Guy Carpenter & Company reports reinsurance pricing fell at the January 1, 2015 renewals in many segments, affecting almost all lines of business and geographies, continuing recent renewal trends.
According to Guy Carpenter’s 2015 global renewals report, entitled “Shaping the Future: Positive Results, Excess Capital and Diversification,” a major factor driving market conditions at the renewals was the lack of costly catastrophes that resulted in global insured losses for 2014 of approximately USD$30 billion, the lowest total in four years and 25 percent lower than 2013.
Another major driver was third party capital, which continued to flow into the reinsurance market as institutional investors such as pension funds and hedge funds sought higher yields amid a persistent low interest rate environment, the report said.
As convergence capital has expanded, utilization within catastrophe products grew to 18 percent of total catastrophe limit or USD$60billion, up from 15 percent at year-end 2013, Guy Carpenter said. This was a contributing factor to the moderate expansion of overall catastrophe limit purchased as pricing came down and buyers were able to secure more limit at lesser cost.
Alternative capital continues to access the reinsurance market in a variety of forms, Carpenter noted. Industry loss warranties (ILWs) decreased through 2014 as price reductions made indemnity protections more attractive but this was more than offset by growth in collateralized reinsurance, sidecars and catastrophe bonds.
This was well illustrated by the growth in catastrophe bond issuance through 2014, a record setting year with 144A property and catastrophe bond issuance of approximately USD$8.03 billion and risk capital outstanding at nearly USD$23 billion as of December 31, 2014, the report said.
These factors led, in turn, to surplus capacity across most business segments as competition spilled beyond property catastrophe lines.
Lower Rates, Excess Capacity
The Guy Carpenter Global Property Catastrophe Reinsurance Rate-on-Line (ROL) Index fell by 11 percent at the renewals. The report said that renewals continued to be characterized by lower rates, excess capacity and broader terms and conditions.
“Market conditions that continue to bring downward pressure on pricing are being met with tremendous, client-focused innovation,” said Lara Mowery, global head of property specialty at Guy Carpenter. “The result has been a customized approach with expanded product offerings and terms and conditions that benefit our clients.”
Rate reductions also occurred in most other lines throughout 2014 as reinsurers continued to look for opportunities to utilize excess capacity, increasing competition across all lines, the Carpenter report said. While specific loss experience did have an impact on programs, even the results in these cases were moderated by excess supply.
The continued expansion of accessible capital came from both favorable company results, due, in part, to light catastrophe losses in 2014 and new capital coming into the reinsurance sector.
Guy Carpenter estimates dedicated sector capital remained at near record levels having risen to approximately USD$400 billion at year-end 2014 from traditional rated markets and all sources of alternative capital including sidecars, collateralized reinsurance vehicles and catastrophe bonds.
“The sustained influx of capital from new entrants and growth from traditional sources continues to reshape the reinsurance landscape’s capital structure and drive innovation in the form of insurance-linked securities (ILS) and collateralized aggregate solutions,” said David Priebe, vice chairman of Guy Carpenter.
“We are also seeing reinsurers execute strategic decisions through the utilization of third party capital facilities and M&A activity in response to new market realities; which is further blurring the lines between ‘alternative’ and ‘traditional’ markets,” he continued.
While some companies took advantage of the significant price decreases and coverage improvements to increase protection for the same or decreased total spend, there was a counter-trend, dampening the potential for greater expansion in limit purchased. The continued centralization of reinsurance purchasing by larger groups in all regions has led to increased retentions and more focused spending with a smaller number of reinsurers, the report said.
“However, the lower rates, broader terms and conditions, and excess capacity available across the EMEA region have meant that creative opportunities can still be found for a wide range of clients,” said Nick Frankland, CEO of EMEA operations at Guy Carpenter.
As the marketplace continues to evolve and capital model adjustments occur, companies are being challenged to rethink their overall capital management, according to the Carpenter report. Lower underwriting returns are causing insurers to seek ways to reduce their costs of capital and look for enhanced asset returns that are now being provided through alternative and secondary markets. In addition to expense management and synergies, the search for greater scale and diversification has also become more critical to some companies as a way to increase or maintain profitability.
The current market environment has provided abundant opportunity to push risk management solutions in new directions. Advances have developed through new technologies, increasing sophistication in measuring risk and the application of abundant capital to pursue tailored strategies.
During this year’s renewals, the focus on tailoring solutions to fit client needs continued and many clients were able to achieve broader coverage, the report said.
Among the wide range of options clients most commonly sought were extended hours clauses, improved reinstatement terms, addition of non-modeled lines and expanded coverage for terror exposures. This was achieved on a case-by-case basis, with clients weighing the benefits specific to the composition of their portfolios and corporate goals against the relative cost savings, the Guy Carpenter report said.
Source: Guy Carpenter
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