Stories by Rosemary Onuoha

Reinsurance broker Willis Re said that January 2015 reinsurance renewals, the key market renewal for much of the globe, natural catastrophe reinsurance rates have continued to decline. The brokers renewals report, Willis Re 1st View states that catastrophe reinsurance rates have declined by around 10% for the renewals.

Willis Re said change is the only sustainable course of action for many reinsurers, as competition at renewals pushes rates on catastrophe business down by 10%, but some evidence of a price floor is emerging the broker said.

Reinsurers have been under threat from declining rates and pricing across lines of reinsurance business for almost two years now, with little in the way of losses to reverse the trend. 2014 has seen another year of almost record low levels of natural catastrophe losses and the pressure on most lines of business continues.

Alternative capital

Continued competition from growing quantities of alternative capital from third-party capital market investors is adding to the pressure and also forcing reinsurers to rethink established business models, as the leaner strategy of ILS managers begins to threaten market incumbents.

It’s wrong to suggest that the inflow of capacity from the capital markets, into instruments such as catastrophe bonds, sidecars and other insurance-linked securities (ILS), alone is causing the pressure to rise for reinsurers, but it is a contributing factor. Added to the excess levels of traditional reinsurance capacity, plus the lower-cost of capital that is now being wielded by ILS specialists, the only natural result is for rates to keep declining.

A 10% average decline would suggest that some regions and perils which are more commoditised and under more competitive pressure from ILS will likely have declined much more than this.

This will likely be particularly evident in any U.S. catastrophe renewals at 1/1, where rates will be catching up with the steep declines seen at the June 2014 renewals.

James Vickers, Chairman of Willis Re International said that the rate declines seen are not as steep as those witnessed in other recent rounds of reinsurance renewals. He said that this is partly because insurers are no longer happy to simply take the cheapest offering of capacity as they are keen to maintain a level of quality and reliability in their panel of reinsurance counterparts. That will bode well for collateralized capacity and ILS players as, for all the discussion of whether they will be here to pay claims in the future, the fact remains that the capacity is fully collateralized and held in trust so it is technically more secure than a reinsurers promise to pay from its balance-sheet or reserves.

If a really serious catastrophe loss occurred it could well be traditional reinsurers that suffered the most and found it impossible to pay, as if they exhaust their reserves they could have nothing left to draw on.