Reinsurers positive despite pricing pressure

As anticipated by many commentators, the April 1, 2016 reinsurance renewal season has seen a continuation of the softening market for the fourth consecutive year. Premium savings have yet again been the main thrust for most buyers and the opportunity to broaden contractual terms and conditions continues, says John Cavanagh, Global CEO, Willis Re

Cavanagh, in a latest report by Willis Re said for reinsurers, relationship management and portfolio underwriting is evident as companies seek ways to maintain relationships with longstanding clients, which may be difficult to rebuild at a later stage.

However, amidst the gloomy picture of sustained pricing pressure, encouraging signs for reinsurers are beginning to show, he noted.

Firstly, price reductions overall at April 1, 2016 were marginally less than those achieved 12 months earlier. A number of factors, such as increased limits purchased as well as some modest losses, including the deterioration of earlier losses, have had an impact. It is also becoming increasingly evident that while most reinsurers are accommodating client requests, many are now at the point where they are no longer prepared to grant any further concessions, irrespective of relationship considerations.

Demand for reinsurance is also picking up at last.

As observed during the January renewals, a number of larger insurers, which over the last few years were driving strategies to retain more risk on their balance sheets, are now looking to selectively reverse their thinking. This is now leading to an increase in cessions to selected third party reinsurers, both on traditional risk sharing reinsurance structures as well as loss portfolio transfers and adverse development covers.

The underlying reasons for this change in strategy are clearly company specific. But increased regulation, which has promoted a more holistic view of risk and reward, allied with shareholder pressure to improve ROEs by reducing the equity element of the calculation, are undoubtedly two key drivers in this development

Despite this, it is premature to conclude that the current market cycle is bottoming out. The underlying imbalance of capital supply and muted demand allied to reinsurers’ largely satisfactory 2015 results continues to hang over the market.

Indeed, despite the low interest rate environment and difficulty in achieving top line growth, most reinsurers have reported marginally lower but still acceptable full year results for 2015. Yet again, the twin saviors have been prior year reserve releases and the lack of major losses linked to active capital management strategies.

Those that have shown top line revenue growth have largely achieved this through their earlier strategic decision to develop a presence in the specialty insurance market. To date, the results of most reinsurers’ specialty insurance portfolios have been satisfactory, although a few have started to report difficulties in some specific lines.

Ultimately, buyers continue to reap the rewards of competitive conditions and reinsurers will be hoping for yet another below average large loss year to produce acceptable results in the face of a tough 2016.

Modestus Anaesoronye