Reinsurance capital levels show no growth: Guy Carpenter

Overall capital levels dedicated to reinsurance have stabilised, according to Guy Carpenter, the global risk and reinsurance specialist and wholly owned subsidiary of Marsh & McLennan Companies.

The firm said that reinsurance capital levels showed no growth for the first time in several years in its 2016 global January renewal report, The Reinsurance Market 2016:  Innovation and Customization.

“In a highly competitive environment, companies assessed broader opportunities and the rate of incoming capital slowed,” said Guy Carpenter.

“However, moderate loss experience kept capacity at abundant levels for the January 1, 2016 renewals. The continued scarcity of costly catastrophe losses and more than adequate capacity led to reinsurance pricing reductions, although there are signs the rate of descent is slowing as compared to 2015.

Pricing declined for most lines of business and geographies, according to the report, but the rate of decline moderated, particularly in US property catastrophe. This trend was largely influenced by two prior years of steep declines and a larger increase in demand in property and certain other lines that began in 2015.

Pricing also flattened in the insurance-linked securities space as protection buyers and sellers assessed adequate compensation for risk, said the firm.

“As this sector was initially at the leading edge of attracting new capital while undergoing significant decreased price adjustments, it is notable that rates have currently reached an equilibrium,” said Guy Carpanter.

“This evidence of underwriting discipline may eventually lead to a greater increase in capital attracted to the space, particularly if growth in demand continues."

According to the company in 2015, while the commitment from the capital markets grew, the rate of growth slowed and was offset by a decline in dedicated capital by rated carriers, leading to overall capital levels that were flat.

Capacity remains more than adequate however, according to the data. With buyers recognising that significant capital levels combined with cumulative decreases in pricing provided a unique opportunity, they increased limits purchased in the past 12 months. These purchases included those of first time buyers, attracted to a market that evolved into a mechanism to manage risk they previously viewed as better addressed elsewhere.

“As reinsurance providers continue to evaluate how to compete in a market flush with capacity, an environment of innovation, responsiveness and customization has become the norm,” said Lara Mowery, global head of property specialty at Guy Carpenter.

“Solution-oriented dialogue has elevated significantly and insurers are increasingly able to focus on improvements in the structure and efficiency of their programs to incorporate more refined capital management goals.”

While there was some slight variation between major regions tracked in the regional property catastrophe rate on line (ROL) index, all experienced decreases of between seven percent and 10 percent, with international regions experiencing greater reductions in the index than the US.  Individual renewals experienced a wide range of outcomes dependent on loss activity, type of structure, geographic concentrations, past renewal experience and other company specific features.

Risk adjusted pricing for US property catastrophe decreased by five percent to eight percent, on average, moderating from the average decreases a year ago of down seven percent to down 14 percent.  Capacity continued to be plentiful, but with a wider range of responses to individual renewals as markets were somewhat more apt to decrease lines or decline participation as margins tightened further, according to the data.

Globally, significant insured losses from catastrophes reached approximately $30.5 billion in 2015, compared to $32 billion in 2014. Record-breaking cold weather in the US and Canada, along with winter storms in Europe, were the major natural disasters that occurred during the first quarter of 2015. Tropical cyclone activity in the Pacific also contributed to losses. Heavy rains in the Southern United States and hailstorms in Australia contributed to the bulk of losses in the second quarter, along with an earthquake in Nepal, said the report.

In 2015, the industry experienced an estimated two to three percent decline in the amount of capital dedicated to writing reinsurance by rated markets, while convergence capital continued to grow, though at a slower rate in comparison to previous years. The decline in rated capital was driven in large part by the rate environment, which caused capital to shift slightly toward insurance lines and away from reinsurance lines, said Guy Carpenter.

As the pricing environment shows signs of stabilisation across both the insurance-linked securities (ILS) and traditional markets, accessing multi-year capacity at pre-agreed static rates is a focus for many cedents,” said the company.

“The reinsurance market has been challenged by a persistent low interest rate environment, the continued inflow of new sources of capital, benefited from an extraordinarily long period of few major natural catastrophes, and record levels of merger and acquisition activity in 2015,” said David Priebe, vice chairman of Guy Carpenter.

“As a result, re/insurance companies are evolving their operating strategies to embrace this complex environment. We believe that alternative capital will be a consistent source of risk capital for re/insurance and corporates and we expect to see sustained high growth to continue in this sector.”