Many property and casualty CFOs agree with what large brokers, analysts and industry observers have been saying: alternative capital is holding down reinsurance rates, contributing to a market that is softer than the primary market.
In Towers Watson's sixth North American P&C CFO Survey, which included 29 CFO participants, 55% of respondents say the property reinsurance market is softer than the primary market, while 34% say the same is true for casualty business. The CFOs cited “the significant growth of insurance-linked securities and other alternative forms of reinsurance capital” as a primary reason, Towers Watson says.
Regarding the impact the softer reinsurance market could have on the primary commercial market, which has already seen some moderation in rate increases, Stuart Hayes, senior consultant, Towers Watson, says, “As reinsurance costs are a component of primary insurance prices, declining prices in the reinsurance market as a result of the influx of alternative capital could potentially contribute to a softening of the primary market.”
He adds, though, that there are other market forces that determine pricing in the primary market, such as “profitability, competition and the availability of more traditional forms of capital to the primary market….”
Hayes adds Towers Watson's previous CFO study on the state of the primary P&C market revealed the current hard U.S. primary insurance market is “projected to be relatively shallow and short-lived compared to prior hard markets, and the availability of reinsurance capital could be considered as one possible driver of this.”
In the most recent CFO survey, nearly all respondents (97%) say they utilize traditional reinsurance, while most insurers are not currently using alternative forms of capital to protect their business. “Twenty-seven percent are currently using, or look favorably on the use of, both insurance-linked securities, such as catastrophe bonds, and hedge fund-owned reinsurers,” Towers Watson says.
In a statement, Hayes says, “The opportunities in the risk-transfer market are just starting to be realized. Many fresh sources of capital are seeking investments that are uncorrelated to their existing investment holdings. With risk-transfer arrangements continuing to evolve, we anticipate P&C insurers hastening their participation in various structures across the risk-transfer spectrum, thus complementing their traditional reinsurance programs.”
Even with the excess capacity in the reinsurance market, only 21% of the CFO respondents feel there is a need for consolidation among reinsurers, and just 24% feel consolidation will take place in the next two years. Fifty-two percent, though, say a prolonged soft market could drive reinsurance-market consolidation in the future.
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