Monte Carlo Rendez-vous preview

Monte Carlo Rendez-vous preview

"It is going to take something pretty sizeable to force a change,” sums up Mike Van Slooten, international head of market analysis at Aon Benfield.

The picture could not be much different from last year, when a slew of first-half losses from Japan, Australia and New Zealand shocked the market, stirring talk of rate hikes, while Thai flood claims seemed to offer to sustain some of that momentum.

“Reinsurers like to talk the story up whenever they get the opportunity,” says Carl Beardmore, CEO of BMS. “We saw the story at the end of last year, after we had seen some loss activity, giving rise to the notion that it would possibly be the level of activity required to push rates up.”

Twelve months on, the reinsurance rate increases observed since last year’s heavy Asian catastrophe losses have not been enough to satisfy reinsurers.

“Last year all the focus was on cat losses,” says Van Slooten. “This year is dull by comparison. Underwriting results are good and the level of cat losses is obviously way down on 2011. We’ve seen continued capital growth across the sector, with implications for future pricing. There’s clear evidence that there’s more capital than required in the sector. Given the strength of earnings, those capital numbers are only being bolstered.”

At the litmus test of July 1 renewals, Beardmore suggests January renewals showed hardening but notes the critical US market was resisting the rate hikes seen elsewhere.

“In the January renewals we saw some rate rises,” says Beardmore. “A lot of those decisions were taken late, so there has been some genuine uncertainty in the market. Fundamentally, the market moved a little – particularly in London – at the start of this year. We didn’t see the same kind of movements in the US at this time, which signalled that rate movements were limited or localised.”
Since then, he says, rate hardening has stalled, sliding the industry back into a soft market.

“It’s been a short-lived movement,” he says. “The dynamics in the marketplace to allow rates to rise are just not there. There will be arguments that rates will need to be significantly increased, but I’m sceptical that they’ll be able to do so unless something very significant occurs within the next few months.”

Rival reinsurance broker Guy Carpenter reports that reinsurers have become noticeably less cautious in the past year. The broker says that the improving capital position of the reinsurance market this year has played an important role in reducing quoting volatility. This is likely to carry through to discussions over January 1 renewals.

At July 1 there was a range around the average quote for lead markets of +6% to -6% compared with quotes in the corresponding period in 2011. The range in 2011 was wider at +5% to -10%.

“The current situation is very different to the conditions at the June and July renewals a year ago when capital was noticeably impacted by losses and reinsurers were uncertain as to how they would ultimately deal with the unquantifiable magnitude of the RMS v11 change,” said Guy Carpenter in an update on the mid-year renewals. “These factors created an overall cautiousness in the market even as pricing was firming.

“Now that reinsurers have had time to assess and implement their response to market conditions, there has been more willingness generally to deploy significant capacity where terms have met reinsurer requirements, particularly as renewals in May, June and July were impacted by pricing adjustments in 2011.”

Guy Carpenter says that the amount of capacity utilised to complete reinsurance programmes compared to the amount authorised has been falling. The impact of the Japan earthquakes and the release of RMS v11 reinsurers was profound. Immediately afterwards, capacity utilised spiked to almost 100% and stayed above 90% for a whole year through April 2012.

However, in recent renewals utilisation has dropped closer to 85%, a result of benign loss activity and the market becoming more comfortable with model changes. This marks a return to a similar level of utilisation as seen in January 2011, which Guy Carpenter says was marked by “lower utilisation indicating excess capacity and softer market conditions”.

A question of supply and demand  

The greatly improved combined ratios and minimal catastrophe claims posted in underwriters’ financial results in the first and second quarters of 2012 are adding to the dynamic by keeping capital levels high, the market’s over-capacity stymieing any rate hardening. “There’s a degree of hoarding of capital at the moment, partly to guard against the EU debt crisis and also what may happen with Solvency II. People have been behaving quite conservatively,” suggests Van Slooten.

The situation comes down to a simple equation of supply and demand – and supply is at record levels. According to Aon Benfield, reinsurance capacity increased to $470bn at the end of the first quarter of this year – back to the peak levels enjoyed in 2010. Lower-than-average global catastrophe losses in the first quarter and increased premiums at January 1 helped reinsurers increase their capital.

The low catastrophe level continued into the second quarter so it is likely that the overall capacity of the reinsurance industry has increased further since Aon Benfield’s last estimate. The reinsurance broker reported that capacity for June and July renewals remained stable.

Nor has the industry at any point looked under-capitalised over the past 18 months, notes Beardmore at BMS. Instead of seeing some firms fail through lack of underwriting discipline, underwriters have hung on, continuing to release excess reserve releases in many cases throughout most or all of the period.

Added to that, the tough conditions faced in capital markets outside the insurance sector have tempted new hedge fund capital into the industry. The role this new capacity from hedge-fund-backed reinsurers as well as sidecars is sure to be a big talking point in the hotels and cafés of Monte Carlo.

“Alternative capital has come in, looked at reinsurance, and made what looked a short-term play,” says Beardmore. “However, people are now wondering whether these hedge fund guys might be around for the medium term or even the long term. In many ways that has exasperated the availability of capital, adding yet more capital to the industry.”

Van Slooten thinks reinsurers will seek to shift their excess capital all over again at the end of the hurricane season – provided it isn’t handed out in claims by any last minute surprises. “As we get towards the end of hurricane season, more management teams are going to think about share buybacks. I think they are going to look to find ways to return capital to investors,” he says.

Economic headwinds are affecting the market on the investment side, squeezing income on asset portfolios. Van Slooten notes that while underwriting results are rosy, investment results are down, because of the low interest rate environment. “We’ve also seen a reduced contribution from prior year reserve releases,” he adds.

Demand for reinsurance has remained stable, although there have been some shifts in the market dynamics. Aon Benfield said that new demand for reinsurance in peak regions at the June and July renewals has been offset but the continuing trend of insurers looking to increase retentions or take larger co-participations. “As a result of the increase in capital held by insurers and the ability to retain additional net losses, the capital benefit and budget for reinsurance protection will continue to be re-evaluated,” said Aon Benfield.

A growth problem  

How to grow in this environment is forcing firms down a limited number of avenues, suggests Beardmore.

“You can’t rely on rates as a device to allow you to grow,” he says. “It puts the onus on finding other methods to grow: taking a bigger slice of the cake or looking internally at how to improve profitability by internal efficiencies.”

He notes that the austere economic environment is causing firms buying insurance – and reinsurance – to question their purchases and cut back on coverage where possible.

“The world is not a friendly place at the moment. There aren’t many places in this market that allow you to grow,” says Beardmore. “It’s forcing people to reassess their insurance spends, and in many cases to make cutbacks. That’s happening a lot, and the ripple effect is filtering through to reinsurers.”

Reinsurers are also looking very seriously at which markets to write in, he notes, accepting that the industry’s capitalisation will keep rates low for some time to come.

“We don’t see the ability to move rates in particular areas. If anything we see markets becoming more rigorous about which sectors they do want to write in, and using their aggregate carefully,” he says. “They are being quite precise about where to place limits and sticking by those disciplines strongly.”

Beardmore adds: “Naturally if it continues over time, and it becomes easier to grow your business by acquisitions, you would expect some consolidation too. Business is not as complex as people make it out to be, and people only ever have a limited number of options for growth or expansion. When the world’s in better shape, we can tell our sales staff to go out and win more business. With a more vibrant economy, there will be scope to do that. Otherwise, you have to look at other ways.”

By David Benyon – dbenyon@euromoneyplc.com

Latest Issue

November 2017

 

In this month's Reactions

  • Hurricane update
  • North America Awards
  • PCI Roundup
  • Baden Baden update

CLICK HERE TO READ THE LATEST ISSUE

 

Follow Us on Twitter @reactionsnet

Catastrophe Centre

Catastrophe Centre