New capital boosts aggressive reinsurance pricing

 A ‘wave’ of new capital entering the reinsurance market saw prices stagnate in April, with more aggressive pricing predicted at coming renewals, according to reinsurance brokers.

Pricing in April, which sees mainly Japanese and some US insurers renew their reinsurance arrangements, was flat overall, and slightly down on loss-free lines of business, according to reinsurance broker Willis Re.

The renewal was marked by significant amounts of new capital entering the market, the broker said. Some $35 billion of new capital has already entered the reinsurance market from a variety of sources this year, up 30 percent on 2012, said Willis Re in its April Renewals Report.

In particular, capital market investors are expanding the scope of their activities in the reinsurance sector through catastrophe bonds, collateralised reinsurers, sidecars and reinsurer operated third-party funds. Willis also notes that there has been a ‘clear acceleration’ of third party capital entering the market in recent months.

Aon Benfield, the world’s largest reinsurance broker, also noted the positive effect of new capital for its insurer clients. “New capital flowing into the insurance-linked securities (ILS) and collateralised reinsurance market materially altered the course of April renewals for peak US perils and are expected to have a continuing material benefit for clients as we look forward to the June and July renewals,” it said in its 1 April Reinsurance Market Outlook.

Traditional reinsurance capital grew 11 percent in 2012 to $505 billion, however demand for reinsurance is flat, Aon said. Renewing cat bonds saw prices decrease by 25 percent to 70 percent for peak US hurricane and earthquake-exposed transactions. The cat bond market now offers the lowest cost of reinsurance for peak perils since it was established after Hurricane Andrew in 1992, according to Aon.