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Fall in reinsurance prices starts to slow

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Reinsurance rates continued to slide at mid-year renewals, but the size of reductions slowed.

Abundant reinsurance capacity — much of it from nontraditional sources such as pension funds and hedge funds — means that buyers often can secure more favorable terms and conditions, experts say.

Many U.S. cedents renew their coverage during June and July. After two years of average rate decreases of 15% on U.S. property catastrophe renewals, risk-adjusted rate declines slipped to the high single digits as of June 1, according to an analysis by reinsurance brokerage Guy Carpenter & Co. L.L.C.

While the decreases depend on cedent insurers' individual risk profiles, the reductions were tempered by factors that include reinsurers “holding the line” after several months of consistent price declines and greater limits purchased, said Lara Mowery, global head of property specialty at Guy Carpenter in New York.

With many cedents buying higher limits during the June and July renewals, “excess capacity lessened and price decreases slowed,” Ms. Mowery said.

“On June 1, 2015, after two years of very predictable and steady price declines, something finally changed,” said David Flandro, head of global analytics at JLT Re, the reinsurance arm of Jardine Lloyd Thompson Group P.L.C., in New York.

“The previous trajectory of year-on-year rate decreases was in the teens,” Mr. Flandro said. “On June 1 it was in the high single-digits.”

“There are many reasons for this, including some capital consolidation through (mergers and acquisitions), a potential moderate tapering of the third-party capital entry rate into the sector compared with previous years, and risk-adjusted property catastrophe insurance rates getting very close to late-1990s lows,” he said.

Increased reinsurance demand has been driven by insurers increasing underwriting in catastrophe-prone regions — notably Florida — as well as increased demand for U.S. mortgage credit risk coverage, said Bryon Ehrhart, CEO of Aon Benfield Americas, a unit of Aon P.L.C.

According to a report by Willis Re, the reinsurance arm of Willis Group Holdings P.L.C., a significant increase in Florida catastrophe demand plus a slowing of the influx of third party capital resulted in some stabilization of rates at the June 1 and July 1 renewals.

Several third-party capital markets now are “showing pricing discipline by cutting the capacity they are prepared to offer as rates continued to soften throughout the first half of 2015,” said John Cavanagh, London-based global CEO of Willis Re.

“This, in turn, has had a knock-on effect on traditional reinsurers, who in recent years have relied on collateralized reinsurance to provide their retrocession capacity,” he said.

In many cases, reinsurance buyers secured improvements in the terms and conditions of their coverage, experts say. “Areas of focus include extended hours clauses, terror cover, multiple year contract terms and improved reinstatement terms,” Ms. Mowery said.

Many buyers continued to seek multiyear deals at renewal, but this trend also appears to be slowing.

“About two years ago, multiyear deals became more commonly offered,” said Mr. Flandro. “Last year, I think many buyers just assumed that certain non-loss-affected programs would be able to obtain multiyear cover.”

But that was not always the case this summer.

While many cedents have used smaller panels of reinsurers in recent renewals, the reduction in excess capacity for property catastrophe business, and particularly books of business with wind exposures, means that “many panels (now) are being filled out through broader participation,” said Guy Carpenter's Ms. Mowery.