Property reinsurance market softer than primary market: Towers Watson survey

About half of the property and casualty insurance chief financial officers (CFOs) taking part in a Towers Watson survey say they believe the property reinsurance market is softer than the primary market, while about a third say the same is true for casualty business.

Towers Watson’s sixth North American P&C CFO Survey, which received input from 29 CFO participants, examined trends in the p&c reinsurance market, as well as drivers and consequences of current market conditions.

Results show that 55% of surveyed p&c CFOs believe the property reinsurance market is softer than the primary market and 34% believe the same is true for casualty business. The CFOs “attribute this softness primarily to the significant growth of insurance-linked securities and other alternative forms of reinsurance capital,” notes a statement from Towers Watson, a global professional services company.

CFO participants were from commercial lines, personal and commercial insurance, p&c insurance and reinsurance, stock and mutual companies. In all, 38% have core operations in the United States, 17% operate locally (New York) and 14% are multinational/global.

Towers Watson reports that 97% of respondents utilize traditional reinsurance, although most insurers are not currently using alternative forms of capital to protect their business. More specifically, 59% are either purchasing reinsurance through a collateralized reinsurer or are likely to consider such a purchase; and 27% are currently using, or look favourably on the use of, both insurance-linked securities, such as catastrophe bonds and hedge fund-owned reinsurers.

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“The opportunities in the risk transfer market are just starting to be realized. Many fresh sources of capital are seeking investments that are uncorrelated to their existing investment holdings,” Stuart Hayes, senior consultant with Towers Watson, says in the statement. “With risk transfer arrangements continuing to evolve, we anticipate P&C insurers hastening their participation in various structures across the risk transfer spectrum, thus complementing their traditional reinsurance programs,” Hayes adds.

Despite the threat of overcapacity in a softening market, Towers Watson reports, just 21% of respondents believe there is a need for consolidation among reinsurance companies and only 24% say they think consolidation will take place in the next two years.

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That said, 52% of CFOs polled feel that prolonged soft market conditions could drive reinsurance market consolidation in the future, while competing alternative capital sources were cited by 48% of respondents as possibly having the same effect.

“Given the increase in reinsurance and alternative capital supply, reinsurers are faced with a property catastrophe market that is likely to soften unless there are major catastrophic events with very large losses,” says Towers Watson director, Matthew Ball. “Reinsurers may face a classic economic example of reduced demand and increased supply that drives prices lower,” Ball adds.

Other survey findings include the following:

• 90% of respondents indicated they have seen or expect to see decreasing prices due to alternative forms of reinsurance;

• 88% reported the lower cost of capital afforded by alternative reinsurance options is their top benefit; and

• 48% expect an increase in the use of catastrophe reinsurance, 38% expect an increase in the use of aggregate loss covers, 31% expect an increase in quota share structures and less than 15% foresee decreased use of aggregate loss covers and aggregate risk transfer structures.

“Reinsurers that realize the efficacies of alternative capital, while maintaining the relationships and platforms already built around traditional reinsurance solutions, will distinguish themselves by providing primary P&C insurers the best risk transfer solutions,” says Ball.