2015 Outlook: Rate Drops Dim Prospects for Underwriting Profits, PwC Says

Underwriting returns alone just won’t cut for some London market insurers and reinsurers in 2015, according to PwC, which says that 20 percent of the market participants are “materially reliant” on investment returns to make a profit.

According to a blog post on PwC’s website, underwriting confidence among these insurers is waning as abundant capacity dampens the possibility of rate increases.

Even for the aviation hull war segment, where insurers previously anticipated rate hikes of 30 percent or more in 2015, overall rates are now expected to be flat following fourth-quarter renewals.

In fact, aviation is the only sector now likely to show flat pricing, with others—energy and property reinsurance, for example, experiencing declines.

Commenting on the consequences of overall conditions beyond the reliance on investment returns for reinsurers, in particular, Bryan Joseph, Global Actuarial Leader at PwC, said that many “need a radical re-think of where and how to compete.”

Separately, industry executives in Bermuda and the U.S. increased the volume on comments about potential problems for customers working with the alternative capital providers instead of traditional reinsurers. See related article, “Who Can You Trust? Execs Wary of Alternative Capital”

Noting that low reinsurance prices and competition from insurance-linked securities providers is allowing clients to be selective, he said clients will opt to do business with a select panel of high-rated, large reinsurers. This is leaving smaller and lower rated counterparts “fighting over the commoditized crumbs,” he said. Engaging in these battles “or hunkering down in the hope of a more favorable rating environment is not a viable strategy for survival in the current market,” he said in the blog post.

If they don’t change strategies, “it’s only a matter of time before they’re absorbed or squeezed out of the market altogether,” he said, reiterating an earlier PwC prediction that 40 percent of the competitors will be squeezed out as merger activity heats up.

More generally, the blog post notes that PwC’s market view shows London Market participants are assuming an average combined ratio of 97 for 2015 with one-in-five materially reliant on investment returns to make a profit.

Separately, Fitch Ratings echoed Joseph’s thoughts about a bifurcation between large strong reinsurers and smaller ones in an announcement affirming Munich Reinsurance Company’s insurer financial strength rating at AA- yesterday.

“Fitch considers Munich Re’s reinsurance operation as one of a select group that have the scale, diversity and financial strength to attract the highest quality business being placed into the global reinsurance market,” the announcement said. “Fitch views this strength as a key factor that should assist the reinsurer in protecting its market share, in the event of a protracted soft market and the continued entry of alternative capital into the reinsurance sector.”

Sources: PwC, Fitch Ratings