1ST VIEW 1 April 2014
Table of Contents Renewals 1 April 2014 Introduction 3 Property Territory and Comments 4 Rates 5 Pricing Trend Graphs 6 Casualty Territory and Comments 7 Rates 7 Specialties Line of Business and Comments 8 Rates 9 Capital Markets Comments 9 1st View This thrice yearly publication delivers the very first view on current market conditions to our readers. In addition to real-time event Responses, our clients receive our news brief, The Daily Willis ReView, periodic newsletters, white papers and other reports. Willis Re Global resources, local delivery For over 105 years, Willis Re has proudly served its clients, helping them obtain better value solutions and make better reinsurance decisions. As one of the world s premier global reinsurance brokers, with 40 locations worldwide, Willis Re provides local service with the full backing of an integrated global reinsurance broker. Page 2 of 10
It s a Buyer s World The trends observed during the 1 January 2014 renewals have continued at 1 April and show clear signs of accelerating. The twin engines of positive 2013 results driving up retained capital, and a seemingly unabated supply of capital from third party investors, continue to add to the oversupply of capacity chasing muted demand. As a result, 1 April renewals have seen a softening of rates across nearly all classes and geographies which, in turn, has allowed buyers to achieve substantial savings in the cost of their reinsurance protections. Some buyers took the opportunity to buy more cover and some renewals saw an expansion in terms and conditions. The overriding target for most buyers, however, was to achieve price reductions or an increase in ceding commissions. Restructuring and consolidation of covers by some of the larger buyers continues to be a trend along with M&A consolidation causing further compression in price in favor of the buyer. Many primary insurance company buyers most noticeably international companies and regional U.S. companies continue to remain cautious in their utilization of insurance-linked securities (ILS) and collateralized markets. To help withstand the challenges of competing with the ILS and collateralized markets, major traditional reinsurers have worked hard to optimize their client relationships, capacity and technical underwriting capability to protect and in some cases increase their shares. Increased investor demand for catastrophe bonds allowed some primary buyers to sponsor new bond offerings and, much like the traditional placements, the new issuances provided improved terms for buyers with savings on price and broader coverage. In addition to the primary reinsurance market, the retrocession market has been the key area of activity for ILS and collateralized markets where they continue to dominate. Retrocession buyers, actively embracing the competitively priced capacity being made available from ILS and collateralized markets, as well as some traditional markets, have sought to manage their retained exposures more aggressively. With demand for natural catastrophe cover continuing to prove insufficient to satisfy the increased capacity supply, capital market investors are beginning to take concrete steps to expand into other classes. In most cases, the new vehicles seeking non-catastrophe risk are closely aligned with or managed by traditional reinsurers with technical underwriting skills. The returns investors are seeking, aligned with the low expense ratio of a sidecar and, most critically, the investment arbitrage that is being taken, result in new vehicles targeting business at loss ratio picks higher than typically supported or sustained by traditional reinsurers. This long anticipated development of nontraditional markets entering non-catastrophe business whose success is so far unproven and is largely in its infancy brings additional capacity and adds a new competitive dynamic to non-catastrophe markets. Faced with a softening market and no sign of relief in the medium term, reinsurers have stepped up efforts to manage their capital through increased share buybacks, special dividends and other techniques. In spite of the softening rate outlook, stock valuations of quoted companies remain attractively high, helped by capital management techniques. A number of companies are taking advantage, through public share offerings, to provide existing investors with an exit strategy. The current reinsurance market clearly favors the buyer. The cost of reinsurance is falling much faster than original rates in many classes and territories. Comfortable though this situation may be for many buyers, the nagging concern remains as to timing. When will a lower cost of reinsurance feed through in lower original rates and put primary companies margins back under pressure? Peter C. Hearn John Cavanagh Chairman, Willis Re CEO, Willis Re 1 April 2014 1 April 2014 Page 3 of 10
Property territory and comments India Softening market conditions resulted in flat to downward price movement for the majority of Property programs in spite of increased exposures Ample capacity available On loss affected programs insurers increased attachment points to maintain expiring reinsurance spend Japan Property risk Abundance of capacity from existing and new markets Large variance in pricing on Property risk business due to idiosyncratic issues such as loss performance and aggregate movement, especially for portfolios with large overseas exposure Where there was significant exposure movement or improvement in losses, significant risk-adjusted reductions were achieved Like the catastrophe programs, there were some improvements to terms and conditions on both the excess of loss and surplus treaties; on the pro rata, some cedants saw improvements to overseas event limits that had significantly reduced post-2011 Thai floods Japan Wind, Flood and Earthquake Abundance of capacity from existing and new markets (both traditional reinsurers and capital market funds) for Japanese Property business While the majority of catastrophe programs fell within the above range, there are examples of individual layers that moved to a lesser or greater extent; larger reductions were typically seen on earthquake rather than wind There was a move by some cedants to combined peril catastrophe programs and this allowed larger year on year savings to be achieved Earthquake quota share event limits largely und Changes to conditions observed across many programs: hours clauses extended, amendments to event definitions, move away from named perils Korea The 1 January renewal was dominated by market risk losses but the results were far more mixed for cedants who maintained a 1 April inception; therefore renewal pricing movements varied considerably Some of the more heavily loss hit risk excess of losses saw deductible increases and fairly sizeable price increases Another catastrophe free year in Korea quickened the softening of event excess of loss pricing There appeared to be more capacity available when compared to the 1 January with many programs being placed is record time Very little resistance from the market to the global natured of the cover enjoyed by most Korean companies. Reinsurers priority seemed to be focussed on maintaining or increasing shares Page 4 of 10
United States Nationwide New capital providers and facilities continue to pressure traditional reinsurers causing capacity over-supply On occasions, incumbent markets have been unable to support firm order terms which have carried the market Risk-adjusted price reductions being seen in all sectors, although accounts with increased expected losses as well as the nationwide programs are seeing the largest risk-adjusted decreases Softening market continue to impact terms & conditions as well as price: extended hours clauses are becoming more widely available and the market is open to expanding terror coverage, but depending on the exposure it may involve additional premium Rates Territory Pro rata commission Property rates Risk loss free % Risk loss hit % Catastrophe loss free % Catastrophe loss hit % India 0% to +3% -15% to -20% 0% -15% to -20% 0% to -10% Japan Earthquake +3% N/A N/A -12.5% to -17.5% N/A Japan Property risk 0% to +2% Varies N/A N/A N/A Japan Wind and Flood N/A N/A N/A -10% to -15% N/A Korea 0% -7.5% to +2.5% +10% to +25% 0% to -15% N/A United States Nationwide N/A -10% to -20% +5% to -5% -10% to -20% 0% to -10% Note: Movements are risk-adjusted. Page 5 of 10
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. United States Nationwide 600 500 400 300 200 100 0 Japan 800 700 600 500 400 300 200 100 0 Page 6 of 10
Casualty territory and comments Japan General Third Party Liability General softening despite some potential loss emergence Increased retentions on some General Liability programs Some markets have offered increased capacity in order to protect shares on other lines of business Increased supply of capacity from reinsurers not previously writing Japanese / International Casualty business Terms and conditions appear relatively stable Japan Personal Accident The Personal Accident market continues to soften which is largely driven by the increase in available capacity More reinsurers willing to offer quotations The best risk adjusted reductions achieved on portfolios with increasing aggregates Improvements on terms and conditions such as increase in reinstatements and hours clauses Rates Territory Casualty rates Pro rata commission XL No loss emergence % XL With loss emergence % International General Third Party Liability N/A -10% 0% Japan General Third Party Liability N/A 0% to -15% 0% Japan Personal Accident N/A -15% to -20% N/A United Kingdom Motor Liability 0% 0% +5% to +10% United States Professional Liability +2.5% to +5% -10% to -15% 0% Note: Movements are risk-adjusted. Page 7 of 10
Specialties line of business and comments Aerospace Little activity in the airline market, however, what has been placed follows the trend for competition and rate reduction: Airlines with good safety records have benefitted from rate reductions of 10% to 20% and even more in some cases Reinsurance capacity remains abundant and continues to drive competition between reinsurers Aviation retrocession pricing continues to remain stable; good experience combined with continuity of relationship tends to be reflected by rate reductions of 5% to 7.5% Japan Marine No discernible overall pattern as rating movement driven entirely by varied contract specific loss experience MOL Comfort worldwide cargo loss approximately US$450 million Domestic market consolidation leading to a reduction in number of contracts placed Marine Pricing was account specific with loss deterioration on Deepwater Horizon, Superstorm Sandy and Costa Concordia being a significant driver International Group Protection and Indemnity Association (IGPIA) continues to be a major pricing driver for Reinsurers and IGPIA review clauses have been widely applied to treaty business as they were in 2013 General increases in retention levels and/or co-insurance participation accompanied by widely available capacity encouraged many reinsurers to try and increase their shares This resulted in significant over placement in some cases and subsequent reinsurer dissatisfaction with eventual signed lines Retrocession clients are demanding to be judged on a case by case basis and terms are showing considerable variation in pricing P&I reinsurance market has been flat but the IGPIA program has seen +10% as a result of 2013 deterioration of Costa Concordia and to a lesser extent MV Rena. P&I Clubs original General Increases have ranged from 0-12.5% but averaged circa 5%-6% Non-Marine Retrocession No significant in market dynamics since main renewal date of 1 January Capacity still ample but more variable depending on 1 January deployment and inflow of new funds to ILS managers and s in inwards reinsurance allocations (inwards reinsurance allocations by traditional markets) Price reductions have slowed since 1 January but still 12.5% to 15% off year on year Indications of additional purchasing focused on capital protection after the core 1 January programs ILW trading volume comparable to same period last year U.S. Healthcare The reinsurance market for Healthcare Liability lines remains strong with ample capacity at favorable terms for cedants Reinsurers are willing to pay ceding commissions reflective of cedant expenses and reflective of profitability Pricing on excess of loss reinsurance continues to reflect the improved loss experience of the underlying and reinsured business Additional support and limit capacity is being offered to support cedants business needs Page 8 of 10
Rates Territory Pro rata commission Specialty rates Risk loss free % Risk loss hit % Catastrophe loss free % Catastrophe loss hit % Aerospace +1% to +2.5% -5% to -10% N/A -5% to -10% N/A Japan Marine Varies Varies Varies N/A N/A Non-Marine Retrocession N/A N/A N/A -12.5% to -15% N/A U.S. Healthcare Reflective of expenses and profitability of reinsured business N/A N/A N/A N/A Note: Movements are risk-adjusted. Capital Markets Continued strong demand for catastrophe bonds driving spreads lower Catastrophe bond investor base shifting towards money managers Pipeline for Q2 2014 is very strong Coverage available under catastrophe bonds continues to widen with more indemnity covers placed Increasing interest from U.S. regional and international primary companies in cat bonds in response to lower spreads, more flexible terms, and increased speed to market Current reasonable stock valuations continue to support new IPOs coming to market Page 9 of 10
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