According to Willis Re’s January 2014 Reinsurance Renewals Report, “a heady cocktail of converging factors has fuelled a soft buyers’ market in nearly all lines of business at the 1 January 2014 renewals.”

Among the challenges faced by both traditional reinsurers and new capacity are “rate reductions, new capacity and market entrants, low interest rates, greater retention of reinsurance premiums by large buyers, diminishing reserve releases, expansion in terms and conditions, and increasing regulatory oversight,” Willis Re said.

CEO John Cavanagh commented: “The key influence on the 1 January renewals has been overcapacity triggered by a number of converging factors. Strong 2013 results have bolstered traditional reinsurers’ already strong balance sheets.

“New capital from non-traditional capital market sources has grown to reach $50 billion. These factors have been compounded by muted demand from buyers arising from the longer term trend of better regulation, which has in turn led to a better understanding and management of tail risk, as well as the trend of major insurance groups to retain more reinsurance premium volume and risk on their own growing balance sheets.”

The report also pointed out that “soft market conditions are no longer unique to Property Catastrophe business, with rates down on most lines at 1 January 2014. Pricing margins on excess of loss business have been compressed, and ceding commissions have increased on pro rata treaties for sought after clients with large ceded premium volumes.”

Willis Re’s Chairman Peter Hearn said: “Faced with these market headwinds, reinsurers are adopting a variety of strategies. Larger reinsurers are using their balance sheet strength and technical ability to offer more capacity and more complex, multi-class, multi-year deals.

“Others are expanding into specialty lines and many have developed multi-channel capacity offerings seeking to use their underwriting expertise to deploy capacity on behalf of capital markets. Additionally, we have seen the rise of pooling arrangements that give smaller reinsurers the opportunity to access business they might not otherwise see in their local markets.”

The report also noted the following significant factors affecting reinsurance pricing at the beginning of 2014:

– 2013’s underwriting performance is not reflective of strong market pricing and restrictive terms and conditions, but rather from a paucity of natural and man-made catastrophes: 2013 natural catastrophes were half of what was experienced in 2012
– US property catastrophe loss free reductions of 10-25 percent
– European property catastrophe loss free reductions of 10-15 percent
– M&A activity is picking up going into 2014: larger companies are looking to manufacture growth through M&A and strategically challenged companies are beginning to accept that being acquired may be the best option for their shareholders, particularly those backed by venture capital funds