PRICING ANALYSIS


reinsurers in favor of larger ones. Smaller companies could mitigate the impact by focusing on smaller, regional cedants that are more dependent on reinsurance partners for analytics and stable capital support. Despite the pervasive negative trends, we see a few bright spots for reinsurers. Retrocession coverage (reinsurance for a reinsurer) for catastrophe risk is becoming cheaper faster than reinsurance rates are declining, primarily because of alternative capital providers’ willingness to underwrite this risk. This can allow reinsurers to cede risk more cheaply than they originally assumed it—in other words, it enables them to lower their cost of capital through use of alternative capacity. Many reinsurers are even building their own alternative capital platforms. This way, they can use alternative capital in their product offerings to maintain their footprint and enhance their value proposition while focusing their internal capital on risks that are most suited for traditional reinsurance capacity—all while earning management and performance fees.


In addition to these approaches, many reinsurers are resorting to simple cycle management by shifting capacity from property exposures into other lines of business. This accounts for some of the pressure on noncatastrophe lines of business, making it less effective for reinsurance lines. However, many reinsurers also have insurance platforms, and in the U.S., where rate increases in most lines have exceeded rises in loss cost for more than two years, the ability to redeploy capital into a positively trending market can provide substantial relief. For reinsurers that write pro-rata reinsurance in the U.S., the benefit of rate increases is mitigating the upward pressure on ceding commissions.


But many of these measures come with additional risks. Although retrocession provides an arbitrage opportunity, overreliance on this strategy could leave a company too dependent on potentially flighty capital. Creating an alternative platform also engenders a number of operational risks: Although the conceptual merits of such platforms seem obvious, executing them successfully may be more challenging than companies anticipate. In extreme cases, reinsurers could risk sacrificing their competitive position by becoming pure conduits for passing risk to the capital markets. Although cycle management through shifts into nonproperty lines of business is more straightforward, many other reinsurance lines are under pressure too. And


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Table 2: Change In Risk-Adjusted Casualty Rates Territory


Pro rata commission (percentage points)


Aerospace Australia - casualty


Australia - professional lines China


Europe - general third-party liability Europe - motor


International - general third-party liability International - motor liability


Japan - general third-party liability South Africa U.K. - motor


U.S. - general third-party liability U.S. - motor liability


U.S. - professional liability U.S. - workers' compensation


1 to 2.5 N/A N/A N/A N/A N/A


2 to 7 varies 2 to 7 N/A N/A


2 to 7.5 1 to 4 5


3 to 5


% Change: excess-of-loss with no loss emergence


-10 to -5 -5 to -2


-7.5 to -5 -15


-10 to 0 -20 to 0 -20 to -5 -10 to 10 -15 to 0 -5


0 to 10


-20 to -5 -20 to -10 -20 to -15 -15 to -5*


*Represents workers’ compensation catastrophe coverage. N/A = Not applicable. Source: Willis Re 1st View, Jan. 1, 2014; Willis Re 1st View, April 1, 2014; and Willis Re 1st View, July 1, 2014.


gaining share in a soft market comes with its own risks, especially as competition pushes reinsurers to accept lower rates or more risk to win deals. As reinsurers move into new lines or regions, they may not have the expertise to underwrite and manage the new risks.


Recently, popular areas for expansion have included accident and health, trade credit, crop insurance, and mortgage reinsurance. These lines can be profitable, but some can also be volatile and require proper expertise to execute. Certain casualty lines have also been attractive because underlying primary rates are improving and loss trends have been favorable.


Where There’s Opportunity, Reinsurers Are Already Knocking


One area of potential that has engendered more effort than actual premiums thus far is expansion into emerging markets. Insurance penetration in these markets is relatively low, and recent catastrophes, particularly Typhoon Haiyan in the Philippines, Micronesia, and Vietnam, highlight how


underinsured these markets may be. The size of these emerging insurance markets, both individually and collectively, are relatively small when compared to mature insurance markets. As such, reinsurance capacity greatly outstrips demand in these areas, making competition sometimes even fiercer than in mature markets, and it could be many years before supply and demand balance out. Reinsurers’ desire for diversification exacerbates competition, as they may price aggressively based on the perceived benefits of risk diversification. Reinsurers must also consider the variations among different countries. One size does not fit all, so they must customize their marketing strategies and prepare for different operational hurdles and regulatory barriers to entry for each market. Cultural barriers to growth may also be a factor. In many underinsured populations, buyers often purchase insurance only when it’s mandatory, like motor insurance. Potential insurance buyers may be skeptical of the value of insurance for reasons ranging from lack of information to distrust of


Global Reinsurance Highlights 2014


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