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.
Regarding the impact the softer reinsurance market could have on the primary commercial market—which already has seen some moderation in rate increases—Stuart Hayes, senior consultant at 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 the primary market softening."
In the most recent CFO survey, nearly all respondents (97%) say they use traditional reinsurance, while most insurers are not 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," says Towers Watson.
In a statement, Hayes says, "Many fresh sources of capital are seeking investments that are uncorrelated to their existing investment holdings.…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 say there is a need for consolidation among reinsurers, and just 24% think 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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