Midyear Renewals Show Early Signs of Price Stabilization: JLT Re Report

Downward pricing pressures eased during the June 1 and July 1 renewals – the first time since January 2013 – which suggests that a reinsurance pricing floor is not far away, according to a report published by JLT Re.

“Although pricing remained under pressure across most lines of business at June 1 and July 1, there were early signs of some stabilization in certain segments, albeit at historically low levels,” said Mike Reynolds, Global CEO, JLT Re, in comments accompanying the report, which is titled “JLT Re Viewpoint Report – Change in the Air?.”

The report noted, however, that pricing can go lower and may in fact “bounce along the bottom” for some time.

JLT Re pointed to three key drivers of the recent pricing stabilization: pockets of increased reinsurance demand, an easing rate of alternative capital entry and robust M&A activity, which are “coalescing to create an eventual pricing trough.”

Referring to the increased demand for reinsurance, the report noted that a number of buyers took advantage of low pricing and cyclically favorable terms and conditions, especially in U.S. property-catastrophe lines. Private carriers bought more wind cover for wind exposures “as state-backed insurers continued to depopulate their portfolios by transferring increasing amounts of risk into the private market.”

The report pointed to the two biggest U.S. state-backed carriers – the Florida Citizens Property Insurance Corporation and the Texas Windstorm Insurance Association – which placed an additional $1.5 billion of cover in total.

Diving into alternative capital trends, the report said, there appears to be a slowing in the rate of alternative capital entry into the sector.

The report noted that capital outstanding in the catastrophe bond market dipped slightly at midyear, and that cat bond issuance fell by nearly a third in the second quarter of 2015 compared to the corresponding period in 2014.

Although “alternative capital will remain a permanent fixture in the reinsurance market – almost irrespective of the magnitude of the next major catastrophe or interest rate rise – the stabilization in the rate of capital inflow indicates investors may be getting closer to target risk allocations,” the report said, reasoning that “returns are not what they used to be.”

The report affirmed that robust M&A activity has been the third factor helping to stabilize reinsurance price declines in 2015.

M&A deals involving reinsurers have amounted to roughly $20 billion, or 7 percent of the sector’s dedicated capital, since the second quarter of 2014, by JLT Re’s count.

“The wave of reinsurance M&A activity in the last 18 months has likewise been driven by excess capital and also by the need to improve diversification and build scale in order to survive in the current environment,” the report said.

The report refers to these trends as possible “green shoots of change,” but noted that “the reinsurance sector has a short collective memory” and there is still an abundance of capital in the market.

“During the last cycle, a terrorist attack, an equity market crash, a reserving crisis, a succession of U.S. landfalling hurricanes, followed by a financial crisis, more severe weather and earthquakes culminating in the largest insured loss year on record, combined to create a period of sustained risk premia,” the report said.

A group of significant events, such as those experienced in the 2000s “will be necessary to create any sustained change in pricing,” JLT Re said.

The report recommended that buyers review strategies and relative costs of capital before the cycle changes again.

“Today’s current environment of abundant capacity, coupled with a renewed focus on innovation, provides an opportunity for carriers to make genuine strides in creating new solutions for underinsured risks, including comprehensive flood and terrorism coverage, and the development of cover for relatively new risks such as cyber, reputational, supply chain, fourth generation nuclear and autonomous vehicles to name a few,” said David Flandro, global head of Analytics, JLT Re.

Source: JLT Re