A Degree Of Balance Restored To Reinsurance Market At 1 January 2017 Renewals With Evidence Of Further Price Stability’ Says JLT Re
30 December 2016
- Later completions and broader pricing moderation in 2017 compared with 2016.
- Despite relative stability at 1 January 2017, rates remain near historic lows.
Whilst renewals twelve months ago were mostly bifurcated between the United States, where single-digit pricing declines were the norm, and the rest of the world, where double-digit falls were common, there was a more universal trend towards moderating price declines in 2017, says JLT Re, the global provider of reinsurance broking and consultancy. As a result, programmes across a number of different territories and lines of business renewed generally at much closer to expiring levels, although a few continued to experience more significant downward pricing pressures.
Figure 1: JLT Re’s Risk-Adjusted Global Property-Catastrophe ROL Index – 1992 to 2017
(Source: JLT Re)
David Flandro, Global Head of Analytics, JLT Re, said, “Figure 1 shows JLT Re’s Risk-Adjusted Global Property-Catastrophe Reinsurance Rate-on-Line (ROL) Index fell by 5.7% at 1 January 2017. This compares to a decline of 8.2% at 1 January 2016, 11% in 2015 and 12% in 2014. Much of the moderation was driven by relatively stable US property-catastrophe renewals . More marked pricing declines were registered for international property-catastrophe business, but the magnitude of these reductions was less than last year’s.”
“The moderating trend at 1 January 2017 is related to today’s historically low pricing levels,” says David Flandro. “Global property-catastrophe pricing is now 33% below 2013 levels and approaching the previous cyclical low of the late 1990s. It is becoming clearer that the scope for further price reductions is limited for some classes of business as rates near technical minimums, i.e. the point where expected returns on capital fall below costs of capital.”
Mike Reynolds, Global CEO, JLT Re, said, “Increased underwriting discipline was evident across non-catastrophe lines, which also exhibited moderating rate reductions at 1 January 2017. Rates for most casualty and healthcare classes were flat to moderately down. Specialty classes once again generally saw more substantial rate reductions. Nevertheless, rate declines in certain specialty lines saw moderations compared to last year.”
It is therefore clear that the challenging operating environment confronting reinsurers is starting to have a discernible impact as they face the reality of deteriorating results and margin compression. Five other key market dynamics contributed to further price stabilisation at 1 January 2017:
- Static levels of reinsurance supply (after rapid growth between 2011 and 2014) due to a marked slowdown in the rate of third-party capital entry in particular.
- Growing demand for reinsurance as cedents recognised current pricing levels presented opportunities to support growth goals, decrease costs of capital and increase franchise value.
- Increased loss experiences in 2016, with an uptick in attritional claims and global catastrophe losses (at approximately USD 50 billion) returning to levels closer to historical norms.
- Growing reserving volatility, with some notable instances of reserve strengthening and evidence that the level of redundancies held by carriers is diminishing.
- A changing macroeconomic environment, including rising inflation expectations in the US, the UK, parts of Europe and some emerging economies, which could compound reserving risks due to higher claims inflation.
Mike Reynolds continued, “2016 was the first year since 2008 that dedicated reinsurance capital did not grow meaningfully. It is nevertheless notable that the sector remains over-capitalised and that reinsurance capacity continues to be at an all-time high (see Figure 2). At the end of 2016, JLT Re estimated sector capital to be approximately USD 320 billion (compared to premiums of USD 255 billion). The result is a continued supply and demand imbalance and a market awash with capacity. This abundance of capacity is preventing any meaningful pricing upturn at present.”
Figure 2: Dedicated Reinsurance Sector Capital and Gross Written Premiums – 1998 to YE 2016E (Provisional)
(Source: JLT Re)
David Flandro concludes, “The macroeconomic and political climate will be an additional factor shaping the (re)insurance market throughout 2017. The new US political landscape, the anticipated triggering of Article 50 in the UK, unpredictable European elections and a still rapidly developing Asia will all have important implications for interest rates and inflation next year, with sector capital and pricing potentially affected. JLT Re will be monitoring these developments closely and quantifying their effects for our clients’ in the coming year.”
A detailed review of sector issues, as well as a renewal assessment by individual line of business, will be provided in JLT Re’s Retrospective Renewal Report ‘In The Balance’, which will be launched later in January 2017. To register to receive a copy, please contact Isabella.Gaster@JLTRe.com.
JLT Specialty USA
Ashely Deal | Tel: +1 310 266 9464 | Email: Ashely.Deal@jltus.com
Isabella Gaster | Tel: (+44) 7920 586 032 | Email: Isabella.Gaster@JLTRe.com
Elizabeth Miller | Tel: +1 215 309 4590 | Email: Elizabeth.Miller@jltre.com
NOTES TO EDITORS:
About Jardine Lloyd Thompson
Jardine Lloyd Thompson is one of the world’s leading providers of insurance, reinsurance and employee benefits related advice, brokerage and associated services. JLT’s client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.
JLT is quoted on the London Stock Exchange and owns offices in 41 countries with more than 10,600 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.
For further information about JLT, please visit our website www.jlt.com.
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About JLT Re
JLT Re’s trusted team of 700 colleagues worldwide combines market leading expertise and proprietary analytical tools with the freedom to challenge conventions.
Deep specialist knowledge and extensive experience of both the reinsurance market and clients’ own industries and sectors enables JLT Re to ask smarter questions, innovate and deliver better results tailored to meet client needs.
JLT Re is part of the Jardine Lloyd Thompson Group plc. www.JLTRe.com