Reinsurers ‘Threatened by New Capital Entering Market’

Many traditional reinsurers see the flow of capital coming into the reinsurance market as a direct threat to their existing portfolios reports Willis Re, the reinsurance broking arm of Willis Group.

The Willis Re 1st View April renewals report, entitled ‘Capital Overflow’, notes there is currently around US$35bn of capital that has entered the reinsurance market from a variety of sources. The volume of capital entering the market is also increasing.

In the report’s opening letter, Peter Hearn, chairman of Willis Re, writes: “While some reinsurers are considering how to respond, others are moving ahead with the development of third party capital management propositions to offer their own skills and platforms as fund managers.”

The influx of new capital could also have a significant impact on the post-event response from the global reinsurance market. Historically, following a major loss, new reinsurance companies have been formed through the creation of permanent capital structures, whereas today new capital flows into the market, in a more fungible manner.

The report also notes that overall global reinsurance premium volume is being squeezed by a combination of merger and acquisition (M&A) activity and higher retentions by larger insurers.

Other areas of concern for reinsurers include:

  • Sluggish growth in mature markets is not yet being offset by growth in emerging markets.
  • Changes in primary market distribution models are effectively concentrating premium into the hands of fewer larger reinsurers.
  • Access to risk to drive growth aspirations

Hearn commented: “Against this background, the outlook for many traditional reinsurers is challenging, with profit margins coming under pressure during 2013.”

Other points of note include:

  • Overall pricing is flat to slightly down on loss-free lines of business.
  • Major Japanese reinsurance buyers have recognised the support they obtained from their reinsurers over the difficult renewals of 2011 and 2012. As a result, they have been rewarded with significant levels of additional capacity. Pricing was either risk-adjusted flat or down across all lines.
  • Early indications of the bellwether 1 June Florida market renewals suggest more aggressive pricing this year.

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