Willis Re blames overcapitalization for low rates

Overcapitalization in the reinsurance market continues to push rates down, with average price reductions of between five and 10% at the January 1, 2011 reinsurance renewals, according to Willis Re.

In a report called "Keep Calm and Carry on," Willis Re says that despite the continued softening and the worst first quarter for natural peril losses on record, the global reinsurance market has emerged from 2010 relatively unscathed, aided by recovering investment positions and continuing strong reserve releases.

According to the report, reinsurers’ 2010 underwriting results are lower than the exceptional ones achieved in comparatively loss-free 2009, but are much better than initially feared after the disastrous first quarter. With the industry overcapitalized, Willis Re predicts more aggressive capital management strategies through share repurchases, dividend payments and other similar measures.

Findings in the Willis Re report point to a challenging 2011 for the global reinsurance market with strong premium growth in emerging markets proving insufficient to offset continuing sluggish premium growth in the mature markets. According to the reinsurance broker, the pricing gap in most classes between reinsurance and primary business shows no signs of narrowing. As a result, Willis Re says that primary carriers are purchasing less, particularly in casualty lines, and reinsurers are seeing reduced premium volumes.

Willis Re chief executive Peter Hearn said: "The global reinsurance industry faces tough prospects for 2011. Thin investment returns and declining back year releases provide little cover for declining underwriting returns. In such an environment, any shock to reinsurers’ capital base, either through underwriting losses or other capital events, is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear.”