Every year, the reinsurance conference in Monte Carlo is accompanied by market analysis from key industry observers that sets the agenda for the next year. Here is our round up of what was said.
Reinsurance broker, Guy Carpenter, estimates that the alternative reinsurance segment has doubled its market share of the global property catastrophe reinsurance market from 8% in 2008 to 16% today. With US cat rates set to decline again in 2015 and negative outlooks from all four rating agencies, the road ahead is far from smooth.
Guy Carpenter used data going back to 1990 to illustrate current rating levels. David Priebe, Vice Chairman and Head of GC Securities commented that price decreases had not yet reversed the supply-demand imbalance – “Strong investor demand meant placements were routinely over-subscribed, often by multiples of the targeted size.”
“The record reinsurer capital levels and continually building strength from the ILS market pushed traditional margins for some programs to levels not seen for a generation,” notes Aon Benfield Securities in its annual ILS report. Even the well-diversified global players are feeling the strain, and the ultimate winner over the near term will be the reinsurance buyer. “In a relative world, reinsurance profits have appeared attractive,” says AM Best in a report. “In absolute terms, the risk premium has been significantly compressed.”
“Even for the most diversified reinsurance organisations, the US property catastrophe business represents a significant share of overall profit, and the earnings compression within that base will be difficult to replace,” it warns. But reinsurers are adapting, notes the rating agency. “Some have come to share access to underwriting portfolios with investors by creating new business units dedicated to leveraging alternative capital.”
At mid-year, global reinsurer capital hit a record high of $570 billion, up six percent in just six months. Around $59 billion of this is alternative capital, according to Aon Benfield, with 70% focused on US catastrophe risk.
The “weakening fundamentals” of the sector include high levels of competition, exacerbated by the influx of third-party capital and low catastrophe activity, poor investment returns and drying up of prior-year reserves (traditionally used to bolster a disappointing underwriting performance).
The predicted deterioration in reinsurer results could occur as soon as next year, thinks Fitch Ratings’ senior director Martyn Street. Much depends on loss activity in the coming months.
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Source: Insurance Linked