Willis Re 1 st View. July 1, Bumping along the bottom

Transcription

1 July 1, 2016 Bumping along the bottom

2 Table of Contents Foreword: Bumping along the bottom... 1 Property... 2 Commentary by territory... 2 Rate movements... 5 Property catastrophe pricing trends... 6 Casualty... 7 Commentary by territory... 7 Rate movements... 9 Specialty Commentary by line of business Rate movements Workers Compensation Rate movements Capital Markets commentary st View This thrice yearly publication delivers the very first view on current market conditions at the key reinsurance renewal seasons: January 1, April 1 and July 1. In addition to real-time event Responses, our clients receive our daily news brief, The Willis ReView, periodic newsletters, white papers and other reports. Willis Re Willis Re combines global expertise with on-the-ground presence and local understanding. Our integrated teams reveal hidden value in the critical intersections between risk, assets and ideas. As the reinsurance advisory business of Willis Towers Watson, Willis Re can access and negotiate with worldwide markets and boost your business performance by making better reinsurance decisions. Together, we unlock value. Find out more at willisre.com or contact your local Willis Re office. July 1, 2016

3 Bumping along the bottom Willis Re 1 st View Market softening continued during the June/July renewal season amid a continued lack of catastrophe losses and abundant capacity across virtually all classes and territories. However, it is increasingly apparent that the magnitude of rate reductions is slowing. Capacity withdrawals where some reinsurers deem pricing to be inadequate are also evident, although considerable pricing variation by class and territory persists. As yet, any indication of widespread pricing stabilization remains elusive. An increase in attritional losses across a number of territories and classes is beginning to feed through into pricing, with a bifurcation in rate movements between the lower level and higher layers of programs. So far in 2016, only one major catastrophe loss the Fort McMurray fires will produce any meaningful catastrophe claims for reinsurers. Stand-alone insurance-linked securities (ILS) funds showed discipline through the first quarter of 2016 but were more aggressive on pricing during the second quarter as spreads declined for liquid reinsurance investments. Negative interest rates in some currencies are affecting the collateralization of some capital market structures. This is likely to promote further moves to alternative structures, which are less exposed to interest rate movements. In the face of continued pricing and interest rate pressure, cost control measures remain a priority for the managers of many reinsurers. The drive to achieve market efficiencies and cost reductions is picking up pace, particularly in the London market. Reinsurers are also becoming acutely aware of the profound that FinTech will drive in the primary insurance markets. Far-sighted reinsurers are also seriously considering the new opportunities FinTech may provide for their own activities. Ultimately however, relief that market pricing in some areas may be nearing the bottom of the cycle is counterbalanced by concern over how and when reinsurance rates might start to increase, even modestly, on a wider basis. The alternative is a market that faces a number of years bumping along at current levels earning very modest returns. How much longer the gift of prior-year reserve releases can keep giving will no doubt be a factor for if or when conditions, at which point differences in individual companies historic reserving practices will be exposed. The balance of risk retention versus return is more acute than ever and the ability of individual re/insurers to manage this crucial dynamic will have a profound impact on the shape of the market to emerge, if or when the rating environment finally offers some relief. The U.K. s decision to leave the E.U. provides an additional dynamic. The exact implications for future policy and regulation are unknown but as highlighted after the Referendum result, Article 50 of the Lisbon Treaty provides for two years to negotiate exit terms from the date the U.K. gives notice to the Council of Europe, and given the the U.K. Government itself is now experiencing, it is unlikely that there will be any significant s in the near future. Underpinned by the strong customer-centric regulation in the U.K. and E.U., we do not see any material risk to clients generally in terms of re/insurers ability in the immediate future to offer continuity in the supply of reinsurance capital and consistency of approach; there is evidence that our industry may be better placed than other financial sector entities to manage the uncertainty developing from withdrawal. Existing provisions regarding E.U. passporting rights will continue until such time if and when these are amended under renegotiated terms, though the recent public statement from QBE concerning this issue highlights revised approaches that could be required. Willis Re agrees with Lloyd s CEO Inga Beale s letter to the Financial Times; the challenge for the re/insurance industry as a whole is to ensure that we remain best placed to provide clients with the risk transfer products they need. Ensuring our sector can continue to attract the best talent from across the globe will also remain a priority. The re/insurance industry will be closely monitoring the outcome of U.K./E.U. negotiations; Willis Re s significant European and global footprint will allow us to navigate the issues and consequences on behalf of our clients that arise out of this momentous decision. Brexit is fundamentally a political issue that has now triggered economic forces that are, on balance, more likely to perpetuate the low/negative interest rate environment. We believe that these dynamics are far more relevant to insurers in the immediate term. John Cavanagh, Global CEO Willis Re July 1,

4 Property Commentary by territory Australia Plentiful capacity still available from both traditional sources and ILS markets Market softening continues, with rate of softening dependent on perceived program price adequacy and level of first event retentions Some reinsurers are starting to walk away from poorly rated business with some moving higher up programs; however, most reinsurers continue to support clients through the current cycle Some buyers are looking to purchase multiyear capacity; others are looking to stretch terms and conditions Minimum Rates on Line (ROLs) continue to reduce Caribbean Excess of Loss Lack of catastrophe loss activity and abundant capital have contributed toward a softening market in recent years However, the compounded impact of year-on-year discounts is leading to a reduction in the degree to which reinsurers are willing to reduce pricing, with average decreases ranging from 5% to 10% Regardless, capacity continues to be plentiful in the region, with new entrants seeking opportunities to gain a foothold in the market Existing reinsurers continue to focus on maintaining market share, whilst some aim for increased shares even after discussions around lack of pricing adequacy Terms and conditions remain broadly stable as the focus of any renewal discussion continues to be price Proportional A number of recent fire losses during the first half of 2016 are expected to contribute towards some deterioration in attrition loss ratios Original rates remain under pressure as local insurers look to diversify into neighboring islands Ceding and profit commission increases have started to slow as multiple years of improvements lead to reinsurers reaching a ceiling for what they are prepared to offer, year-on-year s of between 0% and 3% Proportional support in the form of surplus lines and quota shares continue to be a key source of capital for many cedants in the region and so cession amounts remain largely und China With capital plentiful, competition remains fierce and market softening continues with risk adjusted price reductions, although magnitude of reductions seemingly less than last year Most reinsurers maintained their capacity unless price is too competitive; however, we have also observed a handful of historically active reinsurers became less aggressive after suffering heavy losses 2 July 1, 2016

5 Following markets have not been willing to follow when price does not meet their requirements Clients are willing to accept price increases for layers heavily hit by Tianjin, but controlling overall program price increases is still a priority Despite budgetary constraints, higher limits were purchased in line with exposure growth Latin America There is still significant capacity available for Latin American property treaty business notwithstanding the continued softening of original and reinsurance rates in the last few renewal seasons The softening of reinsurance rates has slowed down gradually over the last twelve months; however, some programs have seen rate reductions of over 5% on a risk-adjusted basis at this latest mid-year renewal Rate movements (reductions) have become more uneven and inconsistent than ever, depending very much on territory, key leaders, whether aligned to a pro rata placement, size of program, etc. There are now fewer stand-alone single territory catastrophe programs than ever, making an accurate year-on-year regional comparison more difficult, with private deals on certain layers contributing to this There are a few isolated cases of treaties (both pro rata and non-proportional) being placed on a two-year basis Middle East Capacities show no sign of reducing, although new capacity is coming in at a much slower pace than seen in the past Reinsurers are willing to walk away from income from loss affected programs Resistance to further price reductions indicates a much more disciplined response from reinsurers Clients expect unabated improvements in terms, irrespective of historical performance South Africa Continued pressure on catastrophe rates Market impacted by mining and hail losses but rate reductions still achieved Pressure on minimum deposit levels downward from 90% Hours clauses remain at 168 for all perils United Kingdom Catastrophe excess of loss pricing down circa 10% as mid-year cedants seek same reductions as at January 1 and April 1 Sufficient market capacity is available for placement Some reinsurers trimming their shares to reflect continuing reductions, but another reinsurer is always another willing to step in to pick up the balance Continuing self-reinsurance/higher deductibles show faith in own business models, albeit with some optimism versus modeled expected loss Capacity continues to be available for per risk excess of loss/pro rata if business case is strong and results sufficiently resilient, although with increased signs of resistance to expected lower margins July 1,

6 United States Florida Average year-on-year risk adjusted price on overall reinsurance programs ranged from flat to down five percent Pricing was higher for new and/or additional capacity compared to renewal capacity Pricing was also higher for newer, less established buyers compared to buyers that were considered to be more well-established Larger year-on-year risk adjusted price decreases were achieved on higher layers with lower rates on lines, compared to lower layers with higher rates on line Buyers were looking to purchase more capacity but demand varied based on individual circumstances driven by acquisitions, portfolio growth, budget and rating agency pressures A small subset of reinsurers pulled backed back their capacity (some significantly), while most reinsurers provided renewal capacity at market terms Multi-year treaties were not as readily available from reinsurers as in previous year renewals with some continued pressure on more favorable contract terms and conditions for buyers Reinsurer demand for quota share treaties exceeded supply again at this renewal leading to improved terms for established cedants including increases in ceding commissions in the range of 1 to 2 points despite industry fears of Assignment of Benefits (AOB) issues Strong demand from reinsurers continued on related per risk and casualty programs which led to oversubscriptions and sign downs at competitive terms United States Nationwide With regard to pro rata, portfolios consisting of small to middle market business are seeing small increases in commissions. For portfolios consisting of large, risk managed accounts, which have experienced multi-year rate pressure, commissions are flat to down slightly depending on experience and projected plan for coping with continued rate pressure. Lack of catastrophe loss activity and abundant capital have driven the softening market in recent years Following several years of compound price reductions, risk adjusted rate reductions continue for catastrophe reinsurance but have definitely slowed since January 1 Increase in demand for top-end capacity from a number of buyers in response to a bottoming market and A.M. Best s new stochastic BCAR methodology; however, for retentions there is no single clear strategy with some companies increasing attachment points and some buying new underlying layers 4 July 1, 2016

7 Property rate movements Territory Pro rata commission Risk loss free % Risk loss hit % Catastrophe loss free % Catastrophe loss hit % Australia 0% to +1% -5% to -15% Varies -5% to -12.5% N/A Caribbean +1% -5% to -10% 0% -5% to -10% N/A China N/A -2% to -7% +20% to +25% -5% to -20% +20% to +25% Latin America 0% to +2.5% 0% to -15% +3% to +15% -3% to -12.5% +5% to +20% Middle East 0% -5% +10% -5% +10% South Africa 0% 0% +5% -7.5% to -10% 0 to -5.5% United Kingdom 0% N/A N/A -10% N/A United States Florida +1% to +2% N/A N/A 0% to -5% N/A United States Nationwide -2% to +1% 0% to -5% 0% to +5% 0% to -5% N/A Note: Movements are risk adjusted July 1,

8 Property catastrophe pricing trends The charts on these pages display estimated year over year property catastrophe rate movement, using 100 in 1990 as a baseline Australia Caribbean United States July 1, 2016

9 Casualty Commentary by territory Australia Continued softening across most lines of casualty business, with reduced rate of softening for some loss affected treaties Some continued expansion of breadth of cover along with a relaxation of some treaty conditions reducing administrative burden for buyers Systemic risk still front of mind for insurers and reinsurers alike; cyber liability remains of greatest concern but some focus also turning to product liability accumulations CTP (Motor Vehicle Bodily Injury) portfolios volatility continues to reduce with state governments nationalizing the catastrophic single injury claims management, effectively removing exposure and premium from private insurers (and subsequently reinsurers) Long term relationships are still valued by both buyers and reinsurers, however some buyers have been prepared to sever and replace relationships if optimum conditions are not realized China As a new growth area for China, Litigation Property Preservation Liability (LPPL) is covered in some liability treaties this year Most treaties add the relevant Collateralization Clause, which ensures the reinsured will be entitled to request loss reserve or letter of credit as collateral against any credit risk Implementation of new Value Added Tax (VAT) policy in China for reinsurance has not yet been clearly defined; the majority of contracts are executed according to the business tax (BX) regime in China for the time being and subject to future negotiation D&O covered in liability treaties is uncommon in China; reinsured has intention to expand jurisdiction to worldwide including U.S. and Canada this year Europe General Third Party Liability Capacity for Casualty excess of loss remains abundant with significant excess supply in the face of favorable reported losses and continued benign loss activity in the aggregate, regardless of modelled predictions Where incumbent markets are flexible and reasonable, buyers tend to avoid making wholly pricedriven s to reinsurance panels; this reflects the different nature of long tail classes, especially its duration and the belief that continuity in reinsurance relationships offers tangible economic value across the cycle For this reason, existing leaders remain pragmatic about the need to be competitive and where relationships are resilient, continuity prevails Signs of increasing flexibility around fundamental coverage issues, e.g., indexation provisions U.K. Motor Liability Capacity for excess of loss is increasing and moderate stress seen in recent years; caused by supply/demand imbalance easing Partly due to increased stability around PPO awards Some existing markets strengthening their appetite for class July 1,

10 Some new markets showing active interest Quota share capacity is increasing and competition exists Margins/commissions heavily dependent on scale and record United States General Third Party Liability Original rates do not appear to be keeping up with loss trends, which are leading to deteriorating loss ratios Quota share ceding commissions are holding steady with very few opportunities to secure improved economics and conditional upon highly compelling evidence based analysis Excess of loss rates + or 10% depending on experience, evidencing that reinsurers remain willing and able to differentiate amongst clients Clients are continuing to move away from siloed reinsurance and towards multi-class combined liability reinsurance programs as they seek to reclaim the economic benefits of diversification (see also Professional Liability) Severity trend assumptions have stabilized Capacity still plentiful but far more price sensitive United States Auto Liability Many personal auto carriers have filed rate increases to offset increased claims frequency trends Ceded margins on pro rata personal auto programs have levelled off after several years of slight reductions Reinsurers increasingly attracted to niche programs whether it s preferred distribution, regional expertise or use of technology Commercial auto continues to be a challenging class of business; reinsurers are placing heavy emphasis on expertise and the track record of the client United States Professional Liability Reinsurers view of gross loss ratios not readily permitting any meaningful softening of Quota Share reinsurance economics; this is following several years of favorable adjustments for buyers Ceding commission levels appear to be reaching a ceiling given putative loss ratios and moderating appetite from reinsurers who were willing to pay for access to portfolios with high barriers to entry and when results justified doing so Some recent prior year reserving issues aggravate concerns about the reliability of current reported results in certain classes Reinsurers are demonstrating discipline in isolated cases and seem willing to reduce capacity in whole or in part where pricing no longer allows them to record an underwriting profit, no matter how modest; this is especially relevant on Quota Share contracts where scope to resolve differences of opinion in loss ratio is constrained Clients are continuing to move away from siloed reinsurance and towards multi-class combined liability reinsurance programs as they seek to reclaim the economic benefits of diversification (see also General Third Party Liability) Combination of new purchases from cedants that previously were net, isolated adverse development from prior years and no new entrants has further re-balanced supply and demand 8 July 1, 2016

11 Casualty rate movements Territory Pro rata commission XL No loss emergence % XL With loss emergence % Australia +2.5% -5% to -12% 0% to -5% China N/A -20% to -5% +6% Europe General Third Party Liability N/A 0% to -10% -5% to +5% U.K. Motor Liability N/A 0% to -10% -5% to +5% U.S. General Third Party Liability 0% to +1% 0% to -10% 0% to +10% U.S. Motor -3% to +2% 0% to -10% +5% to +15% U.S. Professional Liability -1% to +1% 0% to -5% 0% to +10% Note: Movements are risk adjusted July 1,

12 Specialty Commentary by line of business Marine Energy losses concentrating minds, the most recent being Jubilee Field/FPSO Kwame Buyers showing more interest in opportunistic lower level purchases Signs of the excess of loss market starting to bottom out, particularly on primary, risk exposed layers Feeding frenzy has dissipated to a large degree No clear signals as to a trend towards the increased use of Internal Reinsurance Vehicles (IRVs) Non-Marine Retrocession Global Pricing reductions year-on-year in line with the reductions seen at the January and April renewals Additional cover being purchased by cedants as underlying portfolios grow Placements covering U.S. Windstorm encountering capacity shortage as most reinsurers are fully deployed (at prevailing market pricing) Fort McMurray Wildfire likely to impact retrocession programs of cedants who have a larger market share in Canada Continued pushback on widening of conditions, particularly cyber coverage Personal Accident/Life Catastrophe Global There continues to be further softening in rates. The direct and facultative market is extremely competitive; treaty market rates are down, though to a lesser extent Underwriting discipline is eroding and there is an abundance of existing capacity with new markets looking to enter the space in order to diversify into a historically profitable marketplace Political Risk Political Risk and Credit claims have increased in some areas No real correlation in terms of geography, but commodity prices have been a common theme Commodity price stagnation will continue to affect how much insurance is purchased An abundance of direct and reinsurance capacity remains for the class United States Healthcare Reinsurance capacity remains plentiful for medical professional liability and related lines of coverage There continue to be new markets entering the Medical Professional Liability reinsurance space and no notable exits Reinsurance price movements reflective of account experience There is increased willingness to support more leveraged placements and offer cover on a multiyear basis The original business remains stable despite the attention given to headline claim awards 10 July 1, 2016

13 United States Medical Excess Continued increase in severity and frequency of large medical claims Layer excess of $2 million is now a "working layer" for excess medical Continued increase in high cost pharmaceuticals and injectables administered outpatient Carriers and Co-ops suffer losses from ACA and Ex membership Continued increase in medical reinsurance carriers, capacity and competition Carriers have an Increased need for capital due to revenue growth and Medicaid Expansion Specialty rate movements Territory Pro rata commission Risk loss free % Risk loss hit % Catastrophe loss free % Catastrophe loss hit % Non-Marine Retrocession -1% -10% +15% -10% N/A Personal Accident / Life Catastrophe 0% -15% N/A -10% N/A Political Risk 0% to -1% -5% 0% -5% 0% U.S. Healthcare 0% to +5% 0% to +5% Varies N/A N/A U.S. Medical Excess 0% -10% to +10% +10% to +60% N/A N/A Note: Movements are risk adjusted Workers Compensation The Workers' Compensation market can be currently viewed as two separate markets: The working layers, typically defined as including single life coverage and commonly below $10 million per occurrence limit, are priced off actuarially driven exposure and experience analysis The second "market" is the catastrophe capacity and requires multi claimant losses in order to attach; pricing is benchmarked based on catastrophe modeling results and commonly on market driven capacity charges In the working layers, the market has been relatively stable In the catastrophe market, prices and terms have continued to soften, albeit at a much slower pace than we saw in Mergers and acquisitions completed in 2015 have had very little impact on overall capacity and there have been a couple of new entrants adding some capacity to the Workers Compensation catastrophe market in 2016 Rates Workers Compensation rates Territory Pro rata commission Per life XL % Catastrophe XL % United States 0% 0 % -5% to -8% July 1,

14 Capital Markets ILS and M&A commentary Investors have become more eager for liquid paper and secondary spreads have dropped Investors and potential sponsors have increasing interest in deals beyond natural catastrophe as evidenced by recent deals in life VIF, operational risk and mortgage insurance Growth in insurance-linked securities (ILS) placed on an agency basis with either a single investment manager (collateralized re) and with multiple investors in private deals continues to grow Year to date 2016 M&A activity in Asia largely driven by a number of factors, including selected retreats from certain large global players, continued focus by large global players on distribution and increasing appetite from Chinese buyers Driven by increased capital requirements and the need to streamline, there have been selected retreats from certain Asian markets by large global players including Ageas in HK, Allianz in Korea and Taiwan, Zurich in Taiwan Bank distribution remains a key focus for global insurers, highlighted by recent transactions involving high up-front access fees for exclusive bancassurance distribution rights in Asia M&A appetite from Chinese investors for global insurance targets remain unabated despite increased capital controls and weakening macro conditions back home Meanwhile in Europe, the British public vote to exit the E.U., sent financial markets into turmoil with sterling hitting lows not seen since 1985 ($1.33 on Monday 27th June) and S&P cutting the U.K.'s credit rating by two notches to AA. The European insurance sector dropped 13.8% in the first day of trading following the vote, which coupled with the falling pound makes U.K. insurers seem potentially better value for money; especially when considering that the Lloyd's sector (down only 5.1% by comparison) derives the majority of its income in dollars against a backdrop of sterling expenses. Note: Capital Markets commentary provided by Willis Capital Markets & Advisory 12 July 1, 2016

15 Global and local reinsurance Drawing on our network of reinsurance and market experts worldwide, and as part of the wider Willis Towers Watson company, Willis Re offers everything you would look for in a top tier reinsurance advisor, one that has comprehensive analytics and transactional capabilities, with on-the-ground presence and local understanding. Whether your operations are global, national or local, Willis Re can help you make better reinsurance and capital decisions, access worldwide markets, negotiate optimum terms and boost your business performance. For more information visit willisre.com or contact your local office. Media enquiries Laura Molloy Communications Director, Willis Re +44 (0) laura.molloy@willistowerswatson.com Copyright 2016 Willis Limited / Willis Re Inc. All rights reserved: No part of this publication may be reproduced, disseminated, distributed, stored in a retrieval system, transmitted or otherwise transferred in any form or by any means, whether electronic, mechanical, photocopying, recording, or otherwise, without the permission of Willis Limited / Willis Re Inc. Some information contained in this document may be compiled from third party sources and we do not guarantee and are not responsible for the accuracy of such. This document is for general information only and is not intended to be relied upon. Any action based on or in connection with anything contained herein should be taken only after obtaining specific advice from independent professional advisors of your choice. The views expressed in this document are not necessarily those of Willis Limited / Willis Re Inc., its parent companies, sister companies, subsidiaries or affiliates, Willis Towers Watson PLC and all member companies thereof (hereinafter Willis Towers Watson ). Willis Towers Watson is not responsible for the accuracy or completeness of the contents herein and expressly disclaims any responsibility or liability for the reader's application of any of the contents herein to any analysis or other matter, or for any results or conclusions based upon, arising from or in connection with the contents herein, nor do the contents herein guarantee, and should not be construed to guarantee, any particular result or outcome. Willis Towers Watson accepts no responsibility for the content or quality of any third party websites to which we refer. The contents herein are provided for informational purposes only and do not constitute and should not be construed as professional advice. Any and all examples used herein are for illustrative purposes only, are purely hypothetical in nature, and offered merely to describe concepts or ideas. They are not offered as solutions to produce specific results and are not to be relied upon. The reader is cautioned to consult independent professional advisors of his/her choice and formulate independent conclusions and opinions regarding the subject matter discussed herein. Willis Towers Watson is not responsible for the accuracy or completeness of the contents herein and expressly disclaims any responsibility or liability for the reader's application of any of the contents herein to any analysis or other matter, nor do the contents herein guarantee, and should not be construed to guarantee, any particular result or outcome. July 1,