Alternative capital, abundance of capacity keep down reinsurance ratesPosted On: Jan. 4, 2015 12:00 AM CST
An abundance of capacity, boosted by nontraditional capital, meant that most reinsurance buyers were able to achieve rate reductions at the Jan. 1 renewals.
While rates for U.S. property catastrophe business fell by double digits in many cases, the influence of alternative capital also spread to other lines of business and geographical areas, sources say.
And experts add that many cedents were able to take advantage of the competitive marketplace to secure attractive terms and conditions or long-term deals.
An analysis by investment bank Keefe Bruyette & Woods Inc. in December predicted rates likely would fall for most reinsurance lines at the Jan. 1 renewal, while property catastrophe rates would echo the double-digit reductions seen at the midyear 2014 renewals.
Reinsurance pricing likely will remain under pressure during 2015 in the absence of any major catastrophic events, rating agency A.M. Best Co. Inc. noted in a report.
There is a current supply-and-demand imbalance for reinsurance since there is plentiful capacity at a time when many cedents are consolidating their reinsurance purchase among fewer players, said Mark Button, a senior director at Standard & Poor's Corp. in London.
Rates for U.S. property catastrophe business began to fall at the midyear in 2014, and this began to spill over into other lines during the Jan. 1 renewal period, said Roman Lechner, senior economist at Swiss Re Ltd., during a presentation of a Swiss Re report.
The increased level of competition has had a depressing effect on rates for U.S. property catastrophe coverage, said Martin Stephenson, managing director for reinsurance at CGNMB L.L.P. — formerly Cooper Gay & Co. Ltd. — in London.
Alternative capital is now spreading its involvement wider than such areas as industry loss warranties into sectors where it competes more directly with traditional reinsurance companies, he said, and its penetration “is across all classes and territories, not just U.S. property cat.”
An increasing commoditization of property catastrophe coverage means that many underwriters are switching their focus to noncommoditized specialty areas, said Mike Krefta, chief underwriting officer at Hiscox Re, the reinsurance division of Hiscox Ltd. in London.
While price was an issue in renewal discussions, many buyers were more preoccupied with ensuring they had meaningful coverage, Mr. Krefta said.
While the impact of the alternative capital is most directly felt in U.S. property catastrophe business, there is an overspill into other lines and areas because the same markets that underwrite U.S. property catastrophe business usually will underwrite peak zone risks in other geographies or other lines of coverage, said David Flandro, New York-based global head of strategic advisory at JLT Towers Re, the reinsurance unit of Jardine Lloyd Thompson Group P.L.C.
For many property coverages, the terms and conditions that buyers were able to achieve during the recent round of renewals were greatly expanded, Mr. Flandro said. Cedents were able to purchase multiyear deals and coverage with extended hours clauses, for example, he explained.
“Reinsurers are being forced to be extra creative and come up with new and interesting ways to cover the risk — and that can be really good for buyers,” he said.
In Europe, there were significant rate decreases on some business, notably property catastrophe, and Jan. 1 renewals saw a continuation of the softening rates already noted at midyear renewals, said Dirk Spenner, head of Europe North, East & Central at Willis Re, a unit of Willis Group Holdings P.L.C., in London.
There were significant rate reductions for many cedents, and buyers also were able to obtain favorable terms on issues such as reinstatement programs and hours clauses.
“It is a market where the buyer has choice,” he said, “and can really maximize product features against a given price.”
One notable trend at the Jan. 1 renewal was for buyers to seek long-term deals, Alkis Tsimaratos, London-based regional director and head of Europe West at Willis Re. Buyers are keen to “lock in the price” and stabilize their reinsurance spending, he explained.
For Asian business that renewed at Jan. 1, there was sufficient capacity available, and many buyers experienced rate reductions, according to James Beedle, senior managing director of Willis Re Asia in Singapore.
While alternative capital has not been deployed widely outside of Australia and Japan, buyers in Asia have seen the indirect result of the influx of that capital reflected in traditional reinsurers defending their market shares in Asia.
The result of this principally is being seen in short-tail lines, he said, but also in casualty, accident and health and specialty classes.