Despite headline figures forecasting rate increases, there is plentiful capacity in the reinsurance market, according to Willis Re’s 1st View mid-year report, “Looks can be Deceiving.”

“The reinsurance market is stable and orderly, but the reality is that it is not hardening,” said Peter Hearn, chairman of Willis Re.

The report contends that the targeted underwriting approach taken by most reinsurers to manage, analyze and, in some cases, de-risk their portfolios, has been rewarded with differential pricing. While this approach has been welcomed by cedents, it does not support a generalized market hardening.

The potential is there, though. Hearn said that it is the impact of external economic factors that could eventually result in a hardening market. “Curiously, despite the fact that this scenario is well-known and widely discussed in industry circles, pricing on longer-tail classes remains soft despite these warning signs to reinsurers’ balance sheets,” he said. “The eventual increase in interest rates, coupled with an increase in inflation, could potentially trigger a hard market ahead of significant loss events.”

Also found in the report, changing regulatory requirements and the challenges around investment income are significant industry trends, according to Hearn. “The impact of changes to vendor catastrophe models is becoming increasingly muted as the industry becomes more sophisticated,” he says. “Companies and regulators realize that they cannot be too reliant on one model, and are instead blending models to show realistic possible outcomes.”

According to the report, most reinsurers’ satisfactory investment returns in 2011 were derived from capital gains arising from falling interest rates. There are concerns however, that once interest rates begin to rise, falling values of bond portfolios could result in potential investment losses for reinsurers.

Specifically, in U.S. health care, reinsurance market conditions for Medical Professional Liability business remain favorable with pricing flat to falling, reflective of moderated loss trends and stable underlying rates. Reinsurance markets in general however, are receptive to supporting required limit capacity.

 

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