Posted on 09 Jan 2009
According to the January 2009 Reinsurance Market Outlook issued on Thursday by Aon Benfield, one of the world's premier reinsurance intermediary and capital advisor, global reinsurance prices firmed for January 1, 2009 renewals and are expected to remain firm for the April through July 2009 renewals.
Assuming only limited additional turbulence in the financial markets and no significant reinsured catastrophe losses, Aon Benfield expects that the April through July reinsurance renewal market will be similar to the January 1, 2009 market with U.S. hurricane and earthquake reinsurance pricing rising modestly, and pricing of other global natural perils holding firm. However, U.S. hurricane dominated programs, especially those exposed in the state of Florida will likely experience more significant price increases than others due to the potential inability of the Florida Hurricane Catastrophe Fund (FHCF) to fully finance its projected 2009 capacity in the uncertain municipal bond market. The loss of significant optional FHCF capacity or less confidence in its claims paying ability may greatly impact reinsurance renewals for Florida residential property insurers.
Factors Impacting Supply and Demand
The financial and credit crisis as well as the severity of 2008 hurricanes impacted reinsurers and it is estimated that reinsurers will be entering 2009 with 15 to 20 percent less economic capital than in 2008. Reinsurers sustained over $10 billion in ceded catastrophe losses in 2008. However, reinsurers have maintained the core capital required to underwrite risk.
"Reinsurers have demonstrated prudent capital management during the recent financial crisis, particularly when measured against other financial institutions. Despite significant investment related losses, equity capital remains at appropriate levels to support underwriting risk for reinsurers," said Bryon Ehrhart, chief executive officer of Aon Benfield Analytics. "Moreover, reinsurers have very low debt leverage and comparatively very low total asset leverage, relative to banks who have struggled greatly during this financial crisis."
In addition, the report notes that the capital markets, who have played an increasing role in the mitigation of insurance risk, have also suffered from the recent financial turbulence. However, the multiple year structure of catastrophe bonds has helped cedents hedge capacity and price in the current firm market.
The impact of the credit and liquidity crisis has been considerably worse for insurers than for reinsurers. For calendar year 2008, Aon Benfield estimates that insurer capital will decrease by 25 to 30 percent. Mr. Ehrhart further commented: "Insurers too have maintained the core capital they need to continue their businesses. They may need additional capital to grow if growth opportunities materialize. Despite the erosion of insurer capital, only in limited circumstances have we seen the more stressed balance sheets driving additional reinsurance buying. Where reinsurance pricing has increased, cedents have, in some cases, tried to offset increased reinsurance spending through higher retentions."
"Aon Benfield believes it delivers more value to insurers by identifying changes to the reinsurance markets in advance of key industry renewal dates rather than merely reporting on the varied results of actual renewals following key renewal dates," concluded Mr. Ehrhart. "Our professionals work with each of our clients to help them understand how these global market factors will affect their property catastrophe reinsurance renewal. Factors such as insurer underwriting methods, data quality, capacity required, experience, and current modeled margin levels are all considered in order to help create the best result for our clients."
About Aon Benfield
Aon Benfield is the world's premier reinsurance intermediary and capital advisor, providing clients with integrated capital solutions and services. The company offers clients access to every traditional and alternative market in the world, through an international network of offices spanning over 50 countries and more than 4,000 professionals. Its worldwide client base is able to access the broadest portfolio of integrated capital solutions and services, world-class talent, unparalleled global reach and local expertise to best meet their business objectives. Aon Benfield is the industry leader in treaty, facultative and capital markets transactions.