Wills Re's First View notes that property/catastrophe reinsurance capacity is a threat to portfolios: a surplus without much demand that is only creating stagnant sales and price competition. James Kent, President, Willis Re North America, says one problem is that reinsurance buyers in general are not increasing the reinsurance purchase limits that they buy.

Yet supply is up because the reinsurance industry has continued to provide strong return on equity (ROEs) over recent years, resulting in increased capitalization from retained earnings. Moreover, despite substantial cat losses in the U.S. and globally in 2010 and 2011, the last five years has been a relatively benign period for catastrophic events for the overall reinsurance market, Kent says. “Long-tail business has not produced the severity and frequency of losses that many were forecasting with reserve releases, adding to reinsurers' returns.”

The peak in supply is creating price competition because some of this overflow is making its way to the traditional market players: a trend that's likely to increase in the months ahead, as reinsurers look to extend their offerings to clients that are seeking alternative forms of property catastrophe cover, Kent says.

CAT RISKS

Companies are “challenged” to write business where the cost of transferring or bearing catastrophe risk is high, Heerde says.

Normally, when markets like Insurance Linked Securities and Collateralized Markets increase their appetites, the pricing of renewals on existing ILS and Collateralized Markets drops substantially.

“So if you have decreased cost with cat exposure, the underlying carriers can reflect that decreased cost in their risk appetite,” Heerde says. Basically, insurance companies can grow into a higher-risk catastrophe zone than they could before, giving them the option to evaluate underwriting in past exposed areas; that is likely to continue to happen, he says.

“We're encouraged by the impact for our clients, as we indicated, if the price points seem persistent (for the collateral markets). That is a big question,” Heerde says. “That could open the door for our clients to enhance their strategic initiatives and potentially grow in areas where they have actively avoided or tried to reduce exposure in before. That could be quite helpful for them.”

Willis Re is hopeful that if North American property cat pricing continues to fall, “We may see buyers utilizing savings to purchase additional protection,” Kent says.

Kent says most reinsurers did well in 2012, as a substantial portion of the losses incurred by Sandy were retained by the insurance market, not the reinsurance market. “It was a very manageable loss for insurers. Despite those challenges, reinsurers still produced good ROEs between 8 percent and 15 percent,” Kent says.

Another factor in less-than-anticipated reinsurance appetites is ongoing changes in primary market distribution models across all segments, which continue to concentrate premium dollars into a smaller set of reinsurance players.

As primary insurers become more sophisticated in pricing and selecting risks, they're also becoming more confident in retaining a larger portion of their business and foregoing reinsurance, says Tom McIntyre, a principal in KMPG's P&C actuarial practice, based in Hartford, Conn. He specializes in risk and capital management for insurers and reinsurers.

PREDICTIVE ANALYTICS

Increasingly sophisticated pricing analytics have combined over the last few years with slow growth during the recession, as well as catastrophe exposure changes from RMSv11, adding up to an appetite for reinsurance that is less than what it might have been, McIntyre says.

Some insurers are looking to streamline their reinsurer panels and place their reinsurance programs with fewer, larger reinsurance carriers, Kent says. A broad buyer of reinsurance may go with a larger, diversified reinsurer over a specialist because the larger firm can take a broader, overall corporate view on pricing and capacity, rather than viewing each placement on its own.

High-tech pricing models are also putting pressure on the small companies that might be the buyers of reinsurance, further thinning the herd.

“A chief actuary from a small company told me they don't have the size and scale to do predictive modeling,” McIntyre says. The company's growth in its private passenger auto business show that one-third of all new business in a recent period came from drivers aged 65 and older. “This was not something they were trying to do; they were being selected against.”