ILS returns join reinsurance rates under pressure

ILS returns join reinsurance rates under pressure

Pressure on reinsurance pricing has not alleviated at the April 1 renewals – which mainly focus on India and the Far East, with some US business – and insurance linked securities are not immune from the current challenges faced by the market, says Willis Re in its second edition of "1st View" this year.

Trends observed over the past few renewals seasons have been reinforced, with the market continuing to favour the buyer. Willis Re said that there was "a clear sense of urgency as reinsurers seek to implement major changes in their strategies and business models".

An additional factor is the ability of major insurers to bypass the traditional reinsurance sector system, with the Ace/Blackstone agreement (ABRre) showing that a primary player could access the lower-cost capital markets, and that this had "ramifications across the entire global reinsurance market".

ILS funds are also facing reduced returns, and that is putting the business models of some of the smaller standalone ILS managers under some strain.

Willis Re global chairman Peter Hearn said that "ILS fund managers evolving into more traditional reinsurer models and reinsurers expanding their own fund management activities appear best placed to trade through this difficult period". However, Hearn also observed that, while this convergence trend was both "logical and anticipated", it entailed a paradox in that the ILS fund business models were beginning to look more like traditional reinsurers. "They are diluting the differentiation of the very offering which has proved so attractive to date for major primary buyers".

Willis Re Global CEO John Cavanagh said that "as investment banks rush to orchestrate the new model reinsurers of the future, previous views about possible M&A transactions are being challenged, including any thoughts that size may be an obstacle".

However, Cavanagh noted another paradox. The key to a successful combination is that the sum should be greater than the parts, and this could, in the short term, lead to increased competition and greater pressure on prices.

Examining the more detailed report, it is hard to see any bright spots at all for reinsurers. For example in Japan prop-cat XoL Willis Re's comment was "abundance of capacity with a number of reinsurers willing to consider areas of the risk spectrum that have until recently been outside of their appetite".

It was observed that there had been a tempering of price reductions in Japan wind and flood "due to a general less favourable perception of margin adequacy". Also, there had not been a discernable move towards pre-paid reinstatements, "although some buyers have explored the option". Median pricing in property at the April Renewals was down about 10%, with hardly any price increases and some declines in the 20% to 25% region being recorded (mainly in India).

The "escape to casualty" option appears to be narrowing, with a softening being reported in Japan general third party liability and Japan personal accident.

In specialty lines, Willis Re said that the recent Germanwings crash was not expected to impact significantly the non-proportional market. Willis Re seemed to sum up the feeling about the whole market in its comment on marine, saying: "The question is, where will it end and/or what will it take to change it?"

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February 2019


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