Big beasts emerge as the reinsurance landscape firms
A reshaped reinsurance market is no longer the subject of speculation – it has arrived, and it is not going anywhere else soon.
The pressures have been building for some time, with an abundant supply of alternative capital and a benign loss environment driving down rates.
Last month’s renewals were the third in a row to feature rate reductions, and there is no real evidence they have bottomed out.
Diversification – as well as size – is now seen as the key to survival, and the long-expected increase in mergers and acquisitions is starting to play out.
Axis Capital and Partner Re will merge to create the fifth-largest reinsurer in the world, while XL Group and Catlin combined will move into eighth position.
Willis Re says many companies now realise that further delay will only result in a deterioration of their value, while consolidators looking for scale know there are a limited number of suitable targets.
Those not prepared to accept thin margins are scaling back their reinsurance portfolios, with long-standing relationships severed, it says.
AM Best agrees, saying some companies have already cut exposure in areas such as property catastrophe, with the trend likely to continue this year.
The ratings agency has also identified a pattern of increased centralised reinsurance purchasing.
“This has helped insurers reduce costs and receive better terms and conditions as they purchase reinsurance with increased bargaining power,” it says.
Beazley has come out fighting, saying it is prepared to make challenging underwriting decisions that others shy away from.
“In the past year there has been more talk about how the reinsurance market has too much capacity, rather than on the action needed to address the risks this presents,” Chairman Dennis Holt says.
“Our reinsurance division underwrote 9% less in gross premium [last year] than in 2013 and we will prune the book further [this year].”
Hannover Re is satisfied with its January renewals, but says the price drop in many markets was significant, with even major aviation losses doing little to lift prices.
Munich Re agrees renewal negotiations were marked by the influx of capacity.
“Over-capacity and a relatively low number of major natural catastrophes [last year] added to the competitive pressure, above all in catastrophe business,” Reinsurance CEO Torsten Jeworrek says. “But Munich Re’s broad diversification across lines of business and markets, bolstered by stable client relationships, paid off for us.”
Allianz Re CEO Amer Ahmed believes rate reductions could at least slow this year.
He says parts of the market are reaching a point where they do not justify the risk-reward, with some programs having to be repriced in January to stop insurers walking away.
Economics may soon prevent further significant reductions, Mr Ahmed says.
Most observers believe the new reinsurance landscape is set in stone – for now at least.
But it need not be all doom and gloom.
Aon Benfield says while the price of traditional reinsurance has been driven down, the industry’s financial security and the value of the product have soared.
“The quality of financial security for the reinsurance market has never been higher,” it says.
“Reinsurers, like their insurer counterparts, take less risk per unit of capital than they ever have. Today it is likely that the value proposition of reinsurance – the combination of quality and price – has never been higher.”
The new-look sector may be a good thing after all. It just depends how you look at it.