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Willis: Overcapacity in Reinsurance Market Keeps Rates Down at January 1 Renewals

Posted on 03 Jan 2011

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Overcapitalization in the reinsurance market continues to gradually push rates downwards with price reductions at the January 1, 2011 reinsurance renewals averaging between 5% and 10%. This assessment of the state of the marketplace comes from the latest renewals report by Willis Re, the reinsurance broking arm of Willis Group Holdings, the global insurance broker.

Titled "Keep Calm and Carry on," the Willis Re 1st View report says that despite the continued softening and the worst ever first quarter for natural peril losses on record, the global reinsurance market has emerged from 2010 relatively unscathed, aided by recovering investment positions and continuing strong reserve releases.

According to the report, reinsurers’ 2010 underwriting results are lower than the exceptional ones achieved in comparatively loss-free 2009, but they are much better than initially feared after the disastrous first quarter. With the industry overcapitalized, Willis Re anticipates that reinsurers may seek to implement more aggressive capital management strategies through share repurchases, dividend payments and other similar measures.

Findings in the Willis Re report point to a challenging 2011 for the global reinsurance market with strong premium growth in emerging markets proving insufficient to offset continuing sluggish premium growth in the mature markets. According to the reinsurance broker, the pricing gap in most classes between reinsurance and primary business shows no signs of narrowing. As a result, Willis Re says that primary carriers are purchasing less, particularly in casualty lines, and reinsurers are seeing reduced premium volumes.

Other renewal trends highlighted in the report include:
    •    Despite predictions to the contrary, there is only limited evidence at the January 1 renewals of forthcoming changes in insurance regulation in non-U.S. markets bringing new opportunities for reinsurers.
    •    Updated catastrophe models showing dramatic changes in modelled loss outputs are presenting an increasingly common challenge. In particular, the forthcoming RMS Version 11.0 release for U.S. Hurricane, with its revised treatment of inland losses, is resulting in substantial increases in modelled loss outputs for many carriers and a corresponding elevation of reinsurers’ capital charges.
    •    Unlike most other classes, pricing for Marine has been flat. Additionally, although the ultimate loss to the global reinsurance market from the Deepwater Horizon spill still remains unclear, marine accounts which include energy exposures and pure energy accounts are seeing significant rises with some prices increasing by more than 30%.
    •    The third and fourth quarter of this year saw a dramatic increase in new deals in the catastrophe bond market. 2010 has seen USD 4.8 billion of new natural catastrophe bond capacity issued compared to USD 3.4 billion in 2009 and USD 2.7 billion in 2008. At year end, outstanding natural catastrophe bond amounts total USD 12.2 billion, roughly in line with the 2009 figure of USD 12.3 billion.
Commenting on the conclusions of the report, Peter Hearn, CEO, Willis Re, said, “The global reinsurance industry faces tough prospects for 2011. Thin investment returns and declining back year releases provide little cover for declining underwriting returns. In such an environment, any shock to reinsurers’ capital base, either through underwriting losses or other capital events, is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear.”

About Willis Re

One of the world's leading reinsurance brokers, Willis Re is known for its world-class Analytics capabilities, which it combines with its Capital Markets and Reinsurance expertise in a seamless, integrated offering that helps clients increase the value of their businesses. Willis Re serves the risk management and risk transfer needs of a diverse, global client base that includes all of the world's top insurance and reinsurance carriers as well as national catastrophe schemes in many countries around the world. The broker's global team of experts offers services and advice that help clients make better reinsurance decisions, access worldwide capital markets and negotiate optimum terms. For more information, visit