September 14, 2015 by Canadian Underwriter
Abundant capacity, the influx of new capital and limited loss experience is keeping the pressure on reinsurance pricing, terms and conditions, Alex Moczarski, president and CEO of Guy Carpenter & Company, LLC and chairman of Marsh & McLennan Companies International, said at the company’s eighth annual press briefing for Reinsurance Rendez-Vous 2015 in Monte Carlo.
“The reinsurance industry continues to evolve and adapt to changing and challenging market conditions on several fronts,” Moczarski said in his opening comments to a panel discussion, Guy Carpenter, a wholly owned subsidiary of global professional services firm Marsh & McLennan Companies, reports in a statement Sunday. “The long-predicted consolidation of the market has now started with inevitable consequences for rationalizing reinsurance buying,” he said.
“The declining rates of recent years continued with most lines of business and geographies experiencing decreases through the 2015 mid-year renewals,” Moczarski noted during the briefing. “However, average decreases were mitigated somewhat by more moderate decreases in United States catastrophe reinsurance, and especially the wind peril,” he said in his videotaped remarks.
“Reinsurers were more successful in resisting demands for large price reductions following two years of steep declines, while demand actually increased in some lines as clients continued to seek access to innovative new products and improved terms and conditions,” he pointed out.
David Priebe, vice chairman of global risk and reinsurance specialist Guy Carpenter, sees some opportunity in current conditions. “We believe current price levels for ILS (insurance-linked securities) could be a ‘golden compromise’ in which protection buyers perceive good value for fixed-price multi-year cover and investors continue to broaden and diversify their portfolio of holdings,” Priebe explained. “With costs of issue falling and time-to-market shortening, this equilibrium could provide a substantial boost to the market that the record issuance of early 2015 portends,” he suggested in his taped remarks.
Looking at the U.S. specifically, Priebe said it is a good news/bad news story. On the positive side, there is below average catastrophe loss activity and further positive reserve development, he said. On the negative side, “this has resulted in excess capacity, which continued to weigh on pricing, resulting in a very competitive insurance and reinsurance market,” he noted.
All that said, the rate of decrease is easing on U.S. wind programs. “2015, the mid-year decreases were partly offset by increased demand for catastrophe limit, notably in Florida, where we estimate US$4 billion of additional limit was accessed,” he reported. “Globally, we estimate the overall property Cat market has expanded to US$352 billion,” he noted.
“We anticipate ample capacity for the U.S. casualty reinsurance market, with pricing not expected to firm at January 1, 2016 renewals. We also expect U.S. property reinsurance prices to remain relatively weak as supply, for the most part, exceeds demand,” Priebe said.
“It also remains to be seen whether the tactical exploitation of soft markets by some buyers, and reinsurers’ resistance to aggressive demands for decreases, will be repeated at January 1,” he said.
As for Europe, Middle East and Africa (EMEA), Nick Frankland, CEO of Guy Carpenter’s EMEA operations, said during the briefing that “following another benign loss year, clients will continue to seek improved terms, yet reinsurers are beginning to get near to technical minimums, which will not allow enough scope for firm orders to be easily won.”
With regard to the Asian market, “We expect the M&A trend to continue as insurers, reinsurers and funds in the region pursue growth and diversification by going West, but we also anticipate a larger number of intra-region deals and also capital from the West coming East,” said James Nash, CEO of Asia-Pacific operations for Guy Carpenter.
“Established reinsurers continued to dominate the casualty marketplace as newer entrants remained cautious about and limited in their ability to participate in some of the complex and longer-tail risks,” Priebe said.
“To some extent, this complexity allows established reinsurers and brokers to work closely with core clients to tailor reinsurance coverages to their specific needs. Examples include multi-year contracts, private layers, aggregate coverage, hybrid structures,” he said. “But the pattern is inconsistent.”
Moczarski suggested it is necessary to be prepared. “The requirements of regulators and rating agencies are ever more demanding, intrusive and expensive,” he argued. “The use of advanced data and technology is becoming more sophisticated, presenting opportunities, and for those who do not embrace them, threats.”