July 4, 2016 by Canadian Underwriter
Any indication of widespread reinsurance pricing stabilization remains elusive amidst an environment of continuing market softening in the June/July renewal season, lack of catastrophe losses and abundant capacity across virtually all classes and territories, notes a new report issued Friday by Willis Re.
“It is increasingly apparent that the magnitude of rate reductions is slowing,” John Cavanagh, global CEO of Willis Re, writes in the forward to Willis Re’s 1st View report for July 1, 2016, Bumping along the bottom.
“Capacity withdrawals where some reinsurers deem pricing to be inadequate are also evident, although considerable pricing variation by class and territory persists. As yet, any indication of widespread pricing stabilization remains elusive,” Cavanagh notes in the report.
“An increase in attritional losses across a number of territories and classes is beginning to feed through into pricing, with a bifurcation in rate movements between the lower level and higher layers of programs,” he explains. “So far in 2016, only one major catastrophe loss – the Fort McMurray fires – will produce any meaningful catastrophe claims for reinsurers,” he adds.
“Relief that market pricing in some areas may be nearing the bottom of the cycle is counterbalanced by concern over how and when reinsurance rates might start to increase, even modestly, on a wider basis,” Cavanagh points out. “The alternative is a market that faces a number of years bumping along at current levels earning very modest returns,” he comments.
“How much longer the gift of prior-year reserve releases can keep giving will, no doubt, be a factor for if or when conditions change, at which point differences in individual companies’ historic reserving practices will be exposed,” Cavanagh suggests in the report.
Cost control measures remain a priority for the managers of many reinsurers in the wake of continued pricing and interest rate pressure, he notes. “The drive to achieve market efficiencies and cost reductions is picking up pace, particularly in the London market,” he reports.
“The balance of risk retention versus return is more acute than ever,” Cavanagh writes, adding that the ability of individual re/insurers to manage this crucial dynamic will have a profound impact on the shape of the market to emerge.
The United Kingdom’s decision to leave the E.U. provides an additional dynamic. Willis Re does “not see any material risk to clients generally in terms of re/insurers’ ability in the immediate future to offer continuity in the supply of reinsurance capital and consistency of approach,” Cavanagh notes.
“Brexit is fundamentally a political issue that has now triggered economic forces that are, on balance, more likely to perpetuate the low/negative interest rate environment,” he states. “We believe that these dynamics are far more relevant to insurers in the immediate term.”
With regard to the United States, the report makes a number of observations regarding property reinsurance.
Among other things, a lack of catastrophe loss activity and abundant capital have driven the softening market in recent years, and following several years of compound price reductions, risk-adjusted rate reductions continue for catastrophe reinsurance, but have definitely slowed since Jan. 1.
For casualty, the report’s observations include the following:
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