Soft Reinsurance Market: Is It Here To Stay?

Towers Watson issued a new survey late last week showing that 55 percent of property/casualty insurance CFOs believe the property reinsurance market is softer than the primary market, while around 34 percent believe the same to be true for the casualty business.

“CFOs attribute this softness primarily to the significant growth of insurance-linked securities [ILS] and other alternative forms of reinsurance capital,” the report stated.

The survey looked at several trends in the P/C reinsurance market, along with drivers and consequences of current market conditions.

The report also showed that CFOs were almost unanimously using traditional reinsurance without using alternative forms of capital to safeguard their companies. Around 97 percent freely admitted this, while 59 percent said they were either purchasing reinsurance “through a collateralized reinsurer or are likely to consider such a purchase,” Insurance Journal reported, adding that 27 percent were “currently using, or look favorably on the use of, both insurance-linked securities, such as catastrophe bonds, and hedge fund-owned reinsurers.”

“The opportunities in the risk transfer market are just starting to be realized,” said Towers Watson senior consultant Stuart Hayes. “Many fresh sources of capital are seeking investments that are uncorrelated to their existing investment holdings. With risk transfer arrangements continuing to evolve, we anticipate P/C insurers hastening their participation in various structures across the risk transfer spectrum, thus complementing their traditional reinsurance programs.”


Impact Of Alternative Capital On Reinsurance

Other areas that the Towers Watson survey touched on included the impact of alternative capital on the reinsurance market, and the advantages and disadvantages of using alternative reinsurance vehicles.

Nine in ten of those surveyed said they “had seen or expect to see” decreasing prices due to alternative forms of reinsurance, while 88 percent said lower costs associated to capital afforded by alternative reinsurance options is the top benefit at their companies. “When focusing on the limitations of alternative vehicles, 69 percent cited complexity of the contract or deal structure, and 62 percent named ambiguity related to contract triggers,” IJ added.

Despite the threat of overcapacity to the softening market, the Towers Watson respondents are not convinced that consolidation of reinsurance companies will be a necessity. (Only 21 percent believe otherwise, while just 24 percent believe consolidation will take place in the next two years.)

Even so, a slight majority (52 percent) believe extended soft market conditions might drive reinsurance market consolidation in the years ahead, while 48 percent feel competing alternative capital sources could have a similar effect.

“Reinsurers need to be aware of the near-term realities of a relatively soft reinsurance market and the longer-term potential of the alternative risk transfer market,” said Towers Watson director Matthew Ball. “Given the increase in reinsurance and alternative capital supply, reinsurers are faced with a property catastrophe market that is likely to soften unless there are major catastrophic events with very large losses. Reinsurers may face a classic economic example of reduced demand and increased supply that drives prices lower.”

And according to at least one expert, the “soft reinsurance market” may not be as “near-term” as some anticipate. “We all have a tendency when thinking about the market cycle to look at previous market cycles and presume that the same patterns will emerge again,” said Martin Sullivan, deputy chairman of Willis Group Holdings P.L.C. “I am not so convinced that the historic market cycle movements will be repeated again — in fact, I suspect that the ‘market cycle’ has actually broken down into a number of sub-cycles.”

In comments reported by, Sullivan added that “previous hard markets occurred when there were reductions in industry capitalization and short-term problems in rebuilding and accessing new capital. But improved actuarial and catastrophe modeling have attracted longer-term capital to the market.”

For full results from the Towers Watson survey, IJ has a nice rundown here.


In Summary

While most of the CFOs who took part in the Towers Watson survey concede that the reinsurance market is soft at present, they still seem to prefer traditional reinsurers for managing risk. However, they are starting to experiment with other forms of risk transfer, which could be a wise decision if the soft market becomes “the new norm.” Do you think we’re in the middle of a cycle or that the soft market is here to stay? Share your thoughts in our comments section.

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