Signs of price stabilisation at June 2016 reinsurance renewal

01 June 2016

Low single digit rate reductions typical as market dynamics coalesce to offset record levels of capacity

  • Reaffirming trend of price stabilisation

  • JLT Re’s Risk-Adjusted Florida Property-Catastrophe Rate-on-Line (ROL) Index fell by 3.1% this year 

JLT Re today reports that reinsurance rate declines continued to slow at the 1 June 2016 renewal, reaffirming a trend of gradual price stabilisation that first emerged during the corresponding renewal in 2015. Figure 1 shows that JLT Re’s Risk-Adjusted Florida Property-Catastrophe ROL Index fell by 3.1% this year. This compares to a fall of 8.5% at 1 June 2015 and 17.1% in 2014.

Bob Betz, co-leader of JLT Re’s National Catastrophe Practice along with Brian O’Neill, said: “Average reinsurance rates fell for a fifth consecutive year at the 1 June 2016 renewal, although reductions slowed significantly compared to previous years. Risk-adjusted pricing typically fell within a range of flat to down 5% as markets generally held firm against attempts to negotiate higher discounts. Indeed, efforts to achieve reductions in excess of 5% on any one layer were met with considerable resistance.”

“Significantly, there was some evidence through the renewal process of pricing levels converging between traditional and insurance-linked securities (ILS) markets, reversing the decoupling trend that first emerged in 2013 when ILS investors deviated away from price expectations set by the traditional market. This pricing consensus meant most programmes renewed within a narrow range of flat to low single digit reductions in 2016, although changes to terms and conditions added to the overall economic benefit of cedents in some instances.” 

Figure 1: JLT Re’s Risk-Adjusted Florida Property-Catastrophe ROL Index – 1992 to 2016 (Source: JLT Re)

JLT Re

Whilst outcomes by individual programmes were determined by historical performance, individual loss activity and terms and conditions, the clear trend of price stabilisation was the overriding characteristic of this year’s renewal. In addition to converging pricing levels between the traditional and ILS markets, JLT Re sees three other key developments that contributed to this trend:

  1. Pricing for Florida business is approximately 38% down on 2012 levels and only 17% above the previous cyclical low of 1999/2000, implying limited scope for further profitable pricing reductions.

  2. Evidence of increased underwriting discipline amid margin compression, deteriorating results, increased catastrophe activity in the first five months of the year and predictions of elevated hurricane activity in the North Atlantic due to the potential onset of a La Niña event.

  3. Stable demand for reinsurance cover (after a significant increase last year) as reduced placements by some state-backed insurers was offset by increased appetite within the private market.

Prospects for remainder of 2016 

David Flandro, Global Head of Analytics, JLT Re, said, “Surplus reinsurance capacity continues to contain any prospect of higher reinsurance rates. Nevertheless, with current pricing levels testing technical minimums, slowing capital inflows, pockets of increased reinsurance demand and a series of catastrophe losses so far this year, several programmes renewed slightly down or as expiring at the 1 June renewal. The trend towards price stabilisation is expected to persist for the remainder of the year, depending on loss activity.”

At the end of the first quarter of 2016, JLT Re estimated dedicated sector capital to be at record levels having risen to USD 321 billion from USD 315 billion at year-end 2015 (see Figure 2). Reinsurance supply continues to exceed demand and the market is awash with capacity.

“Reinsurance remains a buyers’ market and current conditions present cedents with a compelling opportunity to lower their costs of capital, increase franchise value and pursue more profitable business. After one of the most costly starts to the year since 2011 with significant catastrophe losses in the United States, Japan and Canada, and with predictions of an active North Atlantic hurricane season, cedents should consider taking advantage of the competitively-priced capacity currently on offer.”

Figure 2: Dedicated Reinsurance Sector Capital and Goss Written Premiums – 1998 to Q1 2016 (Source: JLT Re)

JLT Re

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Enquiries:

JLT Re

Isabella Gaster

Tel: +44 (0)20 7558 3387 / +44 (0)7920 586 032

Email: Isabella.Gaster@JLTRe.com

Notes to editors:

About JLT Re 

JLT Re’s trusted team of 700 colleagues worldwide combines market leading expertise and proprietary analytical tools with the freedom to challenge conventions.

Deep specialist knowledge and extensive experience of both the reinsurance market and clients’ own industries and sectors enables JLT Re to ask smarter questions, innovate and deliver better results tailored to meet client needs. 

JLT Re is part of the Jardine Lloyd Thompson Group plc.

www.JLTRe.com 

About Jardine Lloyd Thompson

Jardine Lloyd Thompson is one of the world’s leading providers of insurance, reinsurance and employee benefits related advice, brokerage and associated services. JLT’s client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.

JLT is quoted on the London Stock Exchange and owns offices in 40 territories with more than 10,600 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.

For further information about JLT, please visit our website www.jlt.com