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Excess capacity in spotlight as reinsurance industry prepares for Rendez-vous

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Excess capacity in spotlight as reinsurance industry prepares for Rendez-vous

It is shaping up to be a buyers' market for reinsurance in 2018, fueled by an abundance of capital and, thus far, relatively few claims from natural catastrophes.

The global reinsurance industry is gearing up for one of the biggest and most opulent events in its calendar, the Rendez-vous in Monte Carlo, where traditionally negotiations for the all-important Jan. 1 renewals begin.

Brokers and cedants, the buyers of reinsurance, predict that high on the list of discussion topics will be the abundance of capital, both traditional and alternative, that can be put to work taking on reinsurance risk. The more capital, the more competition and so in theory the lower the price. This may be frustrating for reinsurers, but it is good news for buyers.

More competitive pressure to come

Broking group Aon PLC's reinsurance solutions division's analysis of reinsurers' first-half 2018 results shows that there was about $605 billion of capital in the market as of June 30, 2018, of which about $98 billion is alternative sources, typically from capital markets investors through instruments such as catastrophe bonds.

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Excess capacity: Mike Van Slooten, head of market analysis at Aon's reinsurance solutions division

Source: AON

"We are still seeing money coming into that [alternative] space," Mike Van Slooten, head of market analysis in Aon's reinsurance solutions division, said in an interview. "We know there is a lot more waiting on the sidelines. That, in itself, is going to exert competitive pressure." Coupled with this, the relatively low level of natural catastrophes meant that the reinsurers that Aon studied recorded a collective combined ratio — a measure of nonlife underwriting performance — of 94.4% in the first half of 2018, with only one percentage point of the ratio attributable to catastrophe losses. A combined ratio below 100% shows an underwriting profit.

Van Slooten noted increasing demand from cedants for reinsurance cover, driven in part by the need for protection from emerging risks such as cyber and additional reinsurance purchases to help cope with the introduction of risk-based capital regimes such as Europe's Solvency II. "Demand is up a bit but it is not enough to soak up the excess capacity we are seeing in the market," he added.

There were rate increases at the various key renewal dates in 2018 following the heavy burden of natural catastrophe claims in 2017, which cost the collective insurance industry $138 billion, according to Swiss Re. But they were more muted than reinsurers were hoping. If 2018 continues to be as quiet on the catastrophe front as it has been so far, there will be no more increases.

U.K.-based insurer Aviva PLC's group reinsurance and credit director Scott McIntosh said that while there was always the potential for rate increases on reinsurance contracts where there had been claims, he estimated that prices for non-loss-affected programs would range from flat to decreases of 5%. "There is still lots of capital out there," he said in an interview. "I don't think that's going to change until interest rates significantly harden."

Higher interest rates could mean investors will find more attractive returns outside insurance, reducing the levels of capital coming from that source. But McIntosh added: "There still seems to be a backlog of capital wanting to get into the market."

Richard Anson, head of ceded reinsurance at Lloyd's of London insurer Antares Managing Agency Ltd., said in an interview that rates for his company's property treaty reinsurance cover, which it did not claim on for the 2017 hurricanes, had increased by about 5% on a risk-adjusted basis in the 2018 renewals.

"On that particular class I would be hopeful that we would get back some or all of that 5% [in 2019]," he said in an interview. Anson added that overall he was expecting a "pretty flat renewal" in 2019 because rates for reinsurance policies that Antares claimed on in 2017 should be generally stable.

Merger mania

Mergers and acquisitions, also likely to be a hot topic at Monte Carlo given the recent swath of megadeals, could be a blessing and a curse for buyers. M&A can mean fewer reinsurers, and so less choice and competition.

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Motorboats lie partially submerged in a marina in Key Largo, Fla., in the wake of Hurricane Irma in September 2017. The number of major natural catastrophes and related claims are down significantly from a year ago.

Source: Associated Press

Anson at Antares said that when reinsurers merge, Antares' security policy means it will not necessarily be able to buy the same level of cover from the combined entity as it had from the individual firms. "The way we calculate it, one and one sometimes still makes one, so it reduces the amount of choice I have in the marketplace," he said. "It is quite frustrating as a buyer to have less choice."

M&A activity looks likely to continue. Hugo Crawley, U.K. chairman and CEO at TigerRisk Partners LLC, a reinsurance broker with a capital markets advisory arm, believes there are a number of global players looking at further expansion and diversification. As a result, "there are some very large entities that have ambitions to become a lot, lot bigger," and some smaller companies that will disappear, he said in an interview.

"Axa's acquisition is one thing. There are others out there looking for deals," Crawley added.

Despite the potential problems from M&A, Aviva's McIntosh said the deals create "stronger counterparties that can offer larger capacities," which is particularly good for Aviva, which because of its size tends to require a lot of underwriting capacity from reinsurers. While acknowledging that M&A could become a negative if it reduced the market to a handful of reinsurers, McIntosh said activity from buyers' perspectives remains positive for now.