Posted on 10 Aug 2010
Despite a catastrophe-plagued first half of the year, reinsurance rates continued to soften in 2010, leaving those in the reinsurance industry to wonder: What will it take for the market to harden, and when might that happen?
"If I had a pound or dollar for everyone who has asked me that question," said Chris Klein, managing director at reinsurance broker Guy Carpenter. July 1 U.S. property catastrophe renewals fell on a risk-adjusted basis about 10% to 15%, Klein said.
Aon Benfield estimated catastrophe program costs decreased by 10% to 20% in the United States at July renewals. "Global reinsurance capacity remains at record high levels, and its growth continues to outpace the growth in demand from cedents," Aon Benfield said in its July 1 reinsurance market outlook.
Also, there was a 38% increase in the available capacity of U.S. national catastrophe programs at July 1. Insurers only purchased about 85% of the reinsurance capacity offered, down from 93% of capacity offered last year, Klein said, noting "It is indicative of excess supply.”
In non-catastrophe U.S. property risk, rates fell 5% to 10% for programs without losses. Programs that had experienced losses saw prices firming by 2% to 7%, Klein said.
The number of global natural catastrophes in the first half of 2010 has more than doubled since 1980, and insured losses for the first half of 2010 were $22 billion, more than double the first-half average of the past decade, according to Munich Re. From January until the end of June, 440 natural catastrophes were registered, which is the second-highest figure for this period since 2000. Overall losses for the first six months were $70 billion, which already is more than the total for all of 2009, and is well above the first-half average for the past 10 years.
The costliest natural disaster for the year as of August press time was the February earthquake in Chile, which caused $8 billion in insured losses, and $30 billion in overall losses. In terms of Munich Re's loss burden, the earthquake was the third-largest loss in its history, after the attack on the World Trade Center in 2001 and Hurricane Katrina in 2005.
In addition to natural catastrophes, the offshore energy industry was hit with the Deepwater Horizon oil rig explosion, which is turning into one of the most expensive claims ever in the offshore energy sector. For Munich Re, it was the largest loss event in the second quarter.
But despite significant claims, the reinsurance industry was still flush with cash in July. "It's an over supply," said James Vickers of Willis Re. "The bottom line is there's too much capacity in the market."
Set the first-half claims against the size of the industry's surplus "and the spectacularly good result that they enjoyed last year, and it's not enough to turn anything," Vickers said.
Rates did harden in specific areas, such as in Latin America as a response to the Chile earthquake. "Our experience for treaty excess-of-loss and facultative risk was in the range of 50% to 70% increases on renewals, just for Chile," Klein said. "Outside of Chile, capacity continued to be readily available, and indeed, there was new capacity coming in which put some pressure on rates."
In marine energy excess-of-loss, rates increased by 10% to as high as 30% for a Deepwater-type risk, Klein said. "We think the Deepwater Horizon is a market-changing event in the marine sector," Klein said. "It's not so much the quantum of it. Estimates of the loss range from $500 million to $650 million, but it's the associated liability and business interruption, which have a potential to escalate to $2.5 billion to $3 billion."
Klein said Guy Carpenter expects to see increased demand from reinsurers for transparency on future renewals in the energy arena.
Vickers said the U.S. casualty business could drive the turn. "When that line of business goes cash-flow negative, we will see a turn," Vickers said.
But for now, the market is quietly waiting.
The ample capacity in the reinsurance market indicates "the industry is likely to extend the soft phase of the underwriting cycle, barring some industry-altering event(s)," A.M. Best Co. said in a July 5, 2010 special report, "U.S. P/C Industry Posts First-Quarter Profit Despite Surge in Catastrophes."
"We are some way off from seeing any turn," said Willis Re's Vickers. "I think we will bumble along a bit."
Every summer, "everyone seems to sit there and wonder if the winds are going to blow, are we going to get any major hurricanes," Palmer said. "August and September are active times for windstorms. If we go through another season without winds, we'll continue to have a soft market."