Guy Carpenter reports stable capital at Jan. 1 renewals

Guy Carpenter & Company, a global risk and reinsurance specialist and wholly-owned subsidiary of Marsh & McLennan Companies, announced late Tuesday that overall capital levels dedicated to reinsurance have stabilized, showing no growth for the first time in several years.

In a highly competitive environment, companies assessed broader opportunities and the rate of incoming capital slowed, Guy Carpenter explained in a statement. However, moderate loss experience kept capacity at abundant levels for the Jan. 1, 2016 renewals. The continued scarcity of costly catastrophe losses and more than adequate capacity led to reinsurance pricing reductions, although there are signs the rate of descent is slowing as compared to 2015.

According to Guy Carpenter’s 2016 global January renewal report, The Reinsurance Market 2016: Innovation and Customization, pricing declined for most lines of business and geographies, but the rate of decline moderated, particularly in property catastrophe in the United States. This trend was largely influenced by two prior years of steep declines and a larger increase in demand in property and certain other lines that began in 2015.

Pricing also flattened in the insurance-linked securities (ILS) space as protection buyers and sellers assessed adequate compensation for risk, Guy Carpenter said. “As this sector was initially at the leading edge of attracting new capital while undergoing significant decreased price adjustments, it is notable that rates have currently reached an equilibrium,” the statement said. “This evidence of underwriting discipline may eventually lead to a greater increase in capital attracted to the space, particularly if growth in demand continues.”

In 2015, while the commitment from the capital markets grew, the rate of growth slowed and was offset by a decline in dedicated capital by rated carriers, leading to overall capital levels that were flat, Guy Carpenter said. However, capacity remains more than adequate and with buyers recognizing that significant capital levels combined with cumulative decreases in pricing provided a unique opportunity, they increased limits purchased in the past 12 months. “These purchases included those of first time buyers, attracted to a market that evolved into a mechanism to manage risk they previously viewed as better addressed elsewhere,” the statement said.

“As reinsurance providers continue to evaluate how to compete in a market flush with capacity, an environment of innovation, responsiveness and customization has become the norm,” said Lara Mowery, global head of property specialty at Guy Carpenter, in the statement. “Solution-oriented dialogue has elevated significantly and insurers are increasingly able to focus on improvements in the structure and efficiency of their programs to incorporate more refined capital management goals.”

While there was some slight variation between major regions tracked in the Regional Property Catastrophe ROL index, all experienced decreases of between 7 and 10%, with international regions experiencing greater reductions in the index than the U.S., the statement said. Individual renewals experienced a wide range of outcomes dependent on loss activity, type of structure, geographic concentrations, past renewal experience and other company specific features.

Risk adjusted pricing for U.S. property catastrophe decreased by 5% to 8%, on average, moderating from the average decreases a year ago of down 7 to 14%. Capacity continued to be plentiful, but with a wider range of responses to individual renewals as markets were somewhat more apt to decrease lines or decline participation as margins tightened further, Guy Carpenter said.

Globally, significant insured losses from catastrophes reached approximately US$30.5 billion in 2015, compared to US$32 billion in 2014. Record-breaking cold weather in the U.S. and Canada, along with winter storms in Europe, were the major natural disasters that occurred during the first quarter of 2015. Tropical cyclone activity in the Pacific also contributed to losses. Heavy rains in the southern U.S. and hailstorms in Australia contributed to the bulk of losses in the second quarter, along with an earthquake in Nepal.

Among manmade disasters, the most significant loss event occurred in the third quarter with the explosion at the Port of Tianjin in China in August. This landmark event caused significant insured losses in the range of US$1.6 billion to US$3.3 billion, and is likely to constitute one of the largest insured manmade losses to date in Asia.

Guy Carpenter reported that in 2015, the industry experienced an estimated 2 to 3% decline in the amount of capital dedicated to writing reinsurance by rated markets, while convergence capital continued to grow, though at a slower rate in comparison to previous years. The decline in rated capital was driven in large part by the rate environment, which caused capital to shift slightly toward insurance lines and away from reinsurance lines.

At year-end, total capital dedicated to reinsurance was approximately US$400 billion, unchanged from the previous year. Convergence capital, including catastrophe bonds, industry loss warranties, collateralized reinsurance and sidecars amounted to US$68 billion, up 13% from year-end 2014.

During 2015, a combination of factors led to a notable increase in the amount of catastrophe limit purchased, Guy Carpenter reported. Overall, growth in global property catastrophe limits is estimated to be roughly 4% between Jan. 1, 2015 and Jan. 1, 2016, with the convergence capital component growing by approximately 13%.

Both the 144A cat bond and the private cat bond market continued to be active in 2015, the statement noted. The 144A cat bond market had 23 primary issuance 144A P&C cat bonds successfully completed, amounting to a total of US$5.917 billion in 144A P&C issuance.

In the fourth quarter, ILS pricing conditions generally held steady, as investors continued to spend time on portfolio management. Pricing stabilization in the ILS market was evident throughout 2015 and ample capital remained available, as managers continue to grow pragmatically.

As the pricing environment shows signs of stabilization across both the ILS and traditional markets, accessing multi-year capacity at pre-agreed static rates is a focus for many cedents, Guy Carpenter said. A significant and growing number of property programs were placed at least partially on a multi-year basis at Jan. 1 and notably, multi-year options are beginning to emerge in some casualty sectors, where they have not been available in the past.

The capital markets are also in a strong position to provide multi-year capacity, and 2016 is expected to bring new opportunities in the ILS space for public sector entities, corporates, insurers and reinsurers. Although U.S. peak perils will continue to be a driver of the ILS marketplace, the industry is also likely to see opportunities including new perils, new geographies, new types of protection structures and new sponsors, Guy Carpenter said.

The past year has also brought about several mergers and acquisitions as insurance and reinsurance management teams assessed the changing landscape and looked to position themselves advantageously for the future.

“The reinsurance market has been challenged by a persistent low interest rate environment, the continued inflow of new sources of capital, benefited from an extraordinarily long period of few major natural catastrophes and record levels of merger and acquisition activity in 2015,” said David Priebe, vice chairman of Guy Carpenter, in the statement. “As a result, (re)insurance companies are evolving their operating strategies to embrace this complex environment. We believe that alternative capital will be a consistent source of risk capital for (re)insurance and corporates and we expect to see sustained high growth to continue in this sector.”