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January Renewals Show Fragmented Response to Losses as Capacity Holds Firm

Source: A.M. Best

Posted on 17 Jan 2012

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As details of the January reinsurance renewals emerge, ample capacity remains in place despite the huge catastrophe losses of 2011, and brokers are finding that catastrophe activity is still the only force driving rate changes, despite economic turmoil and uncertainty in financial markets in Europe and elsewhere.

In its January 2012 renewals report, "Catastrophes, Cold Spots and Capital," reinsurance intermediary Guy Carpenter & Co. described the reinsurance market as "transitioning," as reinsurers and buyers adjust to their specific experiences in a market that weathered a significant loss year without capital erosion.

"While the market has tended historically to respond to loss activity or model change in a relatively uniform fashion, there was a much greater degree of customization in reinsurers' responses at this renewal. As the level of sophistication increases, reinsurers are tailoring their pricing and capacity decisions to adhere to their own unique perspectives," Guy Carpenter said in its report. "This can lead to capacity shifts with some reinsurers increasing capacity in certain regions while others are pulling back. Additionally, pricing responses were varied due in part to loss activity but also to the very diverse treatment of the updated vendor catastrophe models."

Along with high levels of catastrophe losses, Jan. 1 renewals were also affected by catastrophe model changes and changes in reinsurer behavior, said David Flandro, global head of business intelligence for Guy Carpenter. There was a 9.5% average increase in global property catastrophe rates at Jan. 1, he said.

"We also saw rates up in marine and energy and in U.S. property catastrophe, with smaller increases in U.S. casualty clash," said Flandro. "There was some action in Europe, but not much."

Average rates in the catastrophe-hit Asia-Pacific markets were up significantly, but within a very wide range, he added. Overall, 2011 was the second-biggest year for large catastrophe losses on record.

According to broker Willis Re's "1st View" report on January renewals, insured catastrophe losses topped $100 billion, of which more than 50% will be paid by the reinsurance market, making 2011 the second-costliest year on record for insured catastrophe losses.

"Of perhaps greater concern is the reality that the majority of this year's catastrophe claims arose from either unmodeled or inadequately modeled perils or territories," Willis Re said. "With ever growing emphasis on risk management, the results of 2011 are a sobering reminder for the global insurance industry of the limitations of the current state of our understanding of natural catastrophes. This realization has led some reinsurers to question the benefits of diversification, which is leading to capacity constraints in second and third tier catastrophe exposed territories."

This phenomenon was referred to by Guy Carpenter as "cold spots," a significant trend for 2011. In its report, Guy Carpenter said cold spots were exposures that were inadequately modeled and where the severity of losses was unexpected. These involved hits to globalized economic activity in unanticipated ways, including supply-chain disruptions caused by the tsunami damage that accompanied the March 11 earthquake in Japan and the floods in Thailand.

Guy Carpenter data found that global property catastrophe, along with marine and energy rates, were generally up 5% to 15% at Jan. 1. Aviation and aerospace rates were flat to down 5% and credit, bond and political risk covers were flat to down 20%. Various casualty lines ranged from up 5% to down 5%

"Jan. 1 this year was very different from the previous three or four years in that there was not a lot of agreement on which way rates were going, and that is where a broker really has to come in and show their meddle," said Flandro. Following the last big catastrophe year, 2005, "everyone went into 2006 renewals knowing there were going to be big rate increases," he said. Capital was tight then, but this year that was not the case.

"The fact that there was adequate capital in the sector to satisfy capacity demands, with sufficient competition to restrain pricing, that was a surprise to some, he said.

Flandro said there were three factors at play in this renewals season: the resilience of the reinsurance market, the ability of clients to differentiate themselves and the ability of clients and brokers to match client needs with the right reinsurers' appetite.

These were important factors as reinsurers were changing their behavior based on catastrophe model changes and buyers were changing their behavior based on catastrophe experience. "If there was a positive surprise, I suppose it is that the sector was able to respond and get the business done after such a high catastrophe year," said Flandro.

Rate increases also appear to have been mitigated by the fact that Guy Carpenter's clients and reinsurers "have really strengthened enterprise risk management practices since the last time we had a big cat year like this, in 2005," he added. That factor also contributed to the mitigation of price impacts.

Flandro said the economic turmoil now enveloping Europe is having some impact on primary insurers, particularly those in the "peripheral" countries such as Portugal, Spain, Italy, Greece and Ireland. But it is "hard to make the argument" that those conditions are having a wide-ranging impact on reinsurance buying behavior, he said.

The Guy Carpenter European property catastrophe rate-on-line index is up 2.5% within a range of 0 to 5%, said Flandro. The Guy Carpenter U.S. index is up more, indicating that rates are still driven by catastrophes, he said.