Reinsurance pricing fell at the January 1, 2015 renewals in many segments, affecting almost all lines of business and geographies, continuing recent renewal trends according to risk and reinsurance specialist Guy Carpenter & Company.
The 2015 global renewals report issued by the company, a subsidiary of the Marsh & McLennan Companies, is entitled
‘Shaping the Future: Positive Results, Excess Capital and Diversification’
. The report notes that a major factor driving market conditions at the renewals was the lack of costly catastrophes that resulted in global insured losses for 2014 of approximately US$30bn, the lowest total in four years and 25% lower than 2013.
Another major driver, third party capital, continued to flow into the reinsurance market as institutional investors such as pension funds and hedge funds sought higher yields amid a persistent low interest rate environment. As convergence capital has expanded, utilisation within catastrophe products grew to 18% of total catastrophe limit or US$60bn, up from 15% at year-end 2013. This was a contributing factor to the moderate expansion of overall catastrophe limit purchased as pricing came down and buyers were able to secure more limit at lesser cost.
Alternative capital continues to access the reinsurance market in various forms. Industry loss warranties (ILWs) decreased through 2014 as price reductions made indemnity protections more attractive but this was more than offset by growth in collateralised reinsurance, sidecars and catastrophe bonds. This was well illustrated by the growth in catastrophe bond issuance through 2014, a record setting year with 144A property and catastrophe bond issuance of approximately US$8.03bn and risk capital outstanding at nearly US$23bn as of December 31, 2014.
“Market conditions that continue to bring downward pressure on pricing are being met with tremendous, client-focused innovation,” said Lara Mowery, global head of property specialty at Guy Carpenter. “The result has been a customised approach with expanded product offerings and terms and conditions that benefit our clients.”
Rate reductions also occurred in most other lines throughout 2014 as reinsurers continued to look for opportunities to utilise excess capacity, increasing competition across all lines. Specific loss experience did have an impact on programmes; however, even the results in these cases were moderated by excess supply.
The continued expansion of accessible capital came from both favourable company results, due, in part, to light catastrophe losses in 2014 and new capital coming into the reinsurance sector. Guy Carpenter estimates dedicated sector capital remained at near record levels having risen to approximately US$400bn at year-end 2014 from traditional rated markets and all sources of alternative capital including sidecars, collateralised reinsurance vehicles and catastrophe bonds.
The report notes that the current market environment has provided abundant opportunity to push risk management solutions in new directions. Advances have developed through new technologies, increasing sophistication in measuring risk and the application of abundant capital to pursue tailored strategies.
The report’s authors predict that in 2015, the demand for more state-of-the-art, client-focused strategies will only increase. Clients will seek assistance with the structuring of alternative reinsurance vehicles, entry into new markets and the creation of new distribution channels and new products to address emerging risks.
Excess capacity marked by the influx of traditional and alternative sources of capital along with low investment returns and less costly catastrophic events in recent years “will continue to make the reinsurance marketplace a challenging landscape.”
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