PRICING ANALYSIS
Pricing Slides As Reinsurers Strive For Competitive Footing
By Jason S Porter, Dennis P Sugrue and Taoufik Gharib
Remaining profitable and competitive while ensuring adequate risk controls will be a tough balancing act—so the ability to adapt has become increasingly vital. Companies that can’t meet the challenge may be at risk of downgrades as their business or financial risk rises.
Reinsurers globally are facing headwinds from a number of directions. As a group, these companies have amassed capital faster than they can deploy it, and the resulting excess reinsurance capacity, combined with competition from alternative capital sources, is driving premium rates down across the board. Lower profit margins and potentially riskier underwriting behavior may also make earnings more volatile, which could heighten reinsurers’ risk profiles. In this soft market, reinsurers face increasing pressure to loosen their risk controls and strategic risk management as their ability to compete erodes.
Business And Financial Risks May Be Rising Pricing pressures in various lines of reinsurance are creating fierce competition within the industry. Although they’re most
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acute in U.S. property catastrophe markets, the trend is spilling over into other lines of business and territories as well. Moreover, the recent buying behavior of larger cedants (insurance company clients)— which are purchasing less reinsurance, rationalizing their reinsurance panels, or turning to alternative capital—could make it more difficult for smaller, less-diversified reinsurers to compete. Ultimately, certain companies’ business risks could grow as profitability declines.
As the current soft market continues, underwriters may also loosen their contracts’ terms and conditions to edge out the competition. This could lead to less- disciplined risk management and allow risks to accumulate, which would ultimately make earnings and capital more volatile—and heighten the financial risks for reinsurers.
Prices Are Falling Almost Everywhere Reinsurers have few places to go for relief from the current soft market. Because U.S. catastrophe rates are suffering the most, some reinsurers are reallocating capital to other lines of business and regions, thus creating a spillover effect and increasing competition elsewhere. Therefore, pricing for reinsurance is down in almost every line of business in every region. While property catastrophe rates, particularly in Florida, are experiencing the largest declines, catastrophe rates are dropping sharply in other parts of the U.S. and in Japan, the U.K., and some continental European countries as well (see Table 1).
Other lines are also under substantial pressure: U.S. professional liability, global third-party liability, and European motor businesses have all experienced decreases
Global Reinsurance Highlights 2014
SHUTTERSTOCK / JOSHUA RAINEY PHOTOGRAPHY
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