Reinsurers ‘more willing’ to decline participation where demands from cedents are too great: Guy Carpenter

As investment returns remain low and with recent drops in renewal pricing, reinsurance carriers are resisting “aggressive buying tactics” on the part of cedents, Guy Carpenter & Company LLC suggested in an article published Friday.

“From a buying perspective, while recent years have been characterized by double-digit rate reductions and continual pressure on terms and conditions, there are now clear signs that reinsurers are more willing to stand firm in the face of aggressive buying tactics,” stated Guy Carpenter – a subsidiary of Marsh & McLennan Companies Inc. that places reinsurance – in an article titled “Reinsurers Standing Firm As Insurers Look To Consolidate.”

“As large-scale multi-line insurers enter a period of consolidation following the significant drive to rationalize long-term strategic reinsurance purchasing, recent renewal activity suggests reinsurers are now increasingly resisting shorter-term aggressive buying strategies,” stated Nick Frankland, Guy Carpenter’s chief executive officer of Europe, Middle East and Africa operations and Chris Klein, head of EMEA strategy management.

“The mid-year U.S. renewals experienced a notable moderation in property price decreases, with falls in risk-adjusted rates in the mid- to low-single digit range, as well as a reduction in capacity authorization,” Klein added. “Reinsurers, particularly on the catastrophe side, were more willing to reduce or even decline participation where they deemed buyer demands too great.”

The article was published four days after A.M. Best Company Inc. published its annual global reinsurance segment review.

“Broadly speaking rated balance sheets are currently well-capitalized and capable of withstanding various stress scenarios,” A.M. Best stated in its review released Sept. 5. “However, over time, this strength may be eroded for some carriers as earnings come under increased pressure, favourable reserve development wanes, earnings grow more volatile, and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity. All of these issues reflect increased concern that underwriting discipline has diminished as companies look to protect market share at the expense of profitability.”

Also on Sept. 5, Willis Towers Watson plc released the Willis Re Reinsurance Market Report, which includes aggregate data for the Willis Reinsurance Index group of companies.

Investment yield for that index, excluding capital gains was 3.1% in the first six months of 2016, down 0.2 points from 3.3% in the first half of 2015. Excluding gains from the “large life portfolios of Mapfre and RGA,” the yield excluding capital gains was 2.7% in the first six months of this year, down from 3% in the first half of 2015.

Net income for the index was US$14.5 billion during the first six months of 2016, down from US$17.3 billion during the same period in 2015.

The profitability of reinsurers in the index “remains heavily reliant on substantial reserve releases,” Willis Towers Watson noted, adding that net income figures reflect a change of composition of the index.

When comparing 2016 to 2015, Willis Towers Watson made a US$7.8 billion adjustment to eliminate the capital of White Mountains Insurance Group Ltd. and Houston-based HCC Insurance Holdings Inc. In 2015, White Mountains sold Sirius International Insurance Group Ltd., to CM International Holding Pte. Ltd. while Tokio Marine Holdings Inc. acquired HCC, whose holdings include Houston Casualty Company.

During the first six months, member firms of the Willis Reinsurance Index returned a combined total of US$10.6 billion in 2016 through share buybacks and dividends, down from $15.6 billion in 2015.

That decrease was “attributable to a one-off intragroup dividend” paid by National Indemnity to its parent company, Berkshire Hathaway.

For multi-year policies, there was a decline in the amount of coverage reinsurers were willing to provide, particularly for new offerings, as perceptions increase that the market is nearing the bottom and prices will stabilize in the near future,” Guy Carpenter’s Klein stated in the Sept. 9 article. “There simply isn’t a willingness to lock in current rates for a number of years.”