Reinsurance rates have continued to decline at the April renewals, according to broker Willis Re, and while the rate of decline continues to be minimal there are market forces at work which will likely see them persist further into the year.
The talk of last year’s mid-year June and July renewals, and also of the January 2017 renewals, was of stability emerging in the reinsurance market, as rate declines began to decelerate.
That talk continues and brokers look set to push on down their path of encouraging clients that there are still savings to be had, albeit smaller ones, while also providing encouragement to reinsurance markets that price declines aren’t as steep as they used to be.
Stable or not though, the general theme continues to be one of downwards pressure on pricing in reinsurance markets around the world. Willis Re cites declines in short-tail reinsurance lines as ranging from flat (or no decline) to down by mid-single digits. This is much the same as seen in January.
“With little other change in market conditions in terms of loss activity and investment markets over the last three months — the 1 April 2017 renewal season has largely followed the direction set at the 1 January 2017,” explained Willis Re CEO John Cavanagh.
Short tail classes of business saw risk-adjusted rate declines continue to moderate. International reinsurance buyers achieved the largest reductions in April, as compared to U.S. and Lloyd’s buyers, but overall the price declines range from flat to mid-single digit, which is an improvement on the low double-digit reductions seen a year ago.
Demand, in terms of overall reinsurance limits purchased, were relatively stable at the April renewal with some even increasing, as more buyers seek additional protection. Retentions of risk have remained largely stable, Willis Re said.
It’s been a challenging environment for new reinsurers, with the competitive environment not making capacity deployment an easy task.
Cavanagh said; “The renewal season has been challenging for new reinsurance capacity coming into the market. In addition to depressed pricing, most existing reinsurers have managed to renew their shares through a combination of client-centric underwriting and some relief now that rate reductions are abating.”
But real “relief” could be a little further off, as the influence of alternative sources of capital on the reinsurance market continues to be felt.
Alternative capital and ILS grew its share at the renewals and Cavanagh explained that there is now a “differentiation in the pricing of catastrophe bonds compared to traditional markets.”
“This erosion in the margin on catastrophe business puts additional stress on traditional reinsurers writing more diversified portfolios, since they have been relying on higher margin catastrophe business to balance their overall portfolios,” Cavanagh continued.
With diversifying lines of reinsurance business offering minimal margins, Cavanagh explained that the pressure to do something about pricing in key catastrophe zones is increasing. Whether that will result in any tangible changes remains to be seen, as with alternative and capital markets players ramping up their participation in these markets it seems unlikely significant upwards price movements would be seen, except on a risk appropriate basis.
Reinsurers have been pushing for better terms in some longer-tailed lines of business, such as in the U.S. on commercial and personal auto, and excess workers compensation, where poor underwriting results have now led to better terms being achieved at renewals. Ceding commissions on these larger account liability lines have also flattened off, according to Willis Re.
Casualty reinsurance renewals have been as expected, with rate movements driven by cedent or territory specific issues caused by loss activity and exposure changes. So far no widespread impacts are being seen from the Ogden rate change in the UK, Willis Re reports.
Looking ahead the continued shift towards more stable pricing should be welcomed, Cavanagh said, explaining that reinsurers can “Draw comfort that in many cases reductions are slowing and unbridled competition is abating.”
Whether the brokers words will be deemed as comforting, at a time when brokers continue to push markets for better terms for their clients, remains to be seen.