FRANKFURT, Jan 6 (Reuters) - Reinsurance prices fell at the start of 2016 and are expected to remain under pressure in the coming months, though the pace of decline is moderating, reinsurance brokers said.
Reinsurers, which help insurance companies shoulder the cost of big claims such as hurricanes and earthquakes in exchange for part of the premium, have been struggling to maintain their pricing power in a multi-year price decline driven by an over-supply of reinsurance capacity and weaker demand from insurers.
A lack of big damage claims that normally enable reinsurers to raise prices and recover costs has also hurt.
“The continued scarcity of costly catastrophe losses and more than adequate capacity led to reinsurance pricing reductions, although there are signs the rate of descent is slowing as compared to 2015,” reinsurance broker Guy Carpenter said on Wednesday.
Both Guy Carpenter and peer broker Aon Benfield said the amount of capital available to write reinsurance business appeared to have stabilised, after years of increases.
Aon calculated global reinsurer capital at $565 billion at the end of September, down 2 percent from the end of 2014.
About 12 percent of this capital, or nearly $70 billion, came from “alternative” investors such as pension, hedge or sovereign wealth funds, whose presence in the market has helped drive down prices for traditional reinsurance companies.
Alternative capital was still growing, brokers said, with Aon predicting it would reach $120-$150 billion by 2018.
Big reinsurers such as Munich Re, Swiss Re and Hannover Re have been able to escape some of the effect of the “softening” in industry pricing power through their global presence, tailored reinsurance products and long-standing relationships with insurance company clients.
Many smaller reinsurers are being squeezed, however.
Broker Willis Re reported European property reinsurance pricing was down 5-15 percent and U.S. pricing was down 2.5-7.5 percent when insurers renewed their contracts with reinsurers in January.
“The hopeful forecasts for a ‘softening in the softening’ at the January 2016 renewal season have proved illusory in all but a few cases,” said Willis Re Chief Executive John Cavanagh.
Insurers were able to strike deals with reinsurers at favourable terms in January and increasingly were locking them in through multi-year contracts, a trend brokers predicted was likely to continue in the coming months.
The outlook for reinsurance buyers was bright, Aon Benfield said.
“Insurers are likely to find improvements in pricing terms and conditions that are similar to what we achieved for clients at January 1, 2016,” Aon said. (Reporting by Jonathan Gould; Editing by Mark Potter)