With $400 billion in available capital flooding the market and relatively little in the way of catastrophic losses, reinsurers are experiencing significant downward pressure on pricing—forcing them to expand their offerings and cut costs to maintain their profitability.

The low returns broadly available for capital in global markets—along with the relatively high perceived uncertainty associated with many potential investments offering higher returns—is driving capital into the reinsurance market, where many investors believe they can achieve better outcomes while taking on risks that are both reasonable and, perhaps more importantly, quantifiable.

“New sources of capital over the past few years have been particularly attentive to developing offerings for peak zone exposures,” observed Lara Mowery, Managing Director and Head of Global Property Specialty at Guy Carpenter & Company, LLC, which recently issued a report on reinsurance renewals entitled Shaping the Future: Positive Results, Excess Capital and Diversification.  “These zones are a focus for modeling firms, and there are therefore robust risk assessment tools available for pricing and managing the associated risks.”

At the same time as capital supply has swelled, the industry has experienced far lower losses than it has in recent years.  In fact, global insured losses for 2014 were approximately $30 billion—the least since 2010 and 25 percent less than 2013.

In response to these market conditions, reinsurance companies are underwriting new specialized offerings that can generate incremental returns.  These offerings include extended hours clauses, improved reinstatement terms, addition of non-modeled lines and expanded coverage for exposures such as terror and cybercrime.  Reinsurance underwriters are also turning to technology to more accurately model extreme weather conditions and other catastrophic risks.

“Market conditions that continue to bring downward pressure on pricing are being met with tremendous, client-focused innovation,” added Mowery. “The result has been a customized approach with expanded product offerings and terms and conditions that benefit clients.”

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