Canadian Underwriter

Downward pressure on reinsurance pricing at Jan. 1 renewals: Guy Carpenter

January 2, 2014   by Canadian Underwriter

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Continued expansion of accessible capital, strong balance sheets and relatively low catastrophe losses were all drivers of the Jan. 1 renewal outcome, which saw reinsurance rates-on-line fall in almost all classes and regions, notes Guy Carpenter’s 2014 global renewal report.

Downward pressure on reinsurance pricing at Jan. 1 renewals: Guy Carpenter

“It is the first renewal in over a decade where all major territories saw pricing move in the same direction, with some isolated exceptions,” says a statement issued Dec. 30 by Guy Carpenter, a global provider of risk and reinsurance intermediary services.

The Guy Carpenter Global Property Catastrophe Reinsurance Rate-on-Line Index fell by 11% at the renewal, largely driven by a 15% decline in the United States. In Continental Europe and the United Kingdom, property catastrophe pricing also came under pressure at Jan. 1, 2014, where prices fell by 10% and 15%, respectively, with risk-adjusted reductions of as much as 20% achievable in some cases.

However, significant catastrophe losses in Germany, some parts of the Nordic region and Canada during 2013 caused catastrophe rates for loss-affected programs to rise.

Guy Carpenter reports that strong balance sheets, relatively low loss experiences and an unprecedented influx of convergence capital spurred competition and innovation at renewal. These factors led to surplus capacity across most business segments as competition spilled beyond property catastrophe lines.

Softening market conditions resulted in price movements across non-catastrophe business showing “a general trend of decline as reinsurers deployed more capacity into these lines. Casualty pricing was generally flat to down, despite low investment yields due to historically low interest rates and adverse development for some U.S. workers’ compensation writers,” the statement adds.

Guy Carpenter estimates dedicated sector capital remained at near-record levels, having risen marginally to US$322 billion at year-end 2013. Reinsurance supply often outstripped insurer demand, the company notes, with global insured losses totalling approximately US$40 billion in 2013, lower than the 10-year average loss of US$60 billion. This contributed to ample capital available in the reinsurance market at Jan. 1, 2014.

“We have seen a surge in capital, through both alternative and traditional vehicles, over the last two years, which has transformed the nature of the reinsurance sector’s capital structure,” comments David Flandro, head of business intelligence at Guy Carpenter. “Today’s market conditions present both challenges and opportunities for all market constituents,” Flandro says in the statement.

Looking ahead, “the potential emergence of reserve deficiencies in particular is likely to be a more important factor over the next five years,” Guy Carpenter reports. Company research shows “it is becoming increasingly apparent that the reserving cycle is approaching, or in some cases passing, an inflection point where accident-year deficiencies may become more common than redundancies. This is particularly apparent in long-tail lines at present and emphasizes the need to explore new and prudent growth avenues.”

Guy Carpenter suggests current market conditions – excess capacity combined with the sustained challenges of subdued economic and premium growth, persistently low investment returns, statistically higher long-term catastrophe loss trends and reduced reserve releases – demand that reinsurers rethink old ways of doing business and seek new opportunities through innovation.

“It is difficult to think of another time in recent history where multiple factors have come together to support a market so focused on individual client need. There is tremendous innovation driving tailored solutions at reduced pricing to the benefit of our clients,” Lara Mowery, global head of property specialty at Guy Carpenter, says in the statement.

For example, Guy Carpenter reports that to help clients pursue specific coverage and pricing goals, broadening of coverage terms was prevalent during this year’s U.S. property catastrophe renewal.

“While a wide range of options were considered based on specific priorities, clients most commonly sought an extension of hours clauses, improved reinstatement provisions and expanded coverage for terror exposures,” notes the statement. “Multi-year coverage was also more widely available, with enhanced features such as price adjustment caps,” Guy Carpenter reports.

In the competitive environment, Guy Carpenter notes that most traditional reinsurers responded by adopting a less standardized, more tailored reinsurance product. “In doing so, many reinsurers offered more tailored coverage utilizing options, such as aggregate and quota share cover, multi-year arrangements and early signing opportunities at reduced pricing,” the company statement adds.

“Buyers continue to place a high value on historical relationships with traditional reinsurers,” says Nick Frankland, CEO of EMEA (Europe, the Middle East and Africa) at Guy Carpenter. “With pricing significantly lower in most lines, reinsurers are offering increased flexibility on reinstatement provisions and other terms and conditions, which is helping clients to obtain more from core partners,” Frankland points out.

Guy Carpenter further reports that “many buyers retained the bulk of their traditional coverage at January 1, 2014. Some large buyers focused their programs on a smaller group of key counter-party relationships that were meaningful in relation to the overall size of the program. Carriers outside of these strategic partner groups were aggressively seeking to secure shares by offering competitive prices and supplemental coverages and products.”