Strengthening primary insurance market conditions underpinned improvements to reinsurance prices, terms and conditions at the June 1 and July 1, 2019 renewals, according to the latest 1st View renewals report from Willis Re, the reinsurance division of Willis Towers Watson.
Most reinsurance buyers were able to secure the capacity they desired at the renewals, but reinsurers are beginning to differentiate between cedents — providing “superior pricing and capacity” to ceding companies that are considered “preferred trading partners.” The accuracy of cedents’ previous catastrophe loss estimates appears to be a big factor in identifying those preferred partners, the report explained.
Indeed, “market-standard” price increases have been displaced by reinsurers’ more discerning approach, creating a wide pricing disparity between different accounts, the report said, noting that loss-hit programs saw the highest premium hikes (similar to previous renewals).
Non-marine retrocession coverage saw the greatest price increases of up to 35% for loss-hit programs, while loss-hit Florida and U.S.-nationwide property catastrophe and per-risk exposures saw prices rise by up to 25%, the report affirmed.
In the United States, for example, property reinsurers remain supportive of cedents that “have not presented substantial losses or loss creep.”
“For casualty classes, there are continued improvements in original rates and reinsurance terms,” said the report. “However, there are signs that the longstanding concern over the level of reserve redundancy in past year reserves is coming to fruition.”
In some casualty classes, there is a clear trend of worsening loss ratios in recent underwriting years due to the prolonged soft market and an increase in loss severity, the report went on to say.
While few doubt that conditions are improving, there remains a concern that the current improvements will need to move further to ensure sustainable returns, Willis Re affirmed.
In casualty lines, pro-rata treaty commissions typically declined, despite improvements in the underlying terms and conditions for most classes, the report indicated. It noted, however, that the same dynamic of superior pricing for the better performing companies was also seen in casualty lines.
Global Cyber Renewals
The report indicated that cyber modeling tools are providing cyber insurers with helpful portfolio and pricing guidance, but the output from models, especially for extreme scenarios, is viewed with caution. This, the report explained, is fueling reinsurance demand.
At the same time, underlying cyber rates continue to drop, which is moderating certain reinsurers’ appetites, although capacity remains plentiful, the report continued.
As a result, “reinsurance (over)supply is particularly evident for niche, small and medium enterprise, low limit and geographically diverse business with limited first party exposures, as distinct from United States & global / Fortune 500 insureds where accumulation challenges are prevalent.”
Further, the report said, more standalone cyber treaties are coming to the market as “buyers look to ring-fence their cyber exposures and react to pressure on ceding commissions on multi-line treaties.”
Willis Re noted that reinsurers are closely monitoring coverage expansions “and whether cyber underwriters will land on a consistent approach to war and cyber terrorism.”
Revisiting Underwriting Models
“Recent smaller catastrophe losses from perils that are less well modeled, allied to continued loss creep from larger events, are challenging parts of the market, and causing some reinsurers to revisit their underwriting models,” said James Kent, global CEO of Willis Re, in a forward to the report.
“This was most notable in the Florida renewals, where pricing took an upward direction, particularly for cedents seeking new limit,” he added.
“Retrocession buyers have also felt the impact of the market’s changing appetite, putting the business models of some buyers under scrutiny as ILS capacity in particular has pulled back — and boosting the opportunity for traditional reinsurance carriers who are less reliant on retrocession capacity,” Kent said.
“Overall it remains a functional and logical reinsurance market with preferred pricing and capacity for cedents viewed as superior partners,” he added.
“Despite the challenging results of 2017 and 2018, the reinsurance market remains well capitalized and able to provide stable capacity to buyers, albeit on an increasingly differentiated basis,” Kent said.
Source: Willis Re
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