Momentum for Rate Hikes Dissipates During June/July Renewals: Willis Re Report

Momentum for rate increases on loss-free reinsurance accounts dissipated during the June/July property catastrophe renewals, and in some cases, pricing declined, according to a report published by Willis Re.

For example, although most loss-free Florida property accounts were flat, some saw rate declines of up to -7.5 percent, as competition for this business was heightened, and non-traditional players offered layers with reinstatements, said the report titled “Willis Re 1st View, New Normal Emerges, July 1, 2018.”

The report said there are three drivers for the stalling impetus for rate hikes:

• Excess capital leading to a surplus of capacity both from traditional and insurance-linked securities (ILS) markets.
• Stabilization of 2017 natural catastrophe loss estimates, which typically remain below initial projections, and often retained net by larger insurers.
• Benign loss activity so far during 2018.

Emergence of ‘New Normal’

Together these three factors are driving the emergence of a “new normal” in property cat reinsurance pricing, and carriers have begun to react – some by cutting costs, including making “difficult decisions around headcount.” Other reinsurers “are applying far greater rigor in examining the profitability of every line of business they are accepting.”

The report emphasized that marginal lines which previously added diversity to the book and helped to increase top line growth “are no longer acceptable if they cannot earn an acceptable return.”

This approach is leading a number of carriers to exit lines of business, the report affirmed. “For those carriers who are not as well advanced in overhauling their business portfolios, the recent announcement from Lloyd’s about focusing on underperforming lines of business is likely to instigate additional withdrawals,” it continued.

Non-Cat Lines See Varied Results

Reinsurance lines beyond property catastrophe have seen varied results for the mid-year renewals, said the report. “Where original loss ratios have deteriorated due to sequential years of rate reductions or high loss activity, reinsurance pricing has firmed,” it said, citing business lines such as U.S. medical malpractice, commercial auto and international D&O.

For those lines that show better prospects for profits, “competition remains intense and pricing consequently continues to favor the buyer,” Willis Re said. “If buyers want to find the lowest pricing point, a turnover in the reinsurer panel is often a necessity with new reinsurers largely comprised of lesser rating and/or capital.”

This approach will ultimately prove beneficial, the report said, as it promotes underwriting discipline that ensures buyers receive long-term, stable support from financially secure counterparties. However, the process may yet result in some challenges for some of the recently promoted business models, particularly around the expansion of managing general agents (MGAs).

“[W]ith reinsurers’ emphasis shifting from top-line growth to pure underwriting profitability and control, some carriers may reconsider their MGA strategy, endangering some coverholder relationships,” the report continued. “The new pricing normal is likely also to impact M&A, as acquirers exercise greater caution and sellers adjust their pricing expectations.”

James Kent, global CEO of Willis Re, said: “Traditional risk carriers face an intense imperative to respond to the new normal with an adjusted business model. Proactive carriers are applying far greater rigor to ensure the profitability of every line of business they accept. The diversity and top-line contribution of marginal lines no longer makes them acceptable if they cannot earn an adequate return.”

Source: Willis Re/Willis Towers Watson

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