Lower pricing, broader coverage for clients at Jan. 1 renewals: Guy Carpenter

New capital inflows, excess capacity and lower catastrophe losses are driving competition and innovation across the reinsurance industry, which saw pricing fall in many segments at Jan. 1 renewals, notes a new report issued Wednesday by Guy Carpenter & Company, LLC.

Guy Carpenter’s 2015 global renewals report, Shaping the Future: Positive Results, Excess Capital and Diversification, indicates that reinsurance pricing fell at the Jan. 1, 2015 renewals in many segments, affecting almost all lines of business and geographies, continuing recent renewal trends.

The Guy Carpenter Global Property Catastrophe Reinsurance Rate-on-Line (ROL) Index fell by 11% at the renewals, notes a statement from Guy Carpenter, which provides risk and reinsurance intermediary services and is a wholly owned subsidiary of Marsh & McLennan Companies. Renewals continued to be characterized by lower rates, excess capacity and broader terms and conditions.

“Market conditions that continue to bring downward pressure on pricing are being met with tremendous, client-focused innovation,” Lara Mowery, global head of property specialty at Guy Carpenter, says in the statement. “The result has been a customized approach with expanded product offerings and terms and conditions that benefit our clients,” Mowery notes.

At Guy Carpenter, among the wide range of options clients most commonly sought were extended hours clauses, improved reinstatement terms, addition of non-modelled lines and expanded coverage for terror exposures.

Guy Carpenter reports that there were also rate reductions in most other lines throughout last year as reinsurers continued to look for opportunities to utilize excess capacity, increasing competition across all lines.

Citing the lack of costly catastrophes as a driver of market conditions at renewals, related global insured losses for 2014 were about US$30 billion, the lowest total in four years and 25% lower than 2013, notes Guy Carpenter.

Third-party capital also served as a driver, continuing to flow into the reinsurance market as institutional investors – such as pension funds and hedge funds – sought higher yields amid a persistent low interest rate environment.

As convergence capital has expanded, Guy Carpenter reports that utilization within catastrophe products grew to 18% of total catastrophe limit or US$60 billion, up from 15% at year-end 2013, notes the company statement. “This was a contributing factor to the moderate expansion of overall catastrophe limit purchased as pricing came down and buyers were able to secure more limit at lesser cost,” it adds.

With regard to the ways in which alternative capital continued to access the reinsurance market, Guy Carpenter notes that industry loss warranties (ILWs) decreased through 2014, but this was more than offset by growth in collateralized reinsurance, sidecars and catastrophe bonds.

It was a record year for Cat bonds, issuance for which was approximately US$8.03 billion and risk capital outstanding at almost US$23 billion as of December 31, 2014. “These factors led, in turn, to surplus capacity across most business segments as competition spilled beyond property catastrophe lines,” notes the Guy Carpenter statement.

The continued expansion of accessible capital is from both favourable company results and new capital coming into the reinsurance sector. Guy Carpenter estimates dedicated sector capital remained at near record levels, having risen to approximately US$400 billion at year-end 2014 from traditional rated markets and all sources of alternative capital, including sidecars, collateralized reinsurance vehicles and catastrophe bonds.

“The sustained influx of capital from new entrants and growth from traditional sources continues to reshape the reinsurance landscape’s capital structure and drive innovation in the form of insurance-linked securities (ILS) and collateralized aggregate solutions,” says David Priebe, vice chairman of Guy Carpenter.

“We are also seeing reinsurers execute strategic decisions through the utilization of third-party capital facilities and M&A activity in response to new market realities; which is further blurring the lines between ‘alternative’ and ‘traditional’ markets,” Priebe points out.

“In addition to expense management and synergies, the search for greater scale and diversification has also become more critical to some companies as a way to increase or maintain profitability,” Guy Carpenter reports.

Noting that the current market environment has provided opportunity to push risk management solutions in new directions, “advances have developed through new technologies, increasing sophistication in measuring risk and the application of abundant capital to pursue tailored strategies,” the company adds.

“While some companies took advantage of the significant price decreases and coverage improvements to increase protection for the same or decreased total spend, there was a counter-trend dampening the potential for greater expansion in limit purchased,” Guy Carpenter points out. “The continued centralization of reinsurance purchasing by larger groups in all regions has led to increased retentions and more focused spending with a smaller number of reinsurers.”

The outlook for 2015 is that the demand for more state-of-the-art, client-focused strategies will only increase. As well, the influx of traditional and alternative sources of capital, low investment returns and less costly Cat events will continue to make the reinsurance marketplace a challenging landscape.