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Willis Re: Reinsurers Repositioning for Possible Market Turn as $48 Billion Losses Take Toll

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Posted on 30 Jun 2011

An “exceptional” run of natural catastrophes over the past 16 months has cost reinsurers approximately $48 billion and insurers $86 billion, says Willis Re, the reinsurance arm of global insurance broker Willis Group Holdings.

Off-setting the reinsurance losses, Willis Re reports that during the first half of 2011, share buy backs have been scaled down and US $1.2 billion of new capital has entered the industry through side cars and fresh equity as some reinsurers start to position themselves for possible reinsurance rate hikes.

The Willis Re 1st View Renewals Report for June/July 2011, titled, “Mixed Messages”, estimates that a string of natural catastrophes in the first quarter of 2011 has cost reinsurers in the region of 10 percent of their total shareholders’ funds at the end of December 2010.

Reinsurers are also contending with changes to some of the widely-used natural catastrophe models in the U.S., says Willis Re, with forthcoming new releases of European catastrophe models generating similar issues. The report highlights this as yet another challenge facing buyers as they seek to understand the impact of model changes on their capital management and performance strategies.

Writing in the foreword of the report, Willis Re Chairman Peter Hearn says, “Given all the variations in loss experience, model change, exposure change, structure change, capacity demand and geographical scope it is not easy to generalize about rate changes. The reinsurance market as a whole has reacted reasonably logically with a differentiated approach driven on a case-by-case basis.”

The Willis Re report found that outside of natural catastrophe classes, this differentiation in approach is clear with “Property risk excess of loss pricing movements driven by individual experience and a continued softness in longer tail Casualty classes, notwithstanding concerns over inflation and stubbornly low interest rates.”

Responding to rising speculation in reinsurance circles about what it will take to drive a harder market, Willis Re says that any event resulting in a further reduction of market capitalization will be the key to a market turn. The report offers some of the most likely triggers, including a major natural catastrophe or potentially, a more damaging series of medium-sized catastrophes, as well as a financial downturn or contagion arising from European debt issues.

Willis Re says that some industry insiders feel that in the absence of clarity around the final implementation of Solvency II and the impact of regulatory equivalence in markets outside Europe, it is premature to discuss market overcapitalization, as the new capital requirements have not yet been adequately defined.

Summing up the latest renewals season, Hearn says: “The reinsurance market remains in a state of uncertainty regarding its short-term future direction, but what is clear is that any turn in the market pricing cycle is unlikely to follow historic patterns. More sophisticated capital management techniques and greater transparency over profitable market niches are driving fragmentation of the cycle into territory-and class-specific cycles.”


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