Reinsurance buyers were able to renew loss-free programs at broadly flat pricing levels during the April 1 renewals – continuing the trend seen at the January renewals, according to a new Willis Re report.

Plentiful capacity from traditional reinsurers and insurance linked securities market continued to dampen pricing, James Kent, global CEO, Willis Re, said in the report “Willis Re 1st View, April 1, 2018, Subdued Markets – Lively M&A.”

The report explained that the ILS market’s capacity had the most effect on property catastrophe pricing. The impact of the 2017 hurricane losses “is proving limited and this is leading to a continued oversupply of capital, which, in turn, is helping to restrain rate increases,” Kent said.

While pricing may be disappointing for reinsurers looking for more substantial increases, Kent noted that growing demand from a number of buyers is bringing new opportunities and welcome premium growth,” said Kent in a forward to the report.

Rather than the “meaningful real rate increases” desired by reinsurers, industry observers expect “a slower upward trend across different lines of business,” especially if loss ratios for the underlying business continue to deteriorate, said the report.

The good news is that reinsurance is increasingly valued by C-suite executives who “continue to assess the impact of reinsurance buying to support earnings and capital management,” the report added.

Beyond property catastrophe renewals, “many other classes managed uncontentious renewals and despite limited movement in original rating levels, underlying exposure growth has fed through into modest increased reinsurance premium volumes for reinsurers,” the report said.

“[R]einsurers can take some solace from the fact that the annual price declines of recent years have abated. We are also seeing a pick-up in demand as a result of exposure growth, plus an increase in buying activity, most noticeably from some large global clients,” Kent said in a statement issued with the report.

Losses in Non-Natural Cat Business

Reinsurers reported their full-year 2017 results during the first quarter of 2018, which show that overall market results were hit by last year’s major natural catastrophes, the report said.

“But even more notable, and an increasingly worrying trend, is the deterioration of results in virtually all non-natural catastrophe lines and the limited reserve release now available from earlier years,” said the Willis Re report.

“While long predicted, the impact of this deterioration is now compelling virtually all managers to take decisive action,” it continued. “This is evident in many reinsurers and specialty carriers stepping up their efforts to reshape their portfolios, exiting unprofitable lines of business and implementing cost-saving programs.”

Mergers & Acquisitions

The report commented that there has been a strategic shift in M&A activity this year with large primary carriers re-entering the reinsurance market, after largely abandoning the sector in the 1990s and early 2000s.

“M&A in the sector, driven by large primary insurers returning to the reinsurance space, has also helped to keep capital plentiful, meaning that it remains a buyer’s market,” said Kent in a statement from Willis Re.

“Many major non-life primary companies with large personal line and small medium enterprises portfolios are facing the greatest disruption from new distribution models,” said the report. “Similarly, large primary companies with life portfolios are facing profitability challenges and an inability to differentiate their results from general investment markets.”

Operating in such a business climate, it makes sense for non-life primary companies to buy “large, transparent, well-managed reinsurance companies with synergies in some areas of their existing portfolio…,” the report continued.

Primary companies exited the reinsurance market in the late 1990s and early 2000s because “poor exposure management had led to earnings volatility and, in many cases, large underwriting losses that resulted in capital strains,” the report explained.

Large primary companies looking to access diversified sources of risk with reinsurance M&A, have “greater confidence that historic technical issues are now better managed through advanced risk quantification techniques…,” it affirmed.

The biggest change, however, could be with the management of large primary companies, which are now “more confident that they have the skills to manage the different social dynamics of a reinsurance business versus a primary commercial/personal lines writer.”

“The ‘Big Balance Sheet’ reinsurer model is being reinvigorated and the real test for management will be their portfolio management ability and the agile use of their large balance sheets,” the report said.

Source: Willis Towers Watson

*A version of this story appeared previously in our sister publication Insurance Journal.