Abundant capacity lowers reinsurance pricing at Jan. 1 renewal: Willis RePosted On: Jan. 5, 2015 12:00 AM CST
Abundant capacity, which is outstripping the demand for reinsurance, led to decreased rates at the Jan. 1 renewal across most territories and lines of business and may increase pressure on some companies to merge or be acquired, according to a report by Willis Re, the reinsurance arm of Willis Group Holdings P.L.C.
As well as rate reductions, many buyers were able to secure improved terms and conditions when their programs renewed at Jan. 1, noted the report, “1st View Market Reshaping a Reality,” released Friday.
Pressure on reinsurers, particularly small or monoline catastrophe underwriters, may lead to an uptick in merger and acquisition activity, according to the report.
“In the current environment, many reinsurers recognize they can no longer hope for salvation through major market losses or increasing interest rates,” Peter Hearn, chairman of Willis Re, said Friday in a statement.
“Their only sustainable course of action is to change their business models, portfolio mixes and to strive for scale,” he said. “The new mantra is diversification.”
“Whether this is by class or geography — preferably both — reinsurers are being actively rewarded by investors and buyers who see diversification as key to sustainability, as well as size,” Mr. Hearn added.
For U.S. reinsurance business, capacity continues to be plentiful driving rate reductions and improvements in terms and conditions for cedents, according to the report.
The reinsurance market is working to respond to the nonrenewal of the U.S. government's terrorism insurance backstop, the Terrorism Risk Insurance Program Reauthorization Act, according to the report, with terrorism coverage being offered both on a stand-alone basis and embedded within catastrophe covers.