Posted on 23 Jun 2009
In a global reinsurance market that should be hardening in favor of reinsurers (given nervousness about catastrophic events, climate change, professional liability and other costly threats), other kinds of uncertainty seem to be pulling in the opposite direction.
Those uncertainties include turmoil in capital markets that makes it difficult to predict the price and availability of capital, regulatory changes looming everywhere (especially in the United States and Europe) and volatile currency exchange rates that can upset the profit calculations of international companies.
Reinsurers are in a bind. Their clients, the primary insurers, have been damaged by underwriting and investment losses and should be in need of greater reinsurance cover. But pricing for such cover is held back by factors related to the recession -- primary insurance buyers are cutting back on purchases, high-cost capital forces primary insurers to trim their budgets and competition is rising in insurance lines that should have seen the greatest pricing gains.
While reinsurers would like to raise prices in line with tight capacity and anemic investment earnings, the underwriting factors that would traditionally prop up price increases are not holding up under the weight of wider financial factors.
Where Are We?
The global reinsurance market's critical negotiating season leading up to Jan. 1 renewals will kick off at Rendez-Vous in September, but as reinsurers and insurers head into Monte Carlo, they may well be less certain of the ground they stand on than in any season in recent memory.
Financially, reinsurers and primary insurers don't appear to have any leverage over each other as both sides have been hammered by investment losses since the global recession took hold last year. That puts a premium on, well, premiums, or underwriting performance. But here too, recessionary pressures and currency volatility can throw off the best of underwriting results.
The currency effect can be seen among Lloyd's reinsurers, where the deprecation of the British pound against the U.S. dollar since mid-year 2008 has created problems for Lloyd's reinsurers with a lot of dollar-denominated business. About 60% of Lloyd's total business is written in U.S. dollars, while capital requirements have to be met in British pounds.
While market capital was up slightly in sterling terms for 2009, capacity fell by about 24% in U.S. dollar terms. The outlook for pricing has improved in recent months as the pound regained some ground, but volatility is still the worry as banking problems, government actions and a possible deepening of the recession all can send the pound plunging.
Catastrophe events are of course always a big potential factor affecting reinsurers, especially Atlantic hurricane activity. But uncertainties over government-backed hurricane pools and the weather itself mean the market will just have to wait and see what happens.
Hurricanes aside, it appears reinsurers this year may be more at the mercy of the global financial crisis than anything else this year, and hence less in control of their own fates. The crisis has had a "considerable effect" on reinsurers' capital positions, which were down by 15% to 20% coming into 2009, according to Andrew Appel, chief executive of reinsurance broker Aon Benfield.
This impact was "far greater" than any catastrophe loss in 2008, Appel said told BestWeek Europe. How reinsurers fare at Monte Carlo will likely have as much to do with what happens in financial markets and government circles as anything else.