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With such a dent to re/insurance capital (more than
$60 billion above the losses from hurricane Katrina
in 2005), rates were expected to harden considerably.
The loss of capital was expected to restrict reinsurance
capacity, particularly for capital-intensive lines of
business at a time when demand should have been
up. While property lines hardened at the January 1
renewals, with price hikes of up to 30 percent to 40
percent for loss-suffering programmes in the gulf of
Mexico, casualty lines remained soft and other classes
hardened marginally. Overall increases were just eight
percent, according to the guy Carpenter World rate
on line Index.
sides. “There are also some insurance companies whose balance sheets are distressed as well,
Subsequent renewals have continued this pattern,
so theoretically, you’d expect to see an increase in demand for reinsurance to provide relief
with a mismatch between short-tail and long-tail lines
to solvency,” explains Klein. “Against that is the fact that we’re in recession and people in
of business (with d&O, E&O and financial institutions
recession tend to buy less insurance.”
proving the exceptions and seeing substantial
hardening), and a growing gap between rates in the
Klein points to clear signs of a serious recession and its impact on the industry. net premiums
primary and reinsurance markets. “At January 1, global
written for US property casualty insurers were -1.8 percent in 2008 and -0.4 percent in 2007,
catastrophe prices were up about eight to nine percent
according to A.M. best. “That is the first time we have seen two consecutive years of premium
but clearly with hot spots,” says Chris Klein, global
decrease in the US since 1932 and 1933 [during the great depression], so you are having this
head of business development at guy Carpenter.
recessionary effect on demand.”
“Those areas that had been affected by losses are
seeing more significant increases, but overall, we didn’t Conning research is keeping its forecast of the property casualty industry at negative
see the spike in pricing that was observed after Katrina premium growth for 2009, citing the combination of recessionary conditions suppressing
and after September 11.”
premium exposure growth and continued price decreases in most commercial lines. “With
expected average investment returns and capital gains opportunities still somewhat limited,
Each of the key renewal points saw rate increases
insurers are likely to focus on underwriting returns,” says the report. “looking forward, we
for cat-exposed lines. The mid-year Florida book
renewals occurred earlier than usual in 2009 as fears
anticipate continued price-firming in personal lines and a turn in pricing for most commercial
over a lack of capacity drove cedants to finalise their
lines in 2010.”
programmes ahead of the renewal date. There, and at
While the losses in the second half of 2008 were substantial, most reinsurers entered last year
the July 1 renewals, price increases were in the range of
with strong balance sheets following two profitable years in 2006 and 2007. In the first half
10 to 15 percent for US property catastrophe, “which
of 2008, many players were returning excess capital to shareholders through share buyback
people seemed to be happy with—albeit perhaps below
schemes and inflated dividends. With a capital cushion at their disposal, investment and
expectations”, reveals Klein.
catastrophe losses later in the year proved mainly an earnings event and the industry emerged
in remarkably good shape at the beginning of 2009.
“US and bermuda reinsurers’ capital losses in 2008, albeit significant, were contained within
the excess capital buffers of most companies, enabling them to continue to write business in
One reason why the market has not hardened as
expected is the push/pull factors associated with recession.
2009 without the need to raise a significant amount of capital (one noteworthy exception being
Scarce capital and reduced capacity should drive up
Xl, which needed to raise $2.9 billion in equity capital to cover significant investment losses),”
reinsurance pricing, while primary insurers would be
says Standard & Poor’s in its mid-year north American reinsurance outlook.

expected to favour reinsurance as a form of contingent
Excess capital certainly helped the industry absorb last year’s losses, but the business model
capital in the midst of a credit crunch. however, insurers
is also highly credited. re/insurers remain conservative investors, instead taking risk on the
are struggling to realise additional premiums as their
underwriting side of the balance sheet. This conservatism protected many from the worst
insureds cut back on insurance spend.
of the financial market volatility. From an underwriting perspective, recent years have seen
These two aspects of the downturn are impacting the concerted efforts to improve modelling capabilities and risk management, with companies
reinsurance supply/demand equation from different looking to diversify and reduce their peak risk exposures. © / alejandrosoto
20 | INTELLIGENT INSURER | September 2009
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