JLT RE 1 JANUARY 2016 REINSURANCE RENEWAL REPORT

Transcription

1 JLT RE 1 JANUARY 2016 REINSURANCE RENEWAL REPORT

2 CONTENTS INTRODUCTION... 3 EXECUTIVE SUMMARY... 5 RENEWAL BY LINE OF BUSINESS... 7 PROPERTY & CASUALTY... 7 US PROPERTY-CATASTROPHE... 7 WESTERN EUROPE P&C... 8 ASIA PACIFIC PROPERTY-CATASTROPHE... 8 LONDON MARKET GLOBAL PROPERTY... 8 RETROCESSION... 9 INDUSTRY LOSS WARRANTIES... 9 US PUBLIC ENTITY... 9 MIDDLE EAST P&C... 9 US WORKERS COMPENSATION LONDON MARKET CASUALTY CYBER (TREATY) SPECIALTY AVIATION MARINE & ENERGY MARINE & ENERGY (ASIA PACIFIC) TERRORISM AGRICULTURE (ASIA PACIFIC) HEALTHCARE A&H NORTH AMERICA MEDICAL MALPRACTICE (TREATY) AUSTRALIA MEDICAL MALPRACTICE (TREATY) MEDICAL PROFESSIONAL LIABILITY (INSURANCE)

3 INTRODUCTION REINSURANCE: NOW MORE THAN EVER The reinsurance market has undergone a seismic shift since the last large catastrophe loss year in This has coincided with volatile equity markets, lacklustre pricing, higher costs of capital and, most recently, rising US interest rates. With pricing falling across most reinsurance lines at 1 January 2016, the current reinsurance market presents a significant opportunity for buyers to lower their costs of capital, increase franchise value and pursue more profitable business. ALL GOOD THINGS MUST END Whilst double-digits pricing declines were typical twelve months ago, there was increasing evidence at 1 January 2016 that the rate of decline is slowing and that the market is beginning to become bifurcated, with most US lines falling by less than the rest of the world. Cession rates are at multidecadal lows but this is beginning to change as carriers begin to realise that reinsurance capital is actually cheaper than equity capital or debt capital. ALTERNATIVE CAPITAL ENTRY IS SLOWING AS TRADITIONAL CAPITAL IS CONSOLIDATING As JLT Re highlighted before Monte Carlo, the rate of entry of alternative capital into the sector is slowing whilst traditional reinsurance capital is consolidating. This means that reinsurance supply, which increased rapidly between 2011 and 2014, is now more static. Figure 1: Reinsurance Capital, Gross Premiums and Changes in Alternative Capital (Source: JLT Re) REGULATORS AND RATING AGENCIES REAR THEIR UGLY HEADS With Solvency II officially coming online in 2016 and A.M. Best increasing its equity and interest rate charges, as well as implementing a simulated A.M. Best s Capital Adequacy Ratio (BCAR) which penalises higher volatility, higher capital levels per unit of risk are now de rigueur. Reinsurance is the 3

4 cheapest, most effective tool to help companies free-up capital for profitable growth in this environment. FEWER RESERVE REDUNDANCIES REMAIN 2015 saw several notable instances of reserve strengthening whilst redundancies, so often the bulwark against poor investment results and lacklustre accident year earnings, began to fade. Reports of the demise of the cycle have been greatly exaggerated and calendar year deficiencies will resurface soon enough. NOW IS THE TIME The best time to buy reinsurance is before prices increase. With unusually low losses, historically low cession rates, slower capital entry and faster consolidation, break-even reserves and, most importantly, early signs of a pick-up in demand, now is the time for buyers to utilise the low cost of reinsurance to grow, to acquire, to release capital and to focus on profitable business. 4

5 EXECUTIVE SUMMARY Risk-adjusted pricing fell across most lines of business and regions at the 1 January 2016 reinsurance renewal, although the trend of moderated declines (first highlighted by JLT Re during 2015 s midyear renewals) continued in certain territories and segments. Whilst rates fell by double-digits for most lines twelve months ago, the market became bifurcated during the 2016 renewal, with a significant difference between the United States and other regions, in addition to the usual variances by lines of business and individual programmes 1. Figure 2 shows JLT Re s Risk-Adjusted Global Property-Catastrophe Reinsurance Rate-on-Line (ROL) Index fell by 8% at 1 January This compares to a fall of 11% at 1 January 2015 and 12% in Much of the moderation was driven by an approximate decline of between 5% and 7.5% in US property-catastrophe pricing. Outside of North America, property-catastrophe pricing declines were more significant with decreases of 10% to 15% in Western Europe. The Asia Pacific region also saw property-catastrophe pricing fall considerably, with reductions of between 10% and 30% fairly typical, depending on the territory. Figure 2: JLT Re s Risk-Adjusted Global Property-Catastrophe ROL Index 1992 to 2016 (Source: JLT Re) An easing in the rate of alternative capital entry into the sector was one key factor behind moderated property-catastrophe price declines in the US as returns fell to less attractive levels for investors. Other factors included reinsurer discipline and there was some additional demand from US insurers in advance of changes to A.M. Best s BCAR model. Despite further evidence that property-catastrophe rates are starting to stabilise in the United States, they have now fallen in most territories for thirteen successive renewals. As a result, pricing on a global basis is approximately 30% down on 2013 levels and only 27% above the previous cyclical 1 Factors impacting individual programmes included historical performance, localised loss activity and terms and conditions. 5

6 low of the late 1990s, implying limited scope for further profitable pricing reductions. Nevertheless, changing reinsurance buying behaviours, low insured catastrophe losses and a sustained supply and demand imbalance may conceivably continue to apply downward pressure in the near future. This is also true of several non-catastrophe lines of business. Casualty pricing generally showed a flat to downward bias at 1 January 2016 as carriers looked to diversify away from property-catastrophe business and into the casualty space. Some healthcare lines experienced similar outcomes, although accident and health (A&H) business saw significant regional variations. Specialty lines, meanwhile, typically saw more severe rate reductions. Of course, sustained pricing pressures have coincided with adverse investment conditions, meaning investment income for most carriers remains significantly below pre-financial crisis levels. Although carriers results have generally held up well during this period, this has been due in large part to favourable reserve development and a sustained period of good luck due to low loss experiences. There are now growing concerns that some companies may be on the cusp of exhausting redundancies as a result of aggressive releasing during softening market conditions. The good fortune with loss experience cannot go on forever either. In fact, estimates indicate that several carriers would have recorded underwriting losses in 2015 had losses returned to historical averages. This difficult operating environment led to a flurry of mergers and acquisitions (M&A) activity in 2015 as a number of carriers looked to build scale and improve diversification in order to survive. These motivations, along with desires to grow into new markets and segments, are likely to ensure deal-making continues through Reinsurer M&A could help support pricing over time. In the shorter-term, sustained capital inflows, consolidated reinsurance buying and price declines are nevertheless likely to continue to prevail in As a result, reinsurance buyers are set to continue to benefit from the heightened competition and innovation currently dominating the marketplace. 6

7 RENEWAL BY LINE OF BUSINESS Figure 3: Loss-Free Risk-Adjusted Rate Movements by Line of Business at 1 January 2016 (Source: JLT Re) PROPERTY & CASUALTY US PROPERTY-CATASTROPHE The US property-catastrophe market saw a moderation in pricing reductions at 1 January 2016 (continuing a trend that first emerged during 2015 s mid-season renewals) as rates fell less sharply compared to the corresponding renewal in Pricing for loss-free property-catastrophe excess of loss (XoL) programmes typically decreased by between 5% and 7.5% on a risk-adjusted basis at 1 January However, it should be noted that this figure represents an average across a varied portfolio and individual programmes saw significant variances as historical performance and terms and conditions influenced renewals. There were also considerably different outcomes for loss-affected programmes. On average, pricing for loss-affected layers on a risk-adjusted basis was flat to up 5%, although some programmes achieved reductions whilst others saw more significant increases. There was evidence of the latter for programmes impacted by severe winter storms in the Northeast in February 2015 (particularly those with exposure around the metro-boston area) as lossimpacted layers saw rates rise, with the increase extent dependent on how deep the loss went into the layer. For the few US property-catastrophe programmes placed on a proportional basis at 1 January 2016, ceding commissions saw some muted upward movement despite resistance from reinsurers. 7

8 Terms and conditions were largely stable. A few programmes saw increased hours clauses for wind but cedents were typically more focused on price in 2016 having achieved more favourable terms in previous years. WESTERN EUROPE P&C The Western European market continued to experience softening across most lines of business at 1 January 2016 as an abundance of capacity was available. This did not prevent new carriers from entering the market however, adding to the glut of supply and applying further downward pressure on rates. As a result, pricing for loss-free property-catastrophe programmes fell by between 10% and 15% on a risk-adjusted basis. There were no major catastrophe losses in the region during Renewals for other lines, including motor and general third party liability (GTPL), were very much dependent on historical performance. Renewals were typically flat to down 5% for these lines of business. For proportional business, ceding commissions generally saw slight increases at 1 January Again, historical performance was the key driver here, with commissions increasing slightly on profitable accounts whilst others remained largely unchanged. ASIA PACIFIC PROPERTY-CATASTROPHE There were no major natural catastrophes in Asia during This, along with increased retentions and an abundance of capacity, saw pricing for loss-free XoL programmes fall by between 10% and 30% on a risk-adjusted basis at 1 January 2016, depending on the territory. Rates for loss-free business in China typically declined by between 10% and 15%. Loss-affected XoL programmes in China ranged from down 5% to up 5%, depending on how badly programmes were affected. Across the Asia Pacific region, loss-affected per risk XoL programmes saw price reductions as cedents benefited from strong competition. Most markets in Asia saw ceding commissions rise by 1% or 2%. Korea was the major exception as Korean Interests Abroad (KIA) cover was withdrawn by some markets following significant losses in the United States and the Tianjin explosion in China. Pricing is expected to come under further pressure in International reinsurers have seen premiums from the Indonesian market (the largest in Southeast Asia) fall by up to 40% in the last two years as more business is ceded to the local reinsurance market following government intervention. In addition, international market capacity is expected to grow through the year, particularly if Asian currencies continue to weaken against the US dollar. LONDON MARKET GLOBAL PROPERTY Loss-free direct and facultative (D&F) property programmes saw average rate reductions range between 10% and 15% at 1 January Some cedents looked to blur the boundaries of marine and non marine by placing whole account composite covers using diversification as a tool to drive down pricing. This trend is expected to continue through Cedents looked to increase ceding commissions for proportional business at 1 January 2016, and were generally successful. Despite some pushback from reinsurers, overriders increased by as much as 20% whilst deficit clauses also reduced in some cases. 8

9 RETROCESSION Market capacity remains abundant for retrocession business. Although some reinsurers reduced lines on the more heavily rate-reduced programmes during the 1 January 2016 renewal, there were no withdrawals of note. Loss-free property-catastrophe retrocession programmes typically saw risk-adjusted rate reductions of between 7.5% and 10% at 1 January Several cedents looked to secure expanded coverage for terrorism on retrocession placements during the renewal process. Some were successful, but not all markets consented and came off programmes as a result. Some cedents also reverted back to buy occurrence coverage alongside aggregate cover to give them greater options, a definite post loss reinstatement and involve more traditional reinsurance carriers. INDUSTRY LOSS WARRANTIES Industry loss warranties (ILWs), meanwhile, were typically flat to down 5% for US nationwide at 1 January 2016 whilst regional coverage generally fell by up to 10%. Forthcoming catastrophe modelling updates may help prevent further reductions through There was also evidence of insurance-linked securities (ILS) markets moving into the ultimate net loss (UNL) space where they perceived margins to be greater. US PUBLIC ENTITY The US public entity market continued to be competitive at 1 January 2016, despite some high profile events in the public entity space in 2015 (such as police shootings and wrongful imprisonment). Such claims activity typically did not impact cedents, enabling further improvements to their reinsurance programmes. In addition, capacity remained plentiful as new markets entered the space. Loss-free property-catastrophe exposed XoL programmes typically saw risk-adjusted reductions of between 8% and 10% at 1 January Loss-free non-catastrophe property programmes renewed down 5%, whilst liability business was also down 5%. Loss-affected programmes saw limited upward pricing pressure as liability and propertycatastrophe exposed programmes renewed flat. Loss-affected layers for non-catastrophe property business saw reductions that averaged 2% on a risk-adjusted basis. Ceding commissions generally increased. MIDDLE EAST P&C The reinsurance market in the Middle East remains highly competitive across all P&C lines. New markets continue to target the region as they seek new growth opportunities, offering competitively-price capacity as they do so. At 1 January 2016, cedents looked to reinsurers with stable capital bases that are capable of writing business across multiple lines of business, with less focus on supporting markets. Loss-free XoL programmes saw risk-adjusted reductions of up to 10% and 15%. Loss-affected programmes saw smaller reductions, falling within a range of flat to -5%, although key accounts were able to negotiate higher discounts (of up to -10%). Ceding commissions generally increased to between 7.5% and 8.5% (with isolated cases of 10%), reflecting the increased popularity of pro rata coverage. 9

10 US WORKERS COMPENSATION Rates for loss-free XoL workers compensation (WC) catastrophe programmes fell by between 6% and 8% at 1 January 2016 on a risk-adjusted basis. For per person exposed WC, pricing was driven primarily by company experience. This generally saw per person exposed layers remaining flat at renewal. For accounts with recent losses and/or adverse development on back years, per person layers saw rates increase by around 5%, whilst there has been very little loss activity within WC cat layers. There was a limited amount of quota share business in the market at 1 January For the few programmes placed on a proportional basis, ceding commissions typically increased by between 1% and 3%. Capacity was generally stable at renewal, with a few new entrants offsetting the fallout from M&A activity. Maximum Any One Life (MAOL) amounts continued to rise at 1 January 2016, similar to previous renewals, with the majority of layers now at USD 15 million and some at USD 20 million and USD 30 million. This increase in MAOL has been particularly beneficial on layers attaching in excess of USD 10 million as it has given cedents additional per person protection, thus future proofing their programmes. Nuclear, biological, chemical and radiological (NBCR) terrorism cover was widely available at 1 January 2016, with the cost varying significantly depending on the location of the underlying risks. Reinsurers have been aware for some time that buyers are increasingly adding this coverage into their programmes and have been proactive in increasing their own aggregates. A number of cedents therefore explored additional NBCR limit during renewal. LONDON MARKET CASUALTY Cedents operating in the London Market Casualty space saw risk-adjusted rates for loss-free XoL programmes typically decline by low single-digits at the 1 January 2016 renewal. This was less than expectations leading up to the renewal (which were closer to low doubledigits). The slowing pace of rate declines was partially due to income bases shrinking as original rates fell, making a significant reduction on a falling income harder to justify. The continued trend of dropping lower layers/using annual aggregate deductibles (AADs) and therefore removing premium and increasing the volatility load for reinsurers also played a part. These trends are likely to prevent further rate reductions through A limited amount of business is placed on a pro rata basis in the London Market Casualty space. However, for the few proportional programmes that did renew at 1 January, ceding commissions were either flat or increased by a nominal amount. Capacity was relatively stable, although recent market consolidation meant fewer reinsurers were active in the space and the combined entities considered reducing capacity. Reinsurers financial strength ratings continue to carry weight when allocating signings and presents a barrier to entry for some new entrants. Interest in loss portfolio transfers and adverse development covers has grown recently for capital purposes and as concerns over reserving risks mount. Cyber aggregate management is likely to be an important issue in 2016, with various reports on the subject due early in the year. There also continues to be a shift towards the binder/delegated authority distribution chain which exercises reinsurers in terms of accumulation management. 10

11 CYBER (TREATY) Loss-free XoL cyber programmes typically renewed at the same ROLs at 1 January 2016, although most cedents were able to achieve increased income levels and to cede more exposure. As a result, programmes offered better value for money as they cost less as a percentage of cedents income. Loss-affected programmes saw prices increase in some instances, depending on severity and frequency. Given the substantial price increases recorded for the original cyber market (of 300% to 500% for US retail and healthcare in 2014, for example), reinsurers were able to ease ROLs upwards at renewal for certain accounts that experienced higher than average losses. Most proportional accounts have performed well in recent years. As a result, there was continued pressure to increase commissions at 1 January Generally, commissions were between 12.5% and 15%, with profit commissions in the region of 15% to 20%. There is now a mature reinsurance treaty market for XoL, proportional, stop loss and aggregate cover. This will have the inevitable effect of putting pressure on pricing. Nevertheless, many participating reinsurers are still taking a cautious approach to the class, making any pricing pressure sensible and manageable. SPECIALTY AVIATION Both the insurance and reinsurance aviation markets continued to attract new entrants in Abundant capacity and strong competition meant loss-free XoL programmes saw riskadjusted reductions of up to 10% and 15% at the 1 January 2016 renewal. The absence of significant aviation losses in 2015 also helped to drive down pricing. For the isolated instances where XoL programmes did suffer small losses, there was essentially no impact on pricing as most layers/programmes have enormous banks. Ceding commissions saw increases of up to 10%. MARINE & ENERGY Marine and energy XoL programmes that renewed at 1 January 2016 typically saw riskadjusted rate reductions of the order recorded at the corresponding renewal in 2015, with buyers seeking to reduce spend as direct incomes fall. Programme structure, coverage and aggregate limit purchased meant more modest singledigit rate reductions were also seen. Cash reductions were more varied in Although cash reductions were substantial for some, the cost of major programmes relative to estimated income did not fall. Select accounts were aggressively targeted by a few reinsurers, with a handful of notable changes in leaders. For the large part, reinsurers were unable to wield any great power over cedents. Security panels reduced in some instances, with cedents seeking a fewer number of more meaningful relationships with their reinsurance partners. Several energy quota share buyers sought to improve treaty conditions. Despite resistance from reinsurers to concede greater commissions given the drastic fall in original rates and reduced volume, strong track records and demand for the business meant negotiating power rested with buyers. Reinsurers will closely monitor results over the next two quarters. 11

12 MARINE & ENERGY (ASIA PACIFIC) Reinsurers have been reviewing their port exposures following the Tianjin loss. Accumulation risk has been an area of particular focus, whether at portside or on stock throughput policies with warehouse exposures (name or unnamed). Car accounts have also been placed under close scrutiny as some car manufactures suffered two significant losses in quick succession in 2015 the Tianjin explosion and the Chennai floods that followed in India. The car market is not currently profitable and certain programmes were consequently excluded from treaties at 1 January 2016 or required to undergo a full review of how they were to be written and risk managed. Loss-free XoL programmes saw risk-adjusted rate reductions of between 10% and 15% at the 1 January renewal. Given the expensive payouts of 2015, loss-affected programmes typically saw increases of between 5% and 20%. Ceding commissions were flat as cedents desire for increases and reinsurers requests for decreases typically offset one another, although there were some instances of reinsurers getting the reductions they wanted. TERRORISM The terrorism market continues to be competitive, despite several high profile attacks in 2015 in both advanced and emerging nations. These events did not cause significant insured losses and new markets continue to enter the space. Loss-free XoL programmes for terrorism business at the 1 January 2016 renewal typically saw risk-adjusted rate reductions of at least 15%, more in certain cases. For proportional business, ceding commissions continued to rise slowly as smaller cessions allowed buyers to lever their remuneration. Wider coverages and products are becoming available, with non-damage business interruption and cyber risk continuing to evolve in treaty markets. AGRICULTURE (ASIA PACIFIC) Capacity for agriculture business in Asia Pacific remains plentiful. Loss-free XoL programmes saw risk-adjusted rate reductions of between 7.5% and 12.5% at 1 January 2016 whilst loss-affected accounts saw pricing range from flat to up 15%. Ceding commissions for proportional business typically increased by between 1% and 2.5%, depending on loss experiences. With the introduction of the China Risk Oriented Solvency System (C-ROSS), buyers increasingly looked to stop loss cover and quota share arrangements. HEALTHCARE A&H US Medical o At attachment levels below USD 5 million per person, reinsurers wanted a trend increase which typically fell between 5% and 10%. o Above USD 5 million, reinsurers wanted more than trend at between 10% and 25% due to concerns over the frequency of larger claims in this band. o Above USD 10 million with very few paid claims at this level, pricing centred on reinsurers minimum returns on capital the greater the number of exposed lives in 12

13 the portfolio, the lower the rate. One cedent achieved a low double-digit rate reduction, but JLT Re does not believe this is representative of the market. Rate movements for accident business showed clear geographical divergences. Asian accounts saw pricing fall by more than 10% whilst reductions for US and European programmes were more subdued (averaging around -5%). Diversification considerations led to greater reductions in Asia as some reinsurers were prepared to tolerate keen pricing to increase their footprint in the region. Base premiums for Asian accounts are also growing at a faster rate than those in more mature markets. Ceding commissions for both medical and accident lines were generally unchanged at 1 January For less profitable accounts, some reinsurers sought increased prices on original business or tightened original policy terms and conditions. There was no material change to capacity availability at 1 January That said, a few new reinsurers entered both the accident and medical markets, prompted by the continuing run of good results on accident business and the diversification benefits both lines bring. Terms and conditions remained relatively stable for accident accounts at renewal. There was little demand for multi-year contracts and hours clauses were typically unchanged. There were isolated instances of passive war clauses on life cat business being given on accounts which increased reinsurer exposures (for example, in the Middle East, Israel and Korea). NORTH AMERICA MEDICAL MALPRACTICE (TREATY) Reinsurance buyers within the North America medical malpractice (treaty) space are increasingly looking for counterparties that can add value and are less concerned about supporting following markets. Indeed, cedents are seeking to establish strategic partnerships with reinsurers willing to support their goals and write bigger lines. Loss frequency remains at historically low levels, and despite anecdotal talk of a rise in severity following some high profile verdicts, there is a lack of hard supporting evidence. Market capacity remained abundant but stable through the 1 January 2016 renewal. As a result, risk-adjusted pricing fell within a range of -5% and +5%, with loss-free programmes typically renewing between flat and down 5%, whilst loss-affected accounts saw muted upward pressure at between flat and up 5%. Ceding commissions were generally flat. AUSTRALIA MEDICAL MALPRACTICE (TREATY) Loss-free programmes for medical malpractice programmes in Australia typically saw reductions of 5% at 1 January 2016 on a risk-adjusted basis. Loss-affected programmes renewed unchanged. There was continued overcapacity for treaty placements during the renewal period. Indeed, cedents main issue was whom to exclude from programmes. One key development leading up to renewal was Berkshire Hathaway s move to start up a manging general agent (MGA) to compete with the doctors mutuals who currently dominate the market. MEDICAL PROFESSIONAL LIABILITY (INSURANCE) The medical professional liability (insurance) market has seen rates remain competitive for eleven years now and this trend was evident again at 1 January 2016 as risk-adjusted pricing generally fell within a range of flat to -5%, with loss-free programmes typically down 5% and loss-affected accounts renewing flat. 13

14 However, price was not the only key driver at renewal as insureds started to focus on reinsurers performance amid instances of poor claims handling services. There were a number of instances where insurers were not prepared to partner and stand shoulder to shoulder with their insured clients. Long-term commitments were also high on buyers agendas, leading to increased requests for multi-year contracts. Batch losses were increasingly prevalent, with estimates of USD 390 million being paid by the commercial market in Several insureds are now taking an interest in the amount of reinsurance ceded by their insurer partners as they start to consider whether the end of the soft market is looming. Nevertheless, reinsurance supply remains plentiful as new markets continue to enter the space (estimates indicate the market has USD 1.4 billion of capacity). 14

15 This publication is for the benefit of clients and prospective clients of JLT Re. It is intended only to highlight general issues that may be of interest in relation to the subject matter and does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. If you intend to take any action or make any decision on the basis of the content of this newsletter, you should first seek specific professional advice and verify its content. 15 JLT Re is a trading name of various JLT reinsurance broking entities and divisions globally and any services provided to clients by JLT Re may be through one or more of JLT s regulated businesses.