Market Softening Slows but Rate Stabilization Is Elusive: Willis Re

July 6, 2016

The June/July 2016 renewal season has seen a continuation in market softening, though the magnitude of rate reductions is slowing, according to the latest 1st View Renewals report from Willis Re, the reinsurance business of Willis Towers Watson.

Capacity withdrawals are evident when some reinsurers deem pricing to be inadequate and there is considerable pricing variation by class and territory. However, there is no indication of widespread pricing stabilization, said the Willis Re 1st View report, titled “Bumping Along the Bottom.

“Capacity remains abundant and continues to overhang the market in virtually all classes and regions. With no material impact from catastrophe loss activity now for the last few years, rating pressure persists. So far in 2016, only one major catastrophe loss – the Fort McMurray fires – will produce any meaningful catastrophe claims for reinsurers,” said John Cavanagh, Global CEO of Willis Re.

“Any relief that pricing may be nearing the bottom of the cycle is counterbalanced by concern over how and when rates might start to increase, even modestly, on a wider basis. The alternative is a market that faces a number of years bumping along at current levels earning very modest returns,” he said.

Ultimately however, concern persists over how much longer prior year reserve releases can sustain reinsurers’ results and how differences in individual companies’ historic reserving practices will be exposed, the report went on to say.

“In the current environment, the balance of risk retention versus return is more acute than ever. The ability of individual reinsurers to manage this crucial dynamic will have a profound impact on the shape of the market to emerge, if or when the rating environment finally offers some relief,” Cavanagh said.

Impact of ILS Capacity

“Stand-alone insurance linked securities (ILS) funds showed discipline through the first quarter of 2016 but were more aggressive on pricing during the second quarter as spreads declined for liquid reinsurance investments,” the report continued.

Negative interest rates in some currencies are “likely to promote further moves to alternative structures, which are less exposed to interest rate movements,” Willis Re said.

FinTech Opportunities

Reinsurers are “becoming acutely aware of the profound change that FinTech applications will drive in the primary insurance markets,” said the report, noting that far-sighted reinsurers are considering the opportunities that FinTech applications may provide for their own activities.

Cost Control

The Willis Re report also highlighted the fact that cost control measures remain a priority for many reinsurers as a result of continued pricing and interest rate pressure.

“The drive to achieve market efficiencies and cost reductions is picking up pace, particularly in the London market,” Cavanagh said. “The UK’s decision to leave the EU provides an additional dynamic, with the exact implications for future policy and regulation unknown.”

Brexit Vote

While the exact implications of the Brexit vote are unknown, the report explained that “Article 50 of the Lisbon Treaty provides for two years to negotiate exit terms from the date the UK gives notice to the Council of Europe….”

Given the changes occurring with the UK government (with current leadership elections), “it is unlikely that there will be any significant changes in the near future,” the report predicted.

Willis Re does not expect “any material risk to clients generally in terms of re/insurers’ ability in the immediate future to offer continuity in the supply of reinsurance capital and consistency of approach….”

Further, there is evidence the re/insurance industry in London “may be better placed than other financial sector entities to manage the uncertainty developing from withdrawal,” the report said, noting that existing provisions regarding EU passporting rights will continue until these are amended under renegotiated terms.

The Willis Re 1st View report, which is published three times a year, includes specific commentary on key trends throughout the world’s major reinsurance classes and regions.

Source: Willis Re

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