger increase in demand in property and certain other lines that began in 2015,” the report said.
Pricing also flattened in the insurance-linked securities space, Guy Carpenter said. As the ILS sector was at the leading edge of attracting new capital “while undergoing significant decreased price adjustments, it is notable that rates have currently reached an equilibrium.”
The report noted, however, that such underwriting discipline may attract more capital to the space, “particularly if growth in demand continues.”
“In 2015, while the commitment from the capital markets grew, the rate of growth slowed and was offset by a decline in dedicated capital by rated carriers, leading to overall capital levels that were flat,” Guy Carpenter said, noting, however, that capacity remains more than adequate.
Buyers recognized that abundant capital combined with cumulative pricing decreases provided a unique opportunity to increased limits purchased in the past 12 months, the report continued.
“As reinsurance providers continue to evaluate how to compete in a market flush with capacity, an environment of innovation, responsiveness and customization has become the norm,” said Lara Mowery, global head of Property Specialty at Guy Carpenter. “Solution-oriented dialogue has elevated significantly and insurers are increasingly able to focus on improvements in the structure and efficiency of their programs to incorporate more refined capital management goals.”
Property Catastrophe Pricing
While there was some slight variation among the major regions tracked by Guy Carpenter’s Regional Property Catastrophe ROL index, all experienced price declines of between 7 and 10 percent, with international regions showing greater reductions in the index than the U.S., the report explained.
“Individual renewals experienced a wide range of outcomes dependent on loss activity, type of structure, geographic concentrations, past renewal experience and other company specific features,” it added.
Risk adjusted pricing for U.S. property catastrophe decreased by 5 to 8 percent, on average, compared with average decreases a year ago of 7 to 14 percent. While capacity was plentiful, the report said, there was a wider range of responses to individual renewals, as markets were more apt to decrease lines or decline participation on tight margins.
“The January 2016 reinsurance renewal in the EMEA region was orderly and business-like with abundant capacity. There were few surprises and pricing, terms and conditions were broadly in line with expectations expressed at Baden Baden in October 2015,” said Nick Frankland, CEO of EMEA Operations at Guy Carpenter.
“Reinsurance buyers generally took cash savings from reduced prices rather than expanding coverage, suggesting a priority of supporting profitability. After many years of waiting, Solvency II exerted a meaningful influence on buying and we expect this to increase in 2016 as the new regime becomes embedded,” Frankland went on to say.
Global Catastrophe Losses
Globally, significant insured losses from catastrophes reached approximately $30.5 billion in 2015, compared to $32 billion in 2014, the report said, citing record-breaking cold weather in the U.S. and Canada, and winter storms in Europe, as the major natural disasters in the first quarter of 2015. Tropical cyclone activity in the Pacific also contributed to losses. Heavy rains in the Southern United States and hailstorms in Australia contributed to the bulk of losses in the second quarter, along with the earthquake in Nepal.
The most significant man-made disaster occurred in the third quarter with the explosion at the Port of Tianjin in China in August. This landmark event caused significant insured losses in the range of $1.6 billion to $3.3 billion, and is likely to constitute one of the largest insured man-made losses to date in Asia, Guy Carpenter said.
Influence of Capital
In 2015, the industry experienced an estimated 2 to 3 percent decline in the amount of capital dedicated to writing reinsurance by rated markets, while convergence capital continued to grow, although at a slower rate in comparison to previous years. The decline in rated capital was driven in large part by the rate environment, which caused capital to shift slightly toward insurance lines and away from reinsurance lines, the report said.
At year-end, total capital dedicated to reinsurance was approximately $400 billion, unchanged from the previous year. Convergence capital, including catastrophe bonds, industry loss warranties (ILWs), collateralized reinsurance and sidecars amounted to $68 billion, up 13 percent from year-end 2014.
The report pointed to the increase seen in the amount of catastrophe limits purchased. Growth in global property catastrophe limits is estimated to be roughly 4 percent between Jan. 1, 2015 and Jan. 1, 2016, with the convergence capital component growing by approximately 13 percent.
Both the 144A cat bond and the private cat bond market continued to be active in 2015. The 144A cat bond market had 23 primary issuance 144A property/casualty (P&C) catastrophe bonds successfully completed, amounting to a total of $5.917 billion in 144A P&C issuance, Guy Carpenter affirmed.
In the fourth quarter, ILS pricing conditions generally held steady, as investors continued to spend time on portfolio management. Pricing stabilization in the ILS market was evident throughout 2015 and ample capital remained available.
Outlook for 2016
As the pricing environment shows signs of stabilization across both the ILS and traditional markets, accessing multi-year capacity at pre-agreed static rates is a focus for many cedents, the report affirmed. A significant and growing number of property programs were placed at least partially on a multi-year basis at Jan. 1, and multi-year options are beginning to emerge in some casualty sectors, where they have not been available in the past, it added.
The capital markets are also in a strong position to provide multi-year capacity, and 2016 is expected to bring new opportunities in the ILS space for public sector entities, corporates, insurers and reinsurers. Although U.S. peak perils will continue to be a driver of the ILS marketplace, the industry is also likely to see opportunities including new perils, new geographies, new types of protection structures and new sponsors.
“The reinsurance market has been challenged by a persistent low interest rate environment, the continued inflow of new sources of capital, benefited from an extraordinarily long period of few major natural catastrophes, and record levels of merger and acquisition activity in 2015,” said David Priebe, vice chairman of Guy Carpenter.
“As a result, re/insurance companies are evolving their operating strategies to embrace this complex environment. We believe that alternative capital will be a consistent source of risk capital for re/insurance and corporates and we expect to see sustained high growth to continue in this sector,” said Priebe.
Source: Guy Carpenter