April 1 Renewals Saw ‘Disciplined Softening’ with Ample Capacity: Aon & Willis Re

By | April 7, 2017

With abundant capacity, aggressive capital market competition and acceptable returns for global reinsurers, it’s no wonder that the elusive bottom of soft market pricing was not evident at the April 1 renewals.

During 2016, global reinsurers generated “an acceptable, though reduced, return,” which meant that the April renewals largely followed the direction set at the January 2017 renewals – with evidence of “disciplined softening,” according to a report published by Willis Re.

“It is clear that in the face of a soft market offering a limited number of acceptably priced opportunities, many reinsurers remain prepared to let their top line revenue growth stall and are opting to return excess capital to their shareholders,” said the report, titled “Willis Re 1st View April 1, 2017 – Disciplined Softening.”

Willis Re noted that risk-adjusted rate reductions for short-tail classes continued to moderate during the renewals. “While international buyers achieved slightly larger reductions as compared to U.S. and Lloyd’s buyers, the extent of the reductions range from flat to mid-single digit reductions and not the low double digit range,” which were seen at last year’s April renewals.

Further, overall limits of reinsurance purchased during the renewals remained steady, with some limits even increasing, as more buyers seek additional protection on their growing portfolios, said Willis Re, noting that retentions remained largely stable.

In a separate report, Aon Benfield agreed that reinsurance demand “remains on a modest upward trend as buyers increasingly recognize the value of the product in a world of proliferating risk-based capital regimes.”

Ample Capacity

During the April renewals, ceding companies found “ample capacity to meet their risk transfer needs and to support geographic and product growth aspirations,” said the Aon Benfield report, titled “Reinsurance Market Outlook – April 2017.”

Indeed, the report said that both traditional and alternative capital reached a record level of US$595 billion at Dec. 31, 2016 — an increase of 5 percent over 2015, said Aon Benfield.

Breaking that total figure down into its component parts, Aon Benfield said that alternative capital rose last year by 13 percent to US$81 billion, “principally reflecting additional deployment into collateralized reinsurance structures.”

At the same time, traditional reinsurance capital rose by 4 percent to US$514 billion, driven by solid earnings, Aon Benfield confirmed.

Aon cited the example of the returns of the 23 global reinsurers that form the Aon Benfield Aggregate, which reported a return on common equity of 8.4 percent for the year, based on a combined ratio of 93.5 percent and an ordinary investment yield of 2.6 percent.

Capital Market Competition

“Capital markets have maintained the aggressive posture that emerged at the end of 2016 with many insurance-linked securities (ILS) funds looking to offset the decline in opportunities as existing catastrophe bonds mature,” said the Willis Re report.

As a result, capital markets are often prepared to price competitively for peak zone catastrophe risk, compared to coverage offered by traditional markets, Willis Re said.

While expected returns have declined for capital market investors, insurance risk remains attractive in comparison to other available investments, said the Aon report, noting that the low correlation of insurance risk with other asset classes also is “a key consideration.”

Such competition erodes margins for catastrophe risks and puts additional stress on traditional reinsurers, which have been relying on higher margin catastrophe business to balance their portfolios, Willis Re continued.

“With results on many diversifying non-catastrophe classes now marginal, there is greater pressure on reinsurers to address the pricing in these classes,” the report affirmed.

Additional reinsurance renewal observations from Willis Re include:

  • Poor results in U.S. commercial and personal auto business, as well as in excess workers’ compensation, are examples of classes where reinsurers are seeking improved terms.
  • April casualty renewals have been “driven by cedent- and territory-specific issues with pricing movements largely driven by loss activity and changes in exposure.”
  • For long-tail classes in the U.K., the March 2017 changes to discount rates in the government’s actuarial “Ogden Tables” – used to calculate personal liability claims – have not yet made an impact in the wider reinsurance market.

“As reinsurers look to the rest of this year, they can draw comfort that in many cases reductions are slowing and unbridled competition is abating as managers face the buffers of tighter regulation, better pricing analytics and transparent shareholder expectations,” John Cavanagh, global CEO of Willis Re.

Aon Benfield said its outlook for the June and July 2017 renewals remains positive, with ceding companies likely to achieve further “improvements in pricing, terms and conditions.”

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