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Reinsurance rates continued to fall at the Jan. 1 renewals, although in many cases the pace of those declines slowed compared with previous renewals.
But while rate reductions for U.S. property catastrophe excess-of-loss programs have slowed, reinsurance rates in other areas have continued to fall more sharply, sources say.
“We have seen rates fall at the Jan. 1 renewal in many classes, but broadly in line with what we expected and at a slower rate of decline than in previous renewals,” said Greg Hendrick, Stamford, Connecticut-based CEO of reinsurance at XL Catlin. “The market remains competitive across many classes of business with the international market remaining more competitive than in the United States.”
Rates continued to fall at the Jan. 1 renewal, but the pace of those declines has slowed down greatly, according to Mike Krefta, London-based chief underwriting officer at Hiscox Re, the reinsurance arm of Hiscox Ltd.
“In North America especially, the brakes have been applied,” he said.
But elsewhere rate reductions have continued, he said, pointing out that Hiscox Re now has its smallest-ever reinsurance book in Europe because it has pulled out of many areas where rate reductions were deemed to be too large.
Sources said that reinsurance rates in the U.S. Midwest, for example, were falling by single-digit percentages, rather than the double-digit declines seen at previous renewals.
For example, said one source who asked not be named, non-loss-affected property catastrophe business in the Midwest experienced rate reductions of about 8% to 10% on average.
While the reinsurance market remains competitive, in some areas rates appear to be “reaching a floor,” according to Mr. Hendrick.
“Certain placements that have pushed for large rate decreases or significant broadening of terms have come back into the market at an increased price,” he said.
“The continued improvement in analytics and modeling has contributed to greater discipline in the marketplace,” Mr. Hendrick added.
There has been some stabilization in rates in some areas, said Mr. Hendrick, notably loss-hit programs and particularly marine and energy business and treaties that suffered losses in U.S. winter storms in 2015, he said.
U.S. casualty rates also have remained “relatively flat” over the year, he said.
But outside of the United States, rates continue to fall fairly rapidly, sources said.
“Despite the signs of price stabilization in peak property catastrophe zones at the June and July 2015 renewals, the hopeful forecasts for a 'softening in the softening' at the 1 January 2016 renewal season have proved illusory in all but a few cases,” James Vickers, London-based chairman of Willis Re, the reinsurance brokerage arm of Willis Group Holdings P.L.C., said in an email.
“In the United States, there are signs that the pace of softening is declining on high-layer property catastrophe excess of loss rates. Outside of North America, however, the pace of softening is not reducing,” Mr. Vickers said.
“In the main this is due to the different ILS dynamics within these two regions,” he said.
“The ILS markets have had a much bigger impact on pricing in the United States than internationally,” Mr. Vickers said. “And with ILS business models not allowing the same degree of flexibility through diversification that the traditional reinsurers enjoy, ILS markets on the whole are taking a more disciplined approach to pricing now and in some cases reducing their capacity.”
“This in turn has allowed for some
respite for the traditional reinsurers in the United States, but the effect for the international markets in comparison has been minimal. For the specialty and casualty markets globally, we have not seen much relief either,” he added.
A moderation of the flow of capital coming into the market has been one factor that has led to a slowdown in rate reductions, said David Flandro, global head of analytics at JLT Re, the reinsurance brokerage arm of Jardine Lloyd Thompson Group P.L.C., in New York.
He said that while new capital continues to enter the marketplace, the pace of that entry has slowed, which is one “marginal” factor affecting rates for reinsurance coverage.
The rate of entry of capital market capacity into the reinsurance market has slowed in comparison with the previous year, noted Kurt Karl, Zurich-based chief economist at Swiss Re Ltd.
This is in part because investors can see more attractive returns elsewhere, but also because most of those investors that are interested in the reinsurance market already are participating, he said.
The exceptionally benign year for catastrophe losses means that it is difficult for reinsurance to make the argument that rates must be raised, Mr. Flandro noted.
Many large reinsurance buyers have continued to consolidate their programs in order to benefit from economies of scale, said Mr. Krefta, and so are buying fewer contracts with higher
And some midsize specialist cedents also have begun to adopt this strategy, Mr. Krefta noted.
While many large cedents in recent years have been buying their reinsurance centrally, reducing the number of reinsurers on their panels and increasing their retentions, some larger players have started to buck this trend and are buying coverage on a regional basis once more because of the very low rates they are able to secure in some territories, said one source who asked not to be named.
The very low rates available in some areas mean that reinsurance buying can become an arbitrage, and ceding more reinsurance can begin to make sense, the source explained.
“The underlying trends of retaining more and consolidating reinsurer panels are still there, but there are signs that some companies are recycling savings into buying more reinsurance,” said Willis Re's Mr. Vickers.
Mr. Hendrick said XL Catlin has “a number of clients that have increased retentions or dropped treaties altogether that are now returning to the market to explore protection beneath current retentions, either with a new underlying layer or an aggregate cover.”
For those clients that have decided to assume a higher net retention, “we are seeing increased interest in purchasing facultative buy down covers on individual risks,” he added.
“We have not seen a rush to restructure programs, as clients are navigating changing regulations, particularly in Europe with Solvency II, and rating agency approaches,” said Mr. Hendrick. “We do expect additional demand throughout 2016 and beyond as clients fully assess and react to the new rules and regulations.”
There has been an uptick in interest in buying adverse development covers, either as capital release for companies that consider themselves to be over-reserved or as capital relief for those companies that believe they are under-reserved, said Mr. Flandro.
With continued excess capacity in the directors and officers liability market, insurance buyers are still enjoying flat or lower renewals, a trend that is expected to continue next year.