Despite catastrophe losses of $20 billion in the first half of this year, reinsurance market rates on line (ROLs) continue to be driven by an influx of capital from third-party investors at the July 1 renewals, according to a report from Guy Carpenter & Co. LLC, a global risk and reinsurance specialist.
For the first time, pricing in the capital markets has broken away from levels set by the traditional market, pushed by catastrophe bond, sidecar and collateralized reinsurance activity, Guy Carpenter said, which has prompted downward pressure on overall traditional market pricing.
“At July 1, we saw continued significant decreases in U.S. property catastrophe program pricing,” said David Flandro, global head of business intelligence at Guy Carpenter. “Although the impact of convergence was less dramatic elsewhere, general downward pressure on rates was observed for property business in several other regions and across some casualty lines. Without further significant catastrophe losses in the remainder of 2013, we expect that this downward pricing trend will likely continue through the remainder of the year and into the January 1, 2014, renewals.”
According to the report, convergence capital now accounts for $45 billion of the global property catastrophe limit, or 14 percent of the market, Guy Carpenter reported. The excess capital helped mitigate the impact of catastrophe losses from tornados in the United States and floods in parts of Europe, India and Canada in the second quarter of this year.
“For the third consecutive year, we’ve seen a significant shift in market conditions during the second half of the renewal season,” said Lara Mowery, global head of property specialty at Guy Carpenter. “This behavior is contrary to the market’s historical precedent, as the factors that typically impact the mid-year renewals are normally driven by those already present in January. As seen in this year’s July renewals, the excess capital in the market, and more importantly, the behavior of that capital, has encouraged a dramatic shift that triggered downward pricing in the traditional market in order to remain competitive.”
Report highlights include:
Property
• Pricing for loss-free U.S. property catastrophe programs continued to decrease significantly at July 1, offering some of the largest individual program decreases.
• Loss impacted programs experienced more moderate decreases.
• U.S. property per risk pricing also was under pressure.
• In Latin America and the Caribbean, many different reinsurer offerings led to rate reductions at July 1. The exception was Argentina, which suffered significant flood losses in April 2013 and faces a reduced offering due to regulatory restrictions.
• Property retrocession business saw significant rate decreases, with the greatest risk-adjusted reductions achieved on growing portfolios. Further downward pricing pressure is expected through the remainder of the year, absent a significant loss.
• Reinsurance rates for global marine and energy lines varied at July 1 depending on territorial region and loss-free/loss-hit business. Pricing between the United States and London has grown closer.
• Aviation business continued to see primary rate reductions, depending on the sector.
• Credit reinsurance rates were flat at July 1 that, when coupled with increasing underlying exposures, resulted in a risk-adjusted reduction in reinsurance terms.
• While aggressive pricing caused terms for industry loss warranties (ILWs) to tumble in early 2013, the market has shown signs of increased activity with the peak U.S. wind season approaching.
• Through July 1, $4.2 billion of P&C catastrophe bonds were issued, risk capital outstanding likely reached an all-time high of $16 billion, deal books marked with oversubscription and increased risk profiles in both books of business and triggers.
Casualty
• U.S. primary casualty lines showed an improved underlying pricing environment, with rate increases across some segments.
• Rate hardening continues in primary workers compensation, but major challenges to the line remain, including: depressed investment rates, reserve development and deficiencies, growth in residual market volume, the unknown impact of the Patient Protection and Affordable Care Act (PPACA) and the pending expiration of Terrorism Risk Insurance Program Reauthorization Act (TRIPRA).
• Primary insurance rates in umbrella and excess liability showed continued rate increases, depending on the exposure, size of the insured and loss activity.
• Indications of a soft workers’ compensation reinsurance market continued through the first and second quarters of 2013.
• Excess of loss rates for UK motor business continued to see upward pressure driven by expectations of an increase in periodical payments order (PPO) settlements.
• Motor reinsurance rates in Continental Europe remained stable.
• Employers and public liability rates in the UK continued to soften at July 1 for programs with good loss histories and a continued increase in burning cost weighting vs. exposure.
• Reinsurance for professional lines remained competitive in all sectors, with the possible exception of larger financial institutions.
• Primary premiums increased slightly for general liability lines in some euro zone countries because of rising revenues.
Life and Accident & Health
• Mid-year renewals in 2013 mark more than 18 months of a highly competitive market for medical reinsurance, with reinsurers showing increasing interest in healthcare as insurers and managed care companies grow increasingly wary of the impact of the PPACA.
• 2013 has seen an improvement in both incidence rates and recoveries for disability claims, but low investment income continues to pose significant pricing challenges for both primary and reinsurance disability companies.
• The accident reinsurance market continues to become more competitive as a result of increased capacity from Lloyd’s and other traditional life reinsurers, no significant catastrophe losses since 9/11 and increased competition among reinsurers looking to grow their overall book of business amid decreasing premiums in other lines.
