Willis Re 1st View
July 1, 2016
Bumping along the
bottom
st
Willis Re 1 View
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 ...................................................................................................................................................... 10
Commentary by line of business ............................................................................................................. 10
Rate movements ..................................................................................................................................... 11
Workers’ Compensation .............................................................................................................................. 11
Rate movements ..................................................................................................................................... 11
Capital Markets commentary ...................................................................................................................... 12
1st View
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July 1, 2016
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Willis Re 1 View
Bumping along the bottom
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.
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.
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.
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 change
the U.K. Government itself is now experiencing, it is unlikely
that there will be any significant changes in the near future.
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.
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.
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.
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.
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.
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.
Reinsurers are also becoming acutely aware of the
profound change 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.
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.
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.
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.
How much longer the gift of prior-year reserve releases can
keep giving will no doubt be a factor for if or when conditions
change, at which point differences in individual companies’
July 1, 2016
John Cavanagh, Global CEO
Willis Re
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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 changes 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
unchanged
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
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■
■
■
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
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United States — Florida
■
■
■
■
■
■
■
■
■
Average year-on-year risk adjusted price change 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
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Property rate movements
Territory
Australia
Caribbean
China
Latin America
Pro rata
commission
Risk loss
free %
change
Risk loss
hit %
change
Catastrophe Catastrophe
loss free %
loss hit %
change
change
0% to +1%
-5% to -15%
Varies
-5% to -12.5%
N/A
+1%
-5% to -10%
0%
-5% to -10%
N/A
N/A
-2% to -7% +20% to +25%
-5% to -20% +20% to +25%
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
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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.
600
Australia
500
400
300
200
100
0
600
Caribbean
500
400
300
200
100
0
600
United States
500
400
300
200
100
0
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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 changes 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
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■
■
■
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
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Casualty rate movements
Territory
Australia
Pro rata
commission
XL — No loss
emergence %
change
XL — With loss
emergence %
change
+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
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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
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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 Exchange 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 %
change
Risk loss
hit %
change
Catastrophe Catastrophe
loss free %
loss hit %
change
change
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
-10% to +10% +10% to +60%
N/A
N/A
U.S. – Medical Excess
0%
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 2014-2015
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 —
% change
United States
0%
July 1, 2016
11
Catastrophe XL —
% change
0%
-5% to -8%
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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
http://www.willis.com/client_solutions/services/wcma/
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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)20 3124 8555
laura.molloy@willistowerswatson.com
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