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Long-term demand for P&C reinsurance remains strong despite headwinds

23rd October 2017 - Author: Staff Writer

Despite headwinds facing property and casualty reinsurers, according to McKinsey’s recent report on the global reinsurance sector, the long-term market demand outlook remains strong.

Resilience imageFactors driving demand in P&C lines of business are the impact of changing climate patterns, coupled with the fast-growing concentration of population and assets in hazard-prone areas, the rise of the middle class in emerging economies, rapid urbanisation, technological disruption and the growth of primary insurance in emerging markets.

However, McKinsey believes the industry will continue to see persistent headwinds from the soft market in the absence of a series of above-average catastrophic losses.

The continued influx of capital into the industry and the low-interest rate environment have contributed to severe pricing pressure in which industry pricing has been declining in most business lines, with rate-on-line declining by 15% to 20% over the last five years.

Pricing deterioration has been worse in property catastrophe – where pricing has come down by 50% or more, according to McKinsey.

Analysts noted that while soft pricing last year caused higher cession rates in some markets, the longer-term trend towards lower cession rates remains clear, with these rates having sunk globally from 12% in 2009 to about 9% in 2015.

These factors have led to P&C reinsurers reporting higher expense ratios.

In addition to this, the P&C industry is rife with disruption, with margins shrinking as alternative capital in the industry has grown to now represent about a quarter of overall P&C capacity, and brokers consolidating and increasing their market share.

Recent years have seen the top three reinsurance brokers slightly increase their market monopoly, (Aon Benfield, Guy Carpenter, and Willis Re) to now hold over three-quarters of the brokered channel.

However, non-life reinsurance remains strongly capitalized and appears ready to meet the market challenges, with industry capitalization unlikely to move below the “A” level even in the case of a 1-in-250-year loss event.

The key for P&C reinsurers in navigating the challenges facing the sector, according to the McKinsey report, will be to “increase agility and speed in establishing differentiated, hard-to-replicate value in an industry which is becoming increasingly commoditized.”

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