During a recent London market trip with management from insurers, reinsurers, and the Lloyd's (NYSE:LYG) of London market, RBC Capital Markets heard reports of Lloyd's insurers taking advantage of the soft reinsurance landscape at the key January 1st renewals.
The reinsurance market pressures that underlined the challenging operating landscape throughout 2015 persisted into the beginning of 2016, in line with brokers' expectations.
The least severe declines of 5-7.5% in the U.S. property catastrophe reinsurance space were reported to RBC during its meetings, with reductions of 10-15% occurring throughout the rest of the world.
"Whilst these continued declines are far from ideal, the consensus during the day was that there is still some rate adequacy left in the market overall. Based on our discussions, terms and conditions still appeared to be holding relatively firm at the recent renewals despite the softness in the market," notes RBC.
The fact that Lloyd's insurance and reinsurance companies believe that rates in some cases are still adequate suggests there is room for further price softening, perhaps in very specific lines and regions, going forwards.
And while the softening reinsurance marketplace continues to test the discipline and prowess of global reinsurance companies, and will most likely continue to do so in the coming months, Lloyd's insurers sought to make the most of the softer reinsurance prices at the January 1st renewals.
It has been noted previously by industry experts and analysts that softening reinsurance rates, and also the implementation of Solvency II in Europe could lead to a rise in demand for reinsurance at 1/1, with primary players looking to reduce retentions and decrease tail risks.
RBC explains; "In order to maintain relationships with their primary clients, many of the Lloyd's insurers continue to write similar gross lines for clients using reinsurance protection to cede some of the risk to their reinsurance partners and reduce their net retentions."
This arbitrage, of writing re/insurance in similar volumes despite softer market pricing and conditions, while making use of cheaper reinsurance or retrocession to enable them to manage risk accumulations and retentions, is expected to become more prevalent over the coming year as the softness persists.
Despite reports of the entry of alternative reinsurance capital slowing somewhat towards the end of 2015 and this trend continuing at renewals, the overall reinsurance market remains awash with capacity from both traditional and third-party sources.
And from the discussions RBC held during its recent London market trip, it's apparent that Lloyd's insurers are taking advantage of the competitive landscape, which in recent times has been underlined by rate reductions, and ultimately the availability of cheaper reinsurance protection for buyers.
Looking further into 2016 RBC says that discussions failed to produce a "clear consensus" on what might make the market turn from its current softening state.
"Answers to this question ranged from several years of further pricing declines, a number of large losses or an early 2000s type scenario with both large losses and investment related losses occurring simultaneously," concludes RBC.
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