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Influx of nontraditional capital drives reinsurance rates down

Pricing for property catastrophe reinsurance expected to improve for cedents at year-end

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Influx of nontraditional capital drives reinsurance rates down

The recent influx of nontraditional capital into the reinsurance market will help to reduce rates for certain property catastrophe lines of coverage at the upcoming January renewals, experts say.

And the redeployment of capacity by traditional reinsurers into lines other than property catastrophe also may serve to push down prices in certain lines, they say.

Overall, in the absence of any major losses, the renewal season likely will be fragmented with no blanket movements in rates, observers say.

While there likely will be rate increases in areas that have been affected by losses, ample capacity will result in rate decreases in other areas, and the overall effect will be a relatively stable renewal, they say.

Rates and, to some extent, terms and conditions likely will improve for buyers at the Jan. 1, 2014, renewals as excess capacity and increased competition drive prices down, said Robin Swindell, executive vice president at Willis Re, the reinsurance unit of Willis Group Holdings Ltd., in London.

The largest effect on rates caused by the influx of nontraditional capital likely will be seen in short-tail property/casualty lines, where most of the nontraditional capital likely will be used, Mr. Swindell said. But reduced rates or improved terms and conditions for buyers also may be seen in areas where traditional reinsurers seek to redeploy some of their capacity as a result of the increased competition from nontraditional sources of capacity, he said.

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For “peak perils,” such as Florida windstorm coverage, the impact of nontraditional capacity on rates was seen at the June and July renewals and as well as rate reductions, some buyers were able to secure longer-term deals and other favorable terms, Mr. Swindell said.

The midyear renewals were the first in which coverage written by nontraditional capital providers was comparable in price, or in some cases less expensive, than that underwritten by traditional reinsurers, said David Flandro, head of business intelligence at Guy Carpenter & Co. L.L.C. in London.

Rates for property catastrophe business fell by as much as 30% at the midyear renewals, he said, though he pointed out that these renewals are dominated by Florida windstorm business.

The Jan. 1 renewals will include many other lines of business and geographies, so the overall rate reductions may not be so pronounced, he said.

If there is no major catastrophe loss between now and the end of the year, rates for property catastrophe business likely will continue to fall, but prices still will be “adequate” for reinsurers' financial health, said Martyn Street, a director at Fitch Ratings Ltd. in London.

“Pricing outcomes will remain fragmented” at the Jan. 1 renewal, said Mr. Street, with some loss-affected lines likely to see rate increases. For example, he said, it remains to be seen what the effect on pricing will be of the Central and Eastern European flooding and German hailstorms that took place last summer.

“Reinsurance markets remain challenging” for 2014, with the effect of new capacity coming in at a time when interest rates are low — hampering reinsurers' ability to earn investment income — said Torsten Jerrowek, the member of the board of management of Munich Reinsurance Co. responsible for reinsurance.

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The influx of nontraditional capital into property catastrophe lines may have the knock-on effect of traditional reinsurers redeploying capital into other lines of business, he said.

“We need to insist on the right pricing,” he said.

Reinsurers such as Munich Re may reduce their participation in areas of the market where prices are not seen as adequate, he said.

While reinsurers have felt the impact of new capacity at some of the U.S. renewals, the effect has so far been small in other regions such as Europe, said Jean-Jacques Henchoz, CEO for reinsurance in Europe for Swiss Re Ltd.

The Jan. 1 renewal likely will be “flat” overall on the portfolio of Paris-based Scor S.E., said Victor Peignet, CEO of Scor Global P&C S.E. The market is fragmented, he said, with rate reductions in some areas and stability or rate increases in others.

While the rate reductions seen at the June and July U.S. renewals had an effect to some extent on the “sentiment” in the market, Hannover Re S.E. believes the renewals likely will be stable, according to CEO Ulrich Wallin.

Demand for reinsurance coverage is expected to remain stable at the Jan. 1 renewal, Mr. Wallin said.

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The pressure of the low-interest-rate environment is one factor that encourages reinsurers to remain disciplined, he said, and recent flood events in Canada and Germany also likely will have a stabilizing effect on rates.

“At Jan. 1, we can expect a disciplined market and a stable renewal,” he said.

While rate decreases were seen for U.S. catastrophe business at the June and July renewals, the extent to which this is continued at Jan. 1 will depend upon how active the hurricane season is between now and year-end, he said.

The markets are quite different in different areas, he said, and while there are “pockets” of rate decreases, there also likely will be some areas — such as business affected by floods in Europe or Canada — where rates will increase.

Overall, terms and conditions likely will not alter much at the Jan. 1 renewal, he said, although this, too, will be dependent on loss experience, among other factors.

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