“Relentless rate reductions, low investment returns and the continued influx of alternative capital have offered no respite for reinsurers at the January 1, 2015 renewal season with a reshaping of the global reinsurance industry now starting in earnest,” according to Willis Re’s new 1st View renewals report.
The report notes that downward pressure on reinsurance rates continued across nearly all lines and geographies along with improved terms and conditions, with abundant oversupply of capital continuing to outstrip demand following yet another year of benign loss activity.
Also, tiering of reinsurers is becoming more popular, “putting real pressure on smaller reinsurers and monoline catastrophe writers who have the additional burden of competing with the capital efficient and highly competitive capital market-backed funds and sidecars.”
As a result, the report finds that “long-rumored” mergers and acquisitions activity is now reality, with some companies fearing delay will mean further deterioration in their valuations. With only a limited supply of attractive target companies, consolidators looking for scale and diversification are moving as company valuations become more reasonable for both parties, according to Wills Re analyasts.
“In the current environment, many reinsurers recognize they can no longer hope for salvation through major market losses or increasing interest rates,” said Willis Re Chairman Peter Hearn.
He said their only sustainable course of action is to change their business models, portfolio mixes and to strive for scale. “The new mantra is diversification. Whether this is by class or geography – preferably both – reinsurers are being actively rewarded by investors and buyers who see diversification as key to sustainability, along with size,” Hearn said.
The report also found that not all reinsurers are accepting wider terms and conditions in addition to reduced rates, and a number of buyers have given firm order prices above the best market terms to maintain their relationships with key partners.
In addition, some reinsurers are also actively scaling back their portfolios and going into 2015 with reduced budgets – particularly within the natural catastrophe sphere – “helping to resist overly aggressive pricing and terms and conditions.” The influx of hedge fund-backed reinsurers also appears to have abated, according to the report. The report suggests, however, that this is more closely related to rating agency hurdles than to current market conditions.
John Cavanagh, Willis Re CEO, said that the outlook is for continued pressure on reinsurers. “Yet again, buyers have held sway. Also adding to reinsurer woes are the predictions that the global reinsurance market is only just managing to cover its cost of capital in 2014 and may fail to do so in 2015. Arguably, the continued lack of demand and oversupply of capital can only keep driving pricing down: unlike other financial markets, the reinsurance market lacks inherent depth, with no structured secondary trading market to help absorb the excess capacity. As a sector, we need to create depth.”
Source: Willis Re
Topics Reinsurance Willis Towers Watson
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