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FTSE 350: Insurers grapple with pricing pressure

A glut of capital against a benign claims backdrop is putting insurers' premium rates under pressure and driving takeover speculation
January 29, 2015

With few costly catastrophe events in 2014, the non-life insurance sector benefited from another year of low claims. According to insurance broker Aon Benfield, the global insured loss in 2014 came in just below $39bn ($26.6bn). That's 20 per cent less than the 2013 tally, which itself was low by historic standards, and modest indeed compared with the 2011 total loss of around $130bn. Even last year's Atlantic storm season ran out of puff: 2014 was the quietest period for hurricanes since 1997.

But that benign claims backdrop is a doubled-edged sword. It's good news for short-term earnings, but it also leaves companies flush with capital and tempted to compete for business by cutting premium rates. Another factor is the influx of new capital into the sector from such sources as hedge funds and pension funds, which is also acting as a catalyst for pricing pressure. In an era of low interest rates, this reflects investors' search for yield, which has drawn them to less traditional asset classes.

Several years of such conditions are now taking a heavy toll on pricing - especially for catastrophe-exposed business. Insurance broker Guy Carpenter's reinsurance review revealed that its global rate index had fallen 11 per cent in January's renewals. "The continued lack of demand and oversupply of capital can only keep driving prices down," notes this month's renewals report from rival broker Willis Re. That doesn't help brokers such as Jardine Lloyd Thompson (JLT), either, as their commissions are usually linked to rates.

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