Against a background of increasing competitive pressure, getting prices that adequately reflect risk will be “crucial” for reinsurance companies entering into renewals, the European Insurance and Occupational Pensions Authority (Eiopa) warned in its financial stability report for June 2017.
The still ongoing finance and debt crisis has continued to push investors into what’s seen as a safe and stable option for diversification, the catastrophe-exposed business – which Eiopa said already holds enough capital to remain adequately capitalised from probable maximum losses; events only occurring once every 100-250 years.
And while this non-traditional capital mostly seems to be moving into non-proportional catastrophe business lines, the levels of influx mean it’s spilling over into other reinsurance lines.
Among the 20 Aon Benfield Aggregate companies, the average combined ratio for the last five years was well below 95%.
And these firms appear set to come under further strain as they’re now less able to rely on releasing reserves from previous years, even as “the long-term business is getting less profitable or even unprofitable as the high interest rates calculated in previous rates are difficult to earn,” Eiopa said.
These factors contribute to an expected further deterioration of return on equity even “assuming a normalised catastrophe load. Given the amount of cash on the sidelines waiting to be put to work,” according to the report.
As primary insurers show increased sensitivity to pricing and competition, a long-term trend has appeared where carriers retain more risks as they streamline their own risk management techniques.
However, primary insurers have also benefitted from reinsurance capital influx and rates that continue to drop – these competitive pressures mean they’ve been able to make negotiating gains with improved terms and conditions for reinsurance placement such as broadened terrorism coverage and improved reinstatement provisions.
Half way into 2017, the macroeconomic environment has shown no significant signs of change ahead for the reinsurance world; it’s been a relatively benign year, with no major natural catastrophe losses with potential to drive pricing change.
Hence, as reinsurers continue to walk the market’s tightrope, the lack of change in conditions from outside of the industry will continue to drive companies to capitalise on profitability through changes from within – moving to areas attractive for innovation and growth such as emerging markets, and shifting to direct risk access through InsurTech and distribution networks.