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Holborn Exec: 2012 Reinsurance Market Is "Brittle"

Source: A.M. Best

Posted on 03 Jan 2012

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More can go wrong with the reinsurance market in the year ahead than can go well, in the opinion of Paul Kneuer, senior vice president and chief reinsurance strategist for reinsurance broker Holborn Corp. In a word, the market is "brittle," he said.

Reinsurers are coming off a difficult catastrophe year, and he expects the industry to post combined ratios of 105 to 110 for year-end 2011. That would be the industry's first underwriting loss since hurricanes Katrina, Rita and Wilma struck in 2005.

Eight of the 25 largest reinsured events have occurred in the past two years, Kneuer said. Those events are: the March earthquake and tsunami in Japan, the Chile quake, three New Zealand quakes, plus floods in Thailand and Queensland (Australia), and the Deepwater Horizon oil spill.

"We know reinsurers that have lost money five quarters in a row. Many have lost money, or underperformed, four quarters out of six, and three out of the last five years," Kneuer said. "I think that will translate into a new attention to discipline, re-underwriting, and getting away from areas where reinsurers feel the risk is too leveraged or just not quantifiable. We think there'll be changes in the market."

Prices are hardening in the United States, and in "cold spots" -- areas that until 2010 had never really experienced large reinsurance losses, he said.

"What is different, especially in these cold spots, is insurance is much more prevalent and reinsurance on that insurance is much more expansive," Kneuer said.

For example, 50 years ago, a severe earthquake hit Chile, and "there was no impact on the industry at all. Chile didn't have an advanced economy, it didn't have much insurance take-up, and what was there was not heavily reinsured," he said.

That's a big contrast from the 2010 Chile earthquake, which caused about $14 billion in direct insured losses, including $9 billion to $12 billion in reinsured losses, according to Holborn's report, "The 2012 Reinsurance Market: Changing Tides."

With reinsured losses of up to $12 billion, Holborn estimates the 2010 Chile quake is the fourth-largest reinsured event ever, behind the 2011 Japan quake (more than $20 billion in reinsured losses); the Sept. 11, 2001, terrorist attacks ($20 billion to $25 billion in reinsured losses); and Hurricane Katrina in 2005 ($20 billion to $24 billion in reinsured losses).

He said it's likely that reinsurers have not fully reported losses from the Japan quake, the New Zealand aftershock and the Thai floods yet.

Those big non-U.S. losses may not have a direct impact on U.S. reinsurance prices, Kneuer said. "It's not going to be that the hip bone is connected to the leg bone, and something that happened in Thailand therefore is going to impact Oldwick, [N.J.]" he said.

But while many of the largest catastrophe losses of 2011 happened outside of the United States, the United States saw a number of extensive tornadoes, wind and hailstorms. One U.S. event never made headlines, but resulted in $1 billion in insured losses in the Midwest. "There were no tornado clouds, no hail, just 100 mph winds," Kneuer said.

Primary writers with losses big enough to trigger their reinsurance contracts in 2011 can expect to see higher reinsurance prices in 2012, he said.

"Many contracts have had claims to their first or second layer of catastrophe protection. Contracts with losses will be paying quite a bit more," Kneuer said.

Changes in catastrophe models is another driver of the market, he noted.

Florida, a significant zone for reinsurers, saw price increases of 20% among some reinsurance layers in 2011, Kneuer said.

Florida is the single-largest commitment of reinsurance capacity for the industry, about $80 billion, Kneuer said.

Other areas where capacity is stressed include the U.S. Northeast and Midwest; quake-prone Southern California and Tokyo; plus the United Kingdom, which has seen some significant windstorm activity in recent years, he said.

"Reinsurers tend to have less capacity to put up, and where there's more demand, the tension generally results in harder market prices," Kneuer said.

Other factors likely to drive the market include the restructuring of the Euro zone, plus troubles with some foreign debt, which could cause large swings in capital levels for some reinsurers, according to the report.

Insured earthquake claims reached $47 billion in 2011, making this year the highest ever recorded for insured quake claims, according to Swiss Re's latest Sigma report.