July 2, 2013 by Canadian Underwriter
U.S. property catastrophe has been identified as a key battleground as reinsurers begin taking robust defensive measures to maintain market positions recently eroded by new capital markets entrants, suggests a new report from Willis Re, a division of Willis Group Holdings plc.
“Despite the impact of the US$30 billion Superstorm Sandy loss, the key battleground is in U.S. property catastrophe where capital markets have been most active so far,” notes the Willis Re 1st View 1 July renewals report, Supply Chases Demand.
It is not easy to see any end to the continuing softening of the global reinsurance market, notes a statement from the reinsurance risk advisor and broker highlighting report findings. Growth in the largest catastrophe market, the United States, remains modest, as does the take-up rate of capital market solutions in other markets, the statement adds.
With the modest outlook for growth and improvements in underwriting profitability, many reinsurers are re-examining their capital management strategies in an effort to improve their overall results, Willis Re reports. “Aside from share buybacks, there are signs that some have started to look for higher investment returns by taking more investment risk and are allocating more capital to this exposure. This acceptance of greater investment risk is being driven to a significant degree by the need for companies to reinvest high-yielding maturing investments in assets which can produce a reasonable yield,” the report notes.
“Traditional reinsurers’ defensive actions include offering price reductions, larger line sizes and, in some cases, broadening of cover by offering options such as multi-year agreements, extended hours clauses and additional reinstatements,” John Cavanagh, global CEO of Willis Re, says in the statement. “Capacity for aggregate cover is also more widely available. As most programs are well over-placed, buyers are facing the challenge of signing down reinsurers’ shares,” Cavanagh reports.
“The trend for traditional reinsurers to set up sidecar-type structures, providing third-party capital access to the risk they are accepting, continues to expand,” Willis Re chairman Peter Hearn adds in the statement. Noting that the catastrophe bond market is on track to surpass the previous record high issuance in 2007 of US$7.2 billion, Hearn says that “with the strong inflow of new funds, the challenge for Insurance-Linked Securities (ILS) fund managers is how to source enough demand to satisfy investor demand for ILS products.”
The report’s findings include the following:
Looking specifically at the U.S. – Nationwide, the report cites the findings below:
“The softening of property catastrophe rates and traditional reinsurers’ desire to maintain their market positions is spilling over into other classes. Casualty markets are seeing substantial increases in capacity around the world and consequently, prices are softening, despite persistent concerns about the current low interest rate environment,” notes the report.
“Despite much speculation about what event or combination of economic scenarios could change the current market dynamics, the reality of any change remains elusive and uncertain. For the first time since 9/1, the increase in primary rates in the U.S. is outpacing reinsurance rating movement,” it adds.
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