Friday, 6 July 2012
Despite appearances reinsurance market not set for hardening says Willis Re
Despite appearances the reinsurance market is not set for a general hardening, according to Willis Re. Capacity remains plentiful and rate increases in the international and North American markets reflect modest losses and poor results, rather than underlying conditions for a market turn, it adds.
Peter Hearn, Chairman of Willis Re
The reinsurance broker’s 1st View mid-year renewals report, entitled Looks can be Deceiving, finds that despite headline figures forecasting rate increases, there is plentiful capacity in the reinsurance market.
“The reinsurance market is stable and orderly, but the reality is that it is not hardening,” says Peter Hearn, Chairman of Willis Re. “In fact, some buyers with loss-free programmes, even in areas of peak exposure, have managed to obtain risk-adjusted rate reductions at the June 1 and July 1 renewals,” he added.
The targeted underwriting approach taken by most reinsurers to manage, analyse and, in some cases, de-risk their portfolios, has been rewarded with differential pricing, the report finds.
This approach has been welcomed by cedents, but does not support a generalised market hardening, asserts Willis Re.
The report identifies model change and macro-economic factors as playing an ‘increasingly muted role’.
Mr Hearn rates changing regulatory requirements and the challenges around investment income as significant industry trends.
“The impact of changes to vendor catastrophe models is becoming increasingly muted as the industry becomes more sophisticated,” he said. “Companies and regulators realise that they cannot be too reliant on one model, and are instead blending models to show realistic possible outcomes.”
According to the report, most reinsurers’ satisfactory investment returns in 2011 were derived from capital gains arising from falling interest rates.
There are concerns however, that once interest rates begin to rise, falling values of bond portfolios could result in potential investment losses for reinsurers.
Mr Hearn believes it is the impact of external economic factors that could eventually result in a hardening market.
“Curiously, despite the fact this scenario is well known and widely discussed in industry circles, pricing on longer tail classes remains soft despite these warning signs to reinsurers’ balance sheets. The eventual increase in interest rates, coupled with an increase in inflation, could potentially trigger a hard market ahead of significant loss events,” he said.
The report also finds a marked increase in the flow of capital into non-traditional vehicles, with investors attracted to the non-correlated returns available in reinsurance risk.
The growing sophistication of the catastrophe bond and Insurance-Linked Securities (ILS) sector means they will increasingly compete with traditional reinsurance to cover risk, it says.
The political risks market continues to be impacted by the credit crunch and resultant global recession, with the ever-changing eurozone crisis of concern to both clients and reinsurers, it concludes.