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1ST VIEW
1 July 2013
Table of Contents
Renewals – 1 July 2013
Introduction
Property
Territory and Comments
Rates
Pricing Trend Graphs
Casualty
Territory and Comments
Rates
Specialties
Line of Business and Comments
Rates
United States Workers’ Compensation
Comments and Rates
Capital Markets
Comments
3
4
5
6
7
8
9
10
11
11
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Page 2 of 12
Supply Chases Demand
The growing momentum behind the emergence of capital markets has escalated, accentuating the increased supply of
capital that is chasing a much slower growth in demand for Property catastrophe capacity. Traditional reinsurers,
unprepared to see their longstanding market positions eroded by new capital entrants, have started to take robust
defensive measures. Despite the impact of the US$ 30 billon Superstorm Sandy loss, the key battleground is in U.S.
property catastrophe where capital markets have been most active to date. Traditional reinsurers’ defensive actions
include offering price reductions, larger line sizes and, in some cases, broadening of cover by offering options such as
multi-year agreements, extended hours clauses and additional reinstatements. Capacity for aggregate cover is also
more widely available. As most programs are well over-placed, buyers are facing the challenge of signing down
reinsurers’ shares.
Collateralized markets continue to evolve their product, affording primary buyers increased flexibility in coverage
while minimizing basis risk. The trend for traditional reinsurers to set up sidecar-type structures, providing thirdparty capital access to the risk they are accepting, continues to expand. Similarly, the catastrophe bond market
continues to grow rapidly and is on track to surpass the previous record high issuance in 2007 of US$ 7.2 billion. With
the strong inflow of new funds, the challenge for ILS fund managers is how to source enough demand to satisfy
investor demand for ILS products. This is proving challenging, as growth in the largest catastrophe market, the United
States, remains modest, as does the take up rate of capital market solutions in other markets – despite the increasing
competiveness of price as compared to traditional reinsurance products. It is sobering to note that only a .5%
allocation of global pension funds’ assets under management into ILS products would be sufficient to deliver US $150
billion of ILS capacity. This represents a substantial increase on the current 2013 year end estimate of US $42 billion
of ILS limit in force.
The softening of property catastrophe rates and traditional reinsurers’ desire to maintain their market positions is
spilling over into other classes. Casualty markets are seeing substantial increases in capacity around the world and
consequently, prices are softening, despite persistent concerns about the current low interest rate environment.
Losses caused by U.S. tornadoes and European floods during the second quarter are likely to only have a modest
impact on the global reinsurance market. Despite much speculation about what event or combination of economic
scenarios could change the current market dynamics, the reality of any change remains elusive and uncertain. For the
first time since 9/11, the increase in primary rates in the U.S. is outpacing reinsurance rating movements.
With the modest outlook for growth and improvements in underwriting profitability, many reinsurers are re-examining
their capital management strategies in an effort to improve their overall results. Aside from share buybacks, there are
signs that some have started to look for higher investment returns by taking more investment risk and are allocating
more capital to this exposure. This acceptance of greater investment risk is being driven to a significant degree by the
need for companies to reinvest high yielding maturing investments in assets which can produce a reasonable yield.
Similarly, M&A activity is picking up as another route for management to address growth and performance challenges.
The changing dynamics in the distribution of specialty and large commercial risks continued to evolve actively in the
second quarter. A number of new initiatives have been launched, the majority of which are aimed at direct and
facultative markets. Reinsurers, though not directly involved in most instances, are carefully monitoring these
changes, as they seek to understand these circumstances, what they may mean for their own business models and
what adjustments they may have to make in order to grow in the future.
Peter C. Hearn
Chairman, Willis Re
1 July 2013
John Cavanagh
CEO, Willis Re
1 July 2013
Page 3 of 12
Property – territory and comments
Australia
• Appetite continues to strengthen with significant reinsurance capacity available
• General softening of rates across the market for non-loss affected programs
• Reinsurers have an increased appetite to write across programs, i.e., long tail and
short tail classes
• The reduction in seismic activity in New Zealand has resulted in increased
confidence and appetite for New Zealand catastrophe risk
• Loss activity on personal lines per risk treaties has resulted in some reinsurers
adjusting their technical rates on per risk programs
• Increased number of sideways catastrophe covers being purchased in response to
changing Australian regulatory requirements
Caribbean
• Property pro rata is flat
• Property catastrophe is down, risk-adjusted 1% to 5%
• Property risk excess of loss is down 5%
China
•
•
•
•
Market is still very soft
Reinsurance capacity is more than adequate
More reinsurers are competing for shares and consequently, are willing to quote
Some non-traditional leading markets are also competing for leading terms
Latin America
• Pro rata commissions are largely flat, but in some cases, seeing modest additional
commissions for cedants with good results
• Capacity requirements in Latin America are increasing, with more interest from
cedants to purchase pro rata covers
• Much increased interest from the traditional reinsurance market for excess of loss
reinsurance
• Retentions are edging up slowly
• Increased capacity leading to over-placement and signing down of reinsurers’ lines
Middle East
• Pro rata capacity is at an adequate level in the region, especially for cedants with
acceptable results
• Influx of capacity in the region continues to grow; majority of this capacity is being
directed towards excess of loss reinsurance
• Retentions, albeit marginally, are on the rise across the region
• Restrictions on facultative inwards continue to be requested by the lead reinsurers
• Event limits on some treaties have reduced slightly following pressure from
reinsurers
South Africa
• Abundance of capacity on excess of loss business
• Local competitiveness for proportional business as reinsurers seek revenue growth
Page 4 of 12
United Kingdom
• Catastrophe excess of loss rates are under downward pressure
• Reinsurers are keen to keep their current participations and perceive competition for them from new markets,
especially from capital market investors
• Technical analysis remains key; margins are therefore declining
United States – Florida
• Significant capacity increases from new managed funds, sidecars and retained earnings led a highly
competitive market
• Capital markets were increasingly aggressive creating competition for traditional reinsurers, with the latter
reducing price and supporting non-traditional placements to defend market share especially on the higher
attaching layers and layers with nil reinstatements
• With abundant capacity available throughout programs, required multiples of expected loss decreased as well
as minimum premium requirements at the top of programs
• Enhanced coverage terms readily available including multi-year terms at current pricing levels
• Pricing variations were being driven by individual company experience, exposure changes, geographical
concentrations and perceived attitudes towards long-term relationships versus opportunistic capacity
United States – Nationwide
• Significant capacity increases from new managed funds, sidecars and retained earnings has led to a highly
competitive market
• Capital markets are increasingly aggressive competition for traditional reinsurers, with the latter reducing
price to defend market share particularly on the higher attaching layers
• New capacity available throughout programs, decreasing required multiples of expected loss and reducing
minimum premium requirements at the top of programs
• With abundant capacity, pricing variations are being driven by individual company experience, exposure
changes and perceived attitudes towards long-term relationships versus opportunistic capacity
Rates
Property rates
Territory
Pro rata
commission
Risk loss
free %
change
Risk loss
hit %
change
Catastrophe
loss free %
change
Catastrophe
loss hit %
change
Australia
0% to +2%
0% to -5%
0% to +20%
0% to -5%
0% to +5%
Caribbean
+1%
-5%
varies
-1% to -5%
N/A
China
N/A
-10% to -15%
+15% to +25%
-5% to -10%
N/A
Latin America
0%
0%
varies
-5%
N/A
Middle East
0%
0% to -5%
+5%
0%
N/A
South Africa
0%
0%
0% to +8%
0%
0% to +8%
United Kingdom
N/A
0%
N/A
-5% to -8%
N/A
United States – Florida
N/A
-10% to -15%
varies
-15% to -25%
N/A
United States – Nationwide
N/A
-10% to -15%
0% to +5%
-10% to -20%
-5% to +5%
Note: Movements are risk-adjusted.
Page 5 of 12
Property catastrophe pricing trends
The charts on these pages display estimated year-to-year Property catastrophe rate
movement, using 100 in 1990 as a baseline.
Australia
600
500
400
300
200
100
0
Caribbean
600
500
400
300
200
100
0
United States
600
500
400
300
200
100
0
Page 6 of 12
Casualty – territory and comments
Australia
• Appetite for Casualty business in Australia remains very strong with an abundance
of reinsurance capacity
• Rates have continued to soften
• Declining investment yields are not having an effect on reinsurance rates
• Buyers continue to prefer APRA-approved reinsurers
• Reinsurance retentions remain stable
International – General Third Party Liability
• Generally, pressure on original rates remains, and it is difficult in most territories
around the world for insurers to increase their pricing on General Third Party
Liability business
• Reinsurance capacity for standard General Third Party Liability classes remains
plentiful, and in many territories there is competition amongst reinsurers to
maintain and increase signings
• Reductions in reinsurance rates on excess of loss treaties are achievable on
accounts with minimal loss activity, based on an abundance of reinsurance
capacity
• Reinsurers, however, are also alert to the increasing trend of U.S. products losses
on European Liability programs
• Higher-risk classes, such as pharmaceuticals and chemicals, remain a more
specialist area, with a different market dynamic and less room to maneuver in
terms of price
International – Motor Liability
• Movements in original rates continue to impact reinsurers’ assessment of treaty
pricing
• Legislative changes, e.g., directives on gender equality, are creating uncertainty in
the original market with associated impact on reinsurance
• In most developed territories, the trend is for a reduction in deaths and serious
injuries from motor accidents, however in many cases serious injuries are costing
more; as such, the reinsurance market view continues to be influenced by
increases in levels of bodily injury awards
• Reinsurance pricing direction varies considerably from territory to territory
depending upon prevailing trends on bodily injury compensation
International – Professional Liability
• Reinsurance capacity remains abundant, especially where exposure to Financial
Institutions is limited
• Buyers continue to benefit from new and returning markets, providing greater
flexibility for reinsurer panels
• Capacity for Financial Institution Professional Liability is available but continues to
be constrained by accumulation and systemic concerns
• Systemic concerns remain in other areas (euro, real-estate related, cyber) but are
becoming less pronounced
Page 7 of 12
•
Pricing is becoming more heavily weighted towards experience, with discounts against technical rate for good
results
United Kingdom – General Third Party Liability
• Insurance rates on the original business continue to be flat or falling
• Reinsurance capacity for the class remains plentiful, largely because reinsurers see the class as being a safe
haven from Motor and Professional / Financial classes
• Hence rate reductions, which while they are unlikely to be strictly justified from a technical angle, remain a
realistic target from a supply-demand perspective
United States – Motor
• Market appetite for liability business is strong
• Pricing is flat to declining
United States – Professional Liability
• Reinsurance capacity remains abundant, especially where exposure to Financial Institutions is limited
• Buyers continue to benefit from new and returning markets providing greater flexibility for reinsurer panels
• Capacity for Financial Institution Professional Liability available, but continues to be constrained by
accumulation and systemic concerns
• Cyber is increasingly a growth area for reinsureds and a major part of every reinsurance renewal discussion
given reinsurers’ concerns around the systemic exposures and the untested policy wordings
• Pricing becoming more heavily weighted towards experience, with reinsurers willing to provide discounts
relative to exposure rate for good results
United States – Third Party General Liability
• Strong market appetite
• Pricing is declining
Rates
Casualty rates
Territory
Pro rata
commission
XL – No loss
emergence %
change
XL – With loss
emergence %
change
Australia
N/A
0% to -5%
0% to -2%
International – General Third Party Liability
N/A
-2.5% to -5%
0% to +10%
International – Professional Liability
0% to +2.5%
-2.5% to -7.5%
0%
South Africa – Employers’ Liability
0%
0%
+20%
United Kingdom – General Third Party Liability
N/A
-5% to -10%
0% to -5%
United States – Motor Liability
0% to +1%
0% to -10%
0%
United States – Professional Liability
0% to +4%
-2.5% to -15%
0% to +10%
United States – Third Party General Liability
0% to +1.5%
0% to -10%
0% to +5%
Note: Movements are risk-adjusted.
Page 8 of 12
Specialties – line of business and
comments
Marine
• Adequate capacity for most risks; energy and retrocession remain the tightest
classes for capacity
• The market shows more signs of competition than 1 January and 1 April, as the
Superstorm Sandy loss has stabilized
• Pro rata: reinsurers demonstrating greater differentiation of clients rather than
simple product approach
• Active Gulf of Mexico wind season predicted and (re)insurers are watching with
great interest
• Losses from the MOL Comfort yet to be determined, but reinsurers are watching
closely in terms of container aggregations
Non-Marine Retrocession
• Notable reductions in retrocession pricing as the ILS market continues to grow
and put pressure on the traditional retrocession market
• Abundant capacity swelled by reinsurers looking to deploy aggregate impacted
by depressed 1 June Florida signed lines
• Some resultant opportunistic retro buying against a backdrop of reduced midyear ultimate net loss purchases following high take-up of pillared products
earlier in the year
• Significant uptick in industry loss warranty activity with clients capitalizing on
attractive prices as they enter the U.S. wind season
Personal Accident / Life Catastrophe
• This market continues to be competitive and stable with regard to pricing and
capacity
Political Risk
• An abundance of reinsurance capacity both for pro rata and excess of loss
remains, following the movements of underwriters in the employment market in
the second half of 2012
• The price softening seen at 1 January has continued, with rates in the region of
5% to 10% down compared to 2012
• The Political Risk insurance market is entering what will be an interesting 6 to
12 month period with a number of new entrants to the class
• This additional capacity is likely have a direct impact on original terms and
conditions and to a further softening in pricing absent of any new loss activity;
opinion remains divided as to the degree of further softening
Page 9 of 12
United States – Healthcare
• Reinsurance pricing for Healthcare Liability lines remains reasonable with pricing reflective of the favorable
loss experience
• Reinsurer margins have remained relatively flat on working layer covers
• Pricing has fallen on higher limit capacity layers where justified
• Adequate reinsurance capacity exists to address the increasing excess limit needs of insurers
• Ceding commissions are generally adequate to cover underwriting expenses
United States – Medical Excess
• The U.S. is seeing an increase in the severity of medical claims
Rates
Specialty rates
Territory
Pro rata
commission
Risk loss
free %
change
Risk loss
hit %
change
Catastrophe
loss free %
change
Catastrophe
loss hit %
change
Marine
0%
0% to -5%
0% to +5%
N/A
N/A
Non-Marine Retrocession
N/A
N/A
N/A
-5% to -10%
N/A
Personal Accident / Life Catastrophe
N/A
0% to -5%
N/A
0% to -5%
N/A
United States – Medical Excess
N/A
+3% to +10%
+15% to +25%
N/A
N/A
Note: Movements are risk-adjusted.
Page 10 of 12
U.S. Workers’ Compensation
•
•
•
•
Primary rates are moving up, generating more interest from reinsurers on lower “per person” exposed layers
Greater interest from cedants in purchasing “per person exposed buffer layers," e.g., $5M xs $5M and $5M xs
$10M
Coverage enhancements available on all contract types
Catastrophe rates remain soft as supply continues to outstrip demand
Rates
Workers’ Compensation rates
Territory
Pro rata
commission
XL – No loss
emergence % change
XL – With loss
emergence % change
United States
0%
0% to -7.5% on catastrophe layers
0% on working layers if cedants can
demonstrate underlying rate increases
N/A
Capital Markets
•
•
•
•
•
•
•
Catastrophe bond spreads continue to decline, encouraging more issuance; this is likely to see the previous
record high issuance in 2007 of US $7.2 billion being exceeded in 2013
Catastrophe bonds being issued in 2013 are now much more at risk than those issued in 2007, clearly
demonstrating the evolution of the catastrophe bond market
Syndication is gaining market share over bespoke deals placed with limited markets; pricing on syndicated
deals is demonstrably better due to the transparency of the book building process, providing capital market
investors with price discovery
Investors have raised additional funds to support risk-taking, with an estimated US $42 billion of
collateralized reinsurance, catastrophe bonds and ILW limit being in force by year end
Reinsurers continue to engage in third party capital activities; hiring of individuals and teams to develop third
party capital strategies is increasing, resulting in more reinsurers launching sidecars, joint ventures with ILS
Fund Managers and investments in ILS
ILS Investors are starting to look more widely than just the Property catastrophe product class, with interest
being shown in Life, Commercial Automobile and Casualty index products
The recent Swiss Re Contingent Convertible Bond placement, which provides full write down of principal in
the event of the trigger being breached, continues to create great interest
Page 11 of 12
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Begin by visiting our website at www.willisre.com
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