The January renewal season demonstrated that market pricing for global property and casualty (P&C) reinsurance has yet to reach a floor, Fitch Ratings says. With current pricing levels that only barely exceed some reinsurers' cost of capital, further material price drops, or disorderly competition in the market, could lead to negative rating actions on P&C reinsurers.

Pressure on reinsurance pricing is partially fuelled by low catastrophe loss experience. The Atlantic hurricane season was quiet for a third consecutive year in 2015. Furthermore, there is abundant reinsurance capacity between and among traditional reinsurers and alternative capital sources. In addition, the sector faces flat to declining demand for reinsurance as insurance companies retain more risk and centralize reinsurance purchasing. In a positive change for pricing, the implementation of Solvency II on Jan. 1, 2016 created some added reinsurance demand for capital relief.

Based on broker and market reports, pricing continued to decline at the Jan. 1, 2016 reinsurance renewals, with US catastrophe reinsurance 'loss-free' pricing down 3%-8%. This reduction is similar to that experienced at the June/July 2015 renewals, although moderated from the 10%-15% decrease seen at Jan. 1, 2015. International property catastrophe rates deteriorated more than the US at Jan. 1, 2016, dropping 5%-15%, in line with declines at Jan. 1, 2015. Absent a significant loss event that reduces reinsurance capital, pricing is unlikely to turn upward.

Casualty 'loss-free' reinsurance rates were down 5%-10% at Jan. 1, 2016 and will likely continue to fall during the year. Competition within the casualty sector and specialty lines is driven by current segment profit margins and a desire to diversify in non-catastrophe lines. The deployment of alternative capital within the casualty sector is not expected to match that of the property market, reflecting reduced investor appetite for longer duration risks that are less easily modelled.

Reinsurance terms and conditions generally held steady, with ceding commissions stabilizing at the mid-to-low 30% level. However, multi-year property treaties remain available and it is difficult to fully ascertain changes in underlying treaty terms and conditions. In some cases cyber risk is being added to casualty coverage.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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