Renewals were stable and on time, according to reinsurance broker Guy Carpenter, while reinsurance buying is becoming more of a strategic purchase for group level capital management.
Some cedants preferred to hold on to their cash than buy more cover, despite still-soft pricing, suggested the reinsurance broker, at its annual results press briefing.
“Capacity still exceeded demand,” said Nick Frankland, Guy Carpenter’s CEO for its Europe, Middle East and Africa regional operations. “Renewal was stable, orderly, business-like…it was on time,” he added.
Guy Carpenter suggested soft market pricing had continued, but the curve is levelling out.
“The rate of decrease slowed,” said Chris Klein, head of Guy Carpenter’s sales operations. “Excess capacity remains, but the amount has stabilised.”
Retentions went largely unchanged, due in some measure to cedants getting more through expanded covers for the same cost, but indicating that they were unwilling to spend more to get more.
“Some players preferred cash savings than increasing cover, and retentions went largely unchanged,” noted Klein.
Frankland added: “The overarching theme was to save money.”
Terms and conditions were also loosened: in some cases hours clauses being expanded; there was a further increase in the number of multi-year placements; while some property and casualty exclusions dropped for some more colourful risks, such as cyber or terrorism.
Soft pricing was also traced through casualty and specialty business, suggested Guy Carpenter.
UK motor pricing hovered at a range between 0.75% and -0.75% at renewal, according to Klein.
Marine, energy and retrocessional risks were increasingly bundled up into multi-line bundled affairs, he noted.
In specialty lines, Klein listed loss events, such as August 2015’s Tianjin port explosion in China, to note the point that they have had no noticeable effect on reinsurance pricing.
“Losses had little or no impact on energy rating,” said Klein, citing the fact that oil prices have fallen by two-thirds in the past two years.
“Less cargo is being moved, and that cargo, particularly if it’s a commodity, is now worth less,” he said.
In political risk, bond insurance and trade credit, “margins became a bit too thin on the risk”, noted Klein.
Retrocessional had seen some “defensive placing”, he said, and was “mostly renewed early – much earlier than in previous years”.
Alternative business now represented the bulk of retrocessional capacity at renewal, he added.
The bulk of insurance linked securities and alternative reinsurance capital is underwriting peak US catastrophe exposures, noted Richard Hewitt, head of business intelligence at Guy Carpenter.
Collateralised fund business now represents 47% of convergence capital, amounting to about $32bn.
This compares with 23% made up of catastrophe bonds, 9% from reinsurers’ sidecar structures, plus 4% from industry loss warranties.
The ongoing pressure exerted on traditional reinsurers was highlighted by Hewitt, who suggested many firms writing reinsurance and direct insurance business were deploying capital from the former to the latter.
“Composition groups are shipping more capacity out of reinsurance and into insurance,” said Hewitt.
However, excess capacity in Europe’s casualty markets suggested convergence capital cannot be blamed for much of the soft market.
“Alternative capital made no inroads whatsoever into Europe in this renewal, and still represents a fraction of the capacity,” said Frankland.
Market conditions also continued to favour the biggest reinsurers, the briefing suggested.
“Reinsurance tiering was noticeable, more noticeable than in previous years,” said Klein.
Those largest reinsurers with the scale and ability to write business across a cedant’s book of business were able to increase their market share, he suggested.
Sidecars represented a favourable avenue for traditional reinsurers, the briefing suggested.
Hewitt noted that in the recent absence of lasting hard market rallies in the wake of catastrophe events (see bottom chart), there were few traditional style reinsurance entrants in 2015, not including sidecars.
Sidecars meanwhile are here to stay, Frankland suggested, as an enduringly easy way to add and withdraw capacity, tapping into alternative capital.
This year’s rollout of Solvency II means its influence is already being felt, particularly in Central and Eastern Europe, and the Nordic region, noted Hewitt and Klein, adding to some limits on a per risk basis.
While there was also some effect in the UK, the bulk of the EU directive’s consequences for reinsurance buying behaviour could still take several more years to materialise, noted Hewitt, largely due to the time needed for accounting practices playing catch up with underwriting results.
Reinsurance purchasing is increasingly being thought of as a capital management tool, with the cedant’s solvency capital ratio (SCR) in mind for Solvency II, suggested Hewitt.
“It’s a strategic purchase,” said Klein. “There’s still some scope for tactical buying, below the group, but generally speaking it’s a CEO and CFO issue.”
This represents a “total capital management” approach, Hewitt thought, as Solvency II and its consequences become more integrated into the business.
Frankland added that “reinsurance buying is going to be more informed by Solvency II and capital requirements than it ever has been before.
“Previously it was about managing annual underwriting profit and loss, which is very different to managing tail risk for the SCR.”
In the context of capital treatment under the standard approach for Solvency II’s capital calculation (adopted by the bulk of insurers) he also noted also that excess of loss purchases are treated less favourably, attracting no further discount than proportional buys.
Turning to market themes for 2016 and beyond, Frankland listed several: capital management; expense control; the tiering of reinsurers; the resulting consolidation of reinsurers; the “insurance gap” between economic and insured losses; and the linked risks of cyber and terrorist attacks.
On tiering, he said that those reinsurers outside of the top twenty would be squeezed by current buying trends.
“If you’re not in the top twenty you’re not a major reinsurer, and if you’re not in the top fifty your business must be very localised,” he added.
“Price reductions will continue,” said Frankland, suggesting that expense ratios provide further opportunities for inefficient reinsurers to wring out better performance.
“It’s not an efficient industry,” said Frankland. “You read it all the time. Expense control, we think, will be critical.”
On closing the insurance gap, he suggested the industry should be doing better at its primary function.
“Transfer of economic loss to insurance loss is inadequate,” said Frankland. “The industry has to get closer to those losses.”
That includes lobbying of governments, he stressed, particularly for flood risk, noting that this has been internationally agreed as the biggest catastrophe peril the world faces.
He touted the combined $4bn reinsurance placements made by the UK’s Pool Re and Flood Re, for terrorism and flood risk respectively, both brokered by Guy Carpenter, as highlighting further opportunity for the market.
On cyber, he suggested that while smaller cyber risks were being soaked up within existing property and casualty reinsurance packages, the biggest cyber exposures still remain under-reinsured.
Terrorism remains under-reinsured, he noted, particularly, for risks other than physical damage, giving the hypothetical example of a chemical or biological attack on a subway system that might leave well-insured structures undamaged, while potentially cause a high casualty or life toll.