Reinsurers are facing further pressure after the December contract renewal season delivered another year of falling prices — the fourth in succession.
Prices for property catastrophe reinsurance in the UK fell by between 10 per cent and 15 per cent. In continental Europe prices fell by between 5 per cent and 12.5 per cent on a like-for-like basis, according to broker Willis, while in the US prices were down by between 2.5 per cent and 7.5 per cent. Just over half of the reinsurance market renews in December, with the rest in April, June and July.
“There was some hope in the middle of the year that pricing reductions would begin to ease but those hopes have largely been dashed and rates have continued to fall,” said James Vickers, chairman of Willis Re International.
The price declines are partly driven by the primary insurers that buy reinsurance, who are facing falling rates themselves. “Primary insurers have been asking reinsurers to help them by reducing costs and widening the coverage,” said Mr Vickers.
Other factors pushing rates down include an influx of capital into the sector from sources such as insurance-linked securities, and an absence of large property catastrophe losses. According to preliminary data from Swiss Re, there were $32bn of insured catastrophe losses in 2015, down 11 per cent on 2014 and about half the level of the $62bn 10-year average.
The floods affecting large parts of the UK are not thought to be widespread enough to have a significant affect on reinsurance pricing.
The falling prices, combined with low investment returns, are taking their toll on reinsurers’ profitability. According to an index compiled by Willis, underlying returns on equity (excluding the effect of reserve releases) in the reinsurance industry fell from 7.8 per cent in the first half of 2014 to 5.1 per cent in the first half of 2015. Many of the quoted reinsurers target ROEs in the low to mid teens.
Changes in the insurance-linked security market could help to keep returns low. While initial investors in ILS targeted double-digit returns, newcomers such as pension funds are not so demanding. “It is long-term money,” said Mr Vickers, “they want stable long-term returns but they are not dissuaded by a 5 per cent return.”
In recent years, reinsurers’ reported profits have been bolstered by reserve releases from previous years. That trend is expected to continue in the results for 2015, allowing the reinsurers to report decent results despite the falling prices.
“The pips are squeaking but they are not yet prepared to walk away from things,” said Mr Vickers. “Some reinsurers have got to start reporting very bad results for the game to begin to stop.”