RATE STAND-OFF When the reinsurance community met in Monte Carlo for the annual
Rendez-Vous de Septembre, it was clear a rate stand-off was beginning, with reinsurance companies pushing for price increases, brokers divided as to the direction of the market and cedants hoping for a level-headed response. While everybody accepts that rates must go up for loss-hit accounts, there is a difference of opinion on whether they should increase for other classes and programmes.
The US has seen its fair share of catastrophe losses so far in 2011, but
Hurricane Irene was not the monster everyone had feared, and the severe weather losses in the first half of the year were more of an issue for the primary market than the reinsurance market. Tornadoes, floods and storms in April and May cost an estimated $15 billion, according to Aon Benfield, nearly three times the annual average for severe weather losses.
“The late-May stretch was highlighted by an outbreak that spawned a massive EF-5 tornado that destroyed a large section of Joplin, Missouri,” said Steve Jakubowski, president of Impact Forecasting. “The tornado led to 154 fatalities in the city, becoming the deadliest singular tornado event since the National Weather Service officially began keeping records in 1950.
“In addition, it is worth noting that the Tuscaloosa and Joplin events will go down as two of the costliest singular tornadoes ever recorded.”
Few of these high-frequency, low-severity losses went beyond their primary layers of protection, leaving insurers rather than reinsurers shouldering the burden. However, globally, reinsurers have been stung by natural catastrophe (nat cat) events.
In total, nat cat losses in the first half of the year—including the Japan
earthquake, Christchurch earthquake in February, floods in Australia and Cyclone Yasi—cost the industry around $70 billion. Losses for the US property/casualty industry in the first half are estimated at $27 billion (up $15 billion on the same period a year ago), according to rating agency A.M. Best, accounting for approximately 12.6 points on the combined ratio.
Insurance loss estimates from Irene, which worked its way up the Eastern
Seaboard on August 27 and 28, bringing extensive flooding to northern states including Virginia, New Jersey and New York, are currently between $2 billion and $6 billion. Had Irene not weakened before making its second US landfall in New Jersey, it could have caused a substantial storm surge as it moved up Chesapeake Bay.
“Irene was not a market-turning event as some people had been
anticipating,” says Robert Hartwig, president and chief economist of the Insurance Information Institute. “It simply turned out to be much weaker from an insurer property casualty loss perspective and total losses are likely to be in the $3 to $5 billion range—which would make it only about 10 percent of Hurricane Katrina losses.
“It may be that it’s even less of an event for reinsurers—because the
larger the event, the more severe the impact for reinsurers—so more of the loss will be retained by primary insurers.”
24 | INTELLIGENT INSURER | November 2011
While the new model release from RMS—version 11—has been hotly
debated, given its increased view of storm risk for areas inland from the coast, there are mixed feelings about its likely influence on pricing. Many cedants using RMS have seen their aggregate exposures increase. They can either hold more capital to write the same amount of business, buy more reinsurance protection, reduce how much business they are writing or opt to use other vendor catastrophe models.
While reinsurers argue that the new model release will cause people to look
carefully at their retention levels, with a resulting impact on demand and pricing for reinsurance cover in hurricane-prone states, brokers are adamant that they did not see this happen at the mid-year ‘Florida book’ renewals.
“ The perfect case for a global increase in rates would have been Katrina as everyone is in the same pool. So [given this theory] they should all have paid more after Katrina, and they didn’t.”
“Don’t expect insurance demand to increase significantly in spite of the model changes,” said Bryon Ehrhart, chairman of Aon Benfield Analytics, speaking at the broker’s Monte Carlo press briefing. “At mid-year, it was clear that reinsurers were trying to help Florida rather than hurt Florida. Florida drives the peak reinsurance peril and it depends on that Florida business, so it is not out to damage it with excessive price increases.”
He also doubted whether the $70 billion of catastrophe losses around
the world would be enough to turn the market on all lines of business, particularly given the fact these losses have been shared unequally amongst reinsurance players. “The perfect case for a global increase in rates would have been Katrina as everyone is in the same pool. So [given this theory] they should all have paid more after Katrina, and they didn’t.
“Reinsurance has got to be a much better business than it was this time
last year,” he added. “Why? Because the prices in Australia, New Zealand and Japan are tremendously better. Capacity is sufficient to supply the anticipated demand of customers.”
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