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19 May 2013
Current reinsurance rate increases do not mean a hardening market, reinsurance broker Willis Re says.
Its mid-year renewals report, Looks can be Deceiving, says that despite headline figures forecasting rate increases the increases are due to “modest losses and poor results – not a hardening market”.
The report says reinsurance capacity remains “plentiful”, but that reinsurers are now taking a more targeted approach to underwriting. Some are looking to “de-risk” their portfolios, resulting in differential pricing.
“The reinsurance market is stable and orderly, but the reality is that it is not hardening,” Willis Re Chairman Peter Hearn says in the report.
“In fact, some buyers with loss-free programs, even in areas of peak exposure, have managed to obtain risk-adjusted rate reductions at the June 1 and July 1 renewals.”
Mr Hearn says reinsurance pricing is becoming determined less by catastrophe models and more by changing regulatory requirements and the challenging environment for generating investment income.
He says a true market hardening will most likely be the result of such external economic factors as the falling values of bond portfolios once interest rates begin to rise. The report says this scenario could result in “potential investment losses for reinsurers”.
“Curiously, despite the fact 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,” Mr Hearn says.
“The eventual increase in interest rates, coupled with an increase in inflation, could potentially trigger a hard market ahead of significant loss events.”
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