Fall in rated reinsurance capacity – GuyCarp - FREE

Fall in rated reinsurance capacity – GuyCarp - FREE

Guy Carpenter logoGuy Carpenter thinks reinsurance sector capital was broadly level at the January 1 renewals, but this disguises a fall in traditional rated reinsurance capital, while recent years’ growth in alternative capital slowed down.

Guy Carpenter said the stabilisation meant the market was “showing no growth for the first time in several years”.

Traditional reinsurance capital fell by 2-3%, said the reinsurance broker, which it said was a direct consequence of poor the pricing environment for reinsurers.

Total capital dedicated to reinsurance at year’s end was estimated at $400bn, unchanged from the previous year.

Meanwhile so-called convergence capital, including catastrophe bonds, industry loss warranties (ILWs), collateralised reinsurance and sidecars amounted to $68bn, up 13% from a year earlier.

“During 2015, a combination of factors led to a notable increase in the amount of catastrophe limit purchased,” said the broker.

“Overall, growth in global property catastrophe limits is estimated to be roughly four percent between January 1 2015 and January 1, 2016, with the convergence capital component growing by approximately 13%,” continued Guy Carpenter. 

Moderate catastrophe loss picture for 2015 ($30.5bn insured loss vs $32bn in 2014), meant that rate reductions were still achievable for cedants, according to the reinsurance broker.

The broker conceded that despite low cat losses “there are signs the rate of descent is slowing as compared to 2015”.

According to its January renewals report, “The Reinsurance Market 2016:  Innovation and Customization”, pricing declined for most lines of business and geographies but the rate of decline moderated, particularly in US property catastrophe.

“This trend was largely influenced by two prior years of steep declines and a larger increase in demand in property and certain other lines that began in 2015. Pricing also flattened in the insurance-linked securities (ILS) space as protection buyers and sellers assessed adequate compensation for risk,” said the broking firm in a statement.

The ILS sector had been “at the leading edge of attracting new capital” noted Guy Carpenter, but noted that after many years of cheapening prices, rates have “reached an equilibrium”.

Seizing on this as “evidence of underwriting discipline”, the broker suggested new capital could enter the space, particularly if demand increases.

Guy Carpenter counted 23 primary 144A property/casualty catastrophe bonds successfully completed in 2015, amounting to $5.917bn in issuance.

“Pricing stabilization in the ILS market was evident throughout 2015 and ample capital remained available, as managers continue to grow pragmatically,” said the broker.

Overall property catastrophe reinsurance pricing was down 7-10%, according to Guy Carpenter’s analysis, but varied – with international regions experiencing greater reductions in the index than the US.

“Individual renewals experienced a wide range of outcomes dependent on loss activity, type of structure, geographic concentrations, past renewal experience and other company specific features,” said the broker.

By Guy Carpenter’s risk adjustment analysis, pricing for US property cat fell by 5-8% percent, slowing from 7-14% average decreases a year previously.

In Europe, retentions have risen, according to Nick Frankland, Guy Carpenter’s CEO of Europe, Middle East and Africa (EMEA) operations.

“The January 2016 reinsurance renewal in the EMEA region was orderly and business-like with abundant capacity. There were few surprises and pricing, terms and conditions were broadly in line with expectations expressed at Baden Baden in October 2015,” he said.

“Reinsurance buyers generally took cash savings from reduced prices rather than expanding coverage, suggesting a priority of supporting profitability.

“After many years of waiting, Solvency II exerted a meaningful influence on buying and we expect this to increase in 2016 as the new regime becomes embedded,” said Nick Frankland, CEO of EMEA Operations at Guy Carpenter,” added Frankland.

In its 2016 Outlook, Guy Carpenter noted the trend of buying multi-year property reinsurance programmes has now spread to casualty lines of reinsurance business, which the broker also sees as a capital markets opportunity for further convergence capital to enter.

The broker sees market evolution as including new geographies, new products and bundles emerging, along with new perils and new sponsors, even as the traditional market continues its consolidation through mergers and acquisitions. 

 “The reinsurance market has been challenged by a persistent low interest rate environment, the continued inflow of new sources of capital, benefited from an extraordinarily long period of few major natural catastrophes, and record levels of merger and acquisition activity in 2015,” said David Priebe, Guy Carpenter’s vice chairman.

“As a result, re/insurance companies are evolving their operating strategies to embrace this complex environment. We believe that alternative capital will be a consistent source of risk capital for re/insurance and corporates and we expect to see sustained high growth to continue in this sector,” Priebe added.

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