Will Falling Reinsurance Rates Be In The Cards For 2014?
Reinsurance prices are slumping, and that’s playing to the strengths of the biggest global reinsurers, according to a recent report from the Insurance Journal.
(The reinsurance market aids insurers in managing risk in exchange for part of the profits.)
Earlier this month, it was revealed that reinsurance suppliers were separating into tiers, with some of the bigger players (e.g. Munich Re, Hannover Re, and Swiss Re), performing better than the smaller and more focused firms. IJ notes that these firms are “more likely to struggle to meet return on equity targets.”
“It’s a tough market for all but the larger two groups,” said Swiss Re CFO George Quinn in comments to Reuters, adding that “the top two tiers of reinsurers, are probably doing disproportionately better.”
Shortages in cat losses over the course of the last two years have left reinsurers with significant cash, and that’s leading to a call for cheaper premiums from their customers.
This pressure has intensified due to competition from pension funds, which are now offering reinsurance in direct competition with the traditional companies.
“Global insurance companies are also getting better at managing risk,” IJ stated.
Smarter Reinsurance Standards
Expanding on this last idea, IJ credits smarter reinsurance practices within the insurance companies are compounding pressure. “Whereas different regions and divisions within one insurance company used to make their own reinsurance decisions,” notes the website, sophisticated modeling techniques are now making it possible for central managers to create and implement group-wide reinsurance strategies.
“Clients are concentrating their buying behavior and are more focused on a smaller list of reinsurers,” said Quinn.
Victor Peignet, a senior exec at French reinsurer SCOR, advised that if a reinsurance company can “offer pricing, capacity and underwriting in multiple business lines that match the global approach of their clients,” they will benefit most. “A group of five to 15 reinsurers is emerging and is going to form the panel of co-partners for an increasing number of large and mid-sized insurers,” he advised earlier this month, foreseeing an “industry shake-out” that would grow more intense in the next rounds of negotiations between reinsurers and their insurance clients.
The Advantage Of Size
According to many brokers, 2014 will bring a drop of 25 percent to several reinsurance segments. Despite the dip, “bigger players do not appear to have suffered too badly so far,” IJ reports, noting that SCOR “has reported a fall in average prices of just 0.2 percent, while industry leader Munich Re said it had seen a 1.5 percent decline.”
“There is a growing sense that some carriers are beginning to fare better than others in this market,” said Mike Van Slooten, head of market analysis at reinsurance broker Aon Benfield.
The results are visible in Aon Benfield’s routine analysis of the top 31 reinsurance players (approximately 60 percent of the market).
“Even among the smaller players in that group, we see growing evidence of disparity in performance,” Van Slooten said.
Smaller reinsurers — defined as companies with capital at around $3 billion — are seeing a lower return on equity in many cases. Thomson Reuters data points out a 5.9 percent return for Argo Group (small) compared to 12.7 percent for industry leader Swiss Re.
“Some smaller reinsurers will likely look to consolidate in order to survive,” Paddy Jago, President of broker Willis Re, said in comments to IJ.
The jury is still out on what 2014 will bring regarding cat losses, but one thing is certain: the last two years have led to a windfall of cash for reinsurers, and that has not gone unnoticed by insurance companies. Anticipating price pressures, you can expect to see many companies weighing the value of consolidation throughout the coming year.
For a look at the top reinsurers and how they fared against one another in the last round of data, be sure to check out our overview.
What do you think lies ahead for the reinsurance market, particularly regarding prices and consolidation? Do you think it’s a good time to be a large company? Share your thoughts with us in the comments section below.