The reinsurance sector saw significant rate reductions at the mid-year renewals as excess capital continues to chase muted demand, according to Willis Re.
The broker added that continued benign loss activity throughout the first half of 2014 has compounded the softening market.
Further inflows of capital from alternative markets has added to the excess supply of capital, although Willis Re notes that much of the competition has also been driven by the traditional reinsurance markets.
Buyers have continued to reap the savings offered by the market and are generally seeking to recycle the saved premium spend back in to increased reinsurance purchase.
John Cavanagh, chief executive officer of Willis Re, said: “The tentacles of the softening market are spreading far and wide, with no immediate signs of relief. We’ve seen muted demand throughout 2014 and market dynamics are unlikely to change for some time to come.
“The current market position is increasingly challenging for reinsurers.
“Below average loss ratios in the first half of 2014 and reasonably adequate reserving positions mean that, barring any major underwriting or investment losses in the coming months, we will see another year of reasonable returns. This places further pressure on rating levels for 2015.”
The tiering of reinsurance capacity suppliers by buyers, into traditional, collateralised and insurance linked industries (ILS) markets, is adding to the competitive pressure.
The broker added that reinsurers and fund managers trading through this challenging period are therefore being forced to examine their strategies carefully. Against this backdrop, the report noted that this could lead to more mergers and acquisitions, capital restructuring and formations of sidecars with ILS investors.
The report noted that as major rating agencies downgrade their outlook on the global reinsurance sector to negative, there is further concern for the reinsurance industry. The rating agencies have focused on the role of the (ILS) markets in driving down pricing in the high margin US catastrophe market, which has produced the lion’s share of reinsurers’ overall returns in recent years.
“Additionally, the emergence of ILS capacity in other non-catastrophe lines of business has been highlighted by ratings agencies as an area of concern,” said the report.
The report also highlighted the continued growth of the catastrophe market. New bond issuance has reached $5.7 billion to date in 2014, with the total outstanding amount reaching an all-time high of $21 billion.
Willis Re added that despite this, there are signs that sophisticated investors are starting to flex their investment downwards. The report concluded that this style of logical, considered investment bodes well for the long term sustainability of ILS capital and should help address some of the persistent market concerns about the long term commitment of ILS investors.
Peter Hearn, chairman of Willis Re, said: “For primary insurance companies, the ability to recognise primary rate increases while reducing reinsurance cost may be coming to an end. Rate reductions are being seen in most territories on primary insurance classes, although in many cases the reductions are not directly linked to reinsurance savings.”
Willis Re, North America, Europe, John Cavanagh