Reinsurance rates are falling amid a glut of capital in the industry, according to reinsurance broker Guy Carpenter.

In its latest market report, Guy Carpenter said property-catastrophe reinsurance rates during January 1 renewals were down 11 percent, while prices for most other types of coverage also fell.

That spells bad news for Bermuda reinsurers, a large part of whose business involves providing catastrophe coverage for their insurance company customers.

The report attributes the fall to an oversupply of capital caused by a combination of reinsurers’ strong balance sheets, unusually low catastrophe losses and an influx of investments from the capital markets.

Guy Carpenter suggests that reinsurers will have to rethink their way of doing business to adapt to the changing marketplace.

In the Bermuda reinsurance sector’s major market, the United States, property-catastrophe rates plunged 15 percent, while Guy Carpenter reported a 10 percent fall in Continental Europe and a 15 percent drop in the UK.

Guy Carpenter said it was “the first renewal in over a decade where all major territories saw pricing move in the same direction, with some isolated exceptions”.

The industry had about $322 billion in dedicated capital at the end of 2013, a near-record level, according to the broker. Global insured losses were about $40 billion this year, $20 billion less than the ten-year average.

Reinsurance capital has been boosted by strong growth in insurance-linked securities (ILS), such as catastrophe bonds, which are structured to give extra capacity to reinsurer sponsors to enable them to write more business. Attractive returns and non-correlation with the financial markets have proved attractive to institutional investors, including pension funds.

This year has seen more than $7.2 billion of new global ILS issuance, according to sector-tracking website Artemis.bm, bringing the total value of ILS to more than $20 billion. ILS vehicles with a combined value of around $9.3 billion are listed on the Bermuda Stock Exchange.

“We have seen a surge in capital, through both alternative and traditional vehicles, over the last two years, which has transformed the nature of the reinsurance sector’s capital structure,” David Flandro, head of business intelligence at Guy Carpenter, said in the report.

The fall in rates comes at a time when reinsurers’ profits are already being squeezed by a prolonged period of ultra-low interest rates which has reduced investment income.

In its outlook for the coming year, Guy Carpenter states: “The excess capacity that now exists in the marketplace, combined with the sustained challenges of subdued economic and premium growth, persistently low investment returns, statistically higher long-term catastrophe loss trends and reduced reserve releases, are forcing (re)insurers to rethink old ways of doing business and to seek new opportunities through innovation.

“The potential emergence of reserve deficiencies in particular is likely to be a more important factor over the next five years. As highlighted by Guy Carpenter research, it is becoming increasingly apparent that the reserving cycle is approaching, or in some cases passing, an inflection point where accident year deficiencies may become more common than redundancies.

“This is particularly apparent in long-tail lines at present and emphasises the need to explore new and prudent growth avenues.”

Useful website: www.gccapitalideas.com