Reinsurance price declines continued to moderate at the key January 1st 2017 reinsurance renewals across the majority of business lines, but the supply/demand imbalance remains despite a slowdown in third-party capital inflow, says JLT Re.
Reinsurance pricing remains at historically low levels in spite of a number of market drivers contributing to moderated rate reductions at the most recent renewal season, with a number of business lines and geographies renewing closer to expiring levels, reports reinsurance broker JLT Re.
“Near-record levels of capital currently remain the dominant force in determining the direction of reinsurance pricing, as excess supply chases relatively muted demand. Nevertheless, moderating capital inflows, increasing cessions at the margin, the prospect of higher insured catastrophe losses, reserving volatility, inflationary and interest rate concerns and declining forward reinsurer returns are coalescing to push back against downward pricing pressures,” said David Flandro, Global Head of Analytics at JLT Re.
Overall, dedicated reinsurance capacity remained relatively stable at 1/1, says JLT Re, driven by a notable reduction in the entry of third-party, or alternative reinsurance capacity. This, combined with increased catastrophe losses throughout the year, reserving volatility, and an increased demand for reinsurance protection from cedents eager to take advantage of a favourable market environment, contributed to further price stabilisation at January 1st 2017, says the broker.
Mike Reynolds, Global Chief Executive Officer (CEO) of JLT Re, said; “Supply/demand dynamics are constantly evolving and there are early signs of a slight shift as capital levels have started to flatten whilst strategic reinsurance purchasing by some buyers has led to a subtle but notable uptick in demand in recent years.
“Reinsurers have produced returns well in excess of expectations over the last three years, due in large part to favourable reserve development and a sustained period of good fortune with low insured catastrophe losses. 2016 was a reminder that these tailwinds cannot be guaranteed in future years.”
When compared with January 1st 2016 a broadening number business lines and geographies experienced moderated rate reductions at 1/1, but owing to how overcapitalised the global reinsurance market is at present rates failed to move in a positive direction.
“The challenges presented by reserving volatility, macroeconomic shocks or major losses (or a combination of all three) reinforce the value and efficiency of reinsurance capital in the current marketplace. Given that cession rates remain at historically low levels, now is the time for insurance carriers to re-examine reinsurance as a form of contingent capital. Evidence emerged in 2016 that this had started to happen as insurance carriers bought new quota share programmes, aggregate covers, excess of loss buy-downs and adverse developments covers (ADCs).
“Interest in multi-class and structured reinsurance products is also growing as cedents look to work with trusted markets to develop alternative and tailored solutions that minimise earnings volatility and secure competitive advantages,” continued Flandro.
