While this change has mostly been caused by recent natural catastrophic
activity, the release of risk modelling company Risk Management Solutions’ (RMS) new US hurricane model has also caused some movement in the market. Early indications are that it could mean changes in results and this uncertainty made cedants hold their terms on rates.
Guy Carpenter says that the full implications for the June/July renewals
remain to be seen. But it acknowledges that the events in Asia have depleted the industry’s capital and any further events would certainly test the industry’s capital base.
“While the actual impact that first quarter losses will have on dedicated
reinsurance sector capital for the full year remains to be seen, many reinsurers’ 2011 natural catastrophe budgets have been exhausted, and a portion of the sector’s excess capital has been absorbed,” says David Flandro, global head of business intelligence, Guy Carpenter & Company.
“While any future significant losses in 2011 could put additional strain
on reinsurers’ capital, the industry is well positioned to deal with this scenario, given our estimates that total dedicated reinsurance sector capital currently ranges between $160 and $180 billion.
“The implications for the June/July reinsurance renewals are unknown
at this time. In the short term, we expect to see increased demand for reinsurance cover and share repurchases likely scaled back or suspended until a clearer picture emerges.”
Other brokers agree with Guy Carpenter. Towers Watson, in its review
of rates at the April 1 renewal season, says that only yet another major event would trigger a hardening of rates in the June/July renewals to the extent that occurred in 2006 after Hurricane Katrina. Prices have been steadily falling ever since.
“Absent another event, we do not foresee the same level of price increases
that we saw at the beginning of 2006,” says William Eyre, managing director of the reinsurance brokerage at Towers Watson. “The 2010- 2011 losses are widely believed to be more of a significant ‘earnings’ event rather than an impairment to capital.”
This sentiment is echoed by Willis Re, the reinsurance broking arm of
Willis. The broker says in its April 1 renewals report that the Tohoku earthquake will not be the catalyst that will bring about a hard market. However, the total tally of first quarter devastation, including the Japan, Chile and New Zealand earthquakes and the Australian floods, has accelerated the likelihood of a market-wide turn should reinsurers be tested again this year.
Titled Shaken and Stirring, the Willis Re 1st View renewals report found that
while there have been rate increases on natural catastrophe excess of loss of between 5 and 50 percent, the Tohoku and Christchurch earthquakes are not by themselves sufficient to drive up market-wide pricing. To trigger a hard market, there needs to be an additional accelerant such as another major natural catastrophe loss, inflation, the reversal of back-year reserve releases or wider financial issues impacting investment income and balance sheet strength, the broker says.
14 | INTELLIGENT INSURER | Summer 2011 The Willis Re report finds that the most immediate challenge for many
reinsurers is that the losses suffered to date in 2011 have largely exhausted their annual catastrophe loss budgets. In response, reinsurers are trying to proactively manage their underwriting results for the remainder of 2011 by applying rate increases in areas of natural catastrophe loss activity and tightly controlling their capacity deployment.
“While the financial strength of the reinsurance industry remains
remarkably intact in the wake of Tohoku, it can only withstand so many blows,” says Peter Hearn, chairman of Willis Re. “The reinsurance industry is on the cusp of change and a hard market may be only one more major event away. It could be something as dramatic as a catastrophic hurricane during the upcoming North Atlantic and European winter windstorm seasons or something more systemic like creeping inflation, but whatever the cause, reinsurers have proven their resilience and are gearing up for a bumpy ride over the remaining months of 2011.”
“ Throughout the recent, significant global events, reinsurance responded to the needs of global and regional insurers as intended, with material volatility shifted to reinsurers from the balance sheets and income statements of global and regional insurers.”
Willis Re notes that of the total 2010 catastrophe losses—approximately
$60 billion of insured losses to the global insurance industry in a 13-month period to March 2011—it is currently estimated that between $35 and $42 billion has been passed from primary insurers to reinsurers.
Reinsurers have been able to absorb these large losses due to their robust
capital position—a product of excellent underwriting results in 2009 and strong investment performances for both 2009 and 2010. But Willis Re warns that while reinsurers’ financial strength may be largely unimpaired, their financial flexibility could be impacted, resulting in less M&A and reduced share buy-backs and other excess capital management techniques.
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