Aon Benfield, the global reinsurance intermediary and capital advisor of Aon Corporation released its 2011 Reinsurance Market Outlook report, which reviews the trends experienced at the January 1 reinsurance renewals and analyzes specific challenges facing insurers and reinsurers in the year ahead.
The report, Partnership Renewed, contains updates by individual business line and region, and also focuses on key topical issues for global insurers and reinsurers that have an impact on reinsurance supply, demand and pricing. It also comprises sections on mergers and acquisitions and catastrophe bond activity, the global financial market and likely rating agency reactions to recent catastrophe model updates.
The report reveals that the partnership between insurers and reinsurers has been renewed, as reinsurers are now lowering rates at the same pace, or greater, than insurers. Both reinsurers and insurers are enjoying fully recovered balance sheets but quite limited growth in demand for their products.
The report cites that the major developed markets in the U.S., Germany, France and the U.K. are facing their second or third year-on-year of non life market-wide premium declines, even as gross domestic product figures return to sequential growth. Therefore, both insurers and reinsurers now need to partner to create new demand generating products and innovations on existing products. Until insurers and reinsurers start to show a reasonable level of traction of new demand, the report reveals the reinsurance market outlook will continue to reflect a global softening.
Aon Benfield's outlook for renewals at the important April, June and July 2011 dates is for softening at a pace similar to what the firm observed during the January 2011 renewals.
The January 2011 renewals are at the upper end of the range of softening that Aon Benfield projected in September of 2010. Following a U.S. hurricane season with no land-falling events and high investment valuations, reinsurers lowered rates at a slower pace than last January. U.S. catastrophe programs that include hurricane exposure, which is the peak reinsured global peril, fell by 5 to 10 percent. Reinsurance rates for property and casualty per risk and per occurrence programs also fell. The report highlights that these programs already substantially reflect the price decreases taken by insurers, saw terms and conditions including ceding commissions and other features changed to reflect a net price decrease of a further 5 to 10 percent.
The study reveals that Aon Benfield's September guidance for U.S. renewals was predictive, with the 2011 renewals seeing decreases in all major catastrophe reinsurance segments in the U.S. It highlights that for the first nine months of 2010 total global reinsurance capacity increased by 17%, reaching a record high of USD470bn by Q3 2010.
Dominic Christian, co-CEO of Aon Benfield, said: "Whilst negotiations around the USD60bn of externally transacted reinsurance premium renewing at 1/1 may be fairly described as being reasoned and assured, there has been on occasion real variability around program outcomes - treaty terms have remained robust, but pricing less homogeneous than for some time."
Bryon Ehrhart, Chairman of Aon Benfield Analytics, added: "Reinsurance performed well in 2010 for insurers. It absorbed underwriting volatility from significant insured earthquakes in Chile and New Zealand and maintained sufficient capacity for orderly renewals in those markets. With capacity at record levels, pricing has been reduced to allow reinsurance to be the most accretive form of underwriting capital for insurers in 2011. With insurer valuations at levels that don't allow for much underwriting volatility, we believe cedents will benefit from executing reinsurance transactions that provide working capital in addition to tail capital relief."
Meanwhile, Insurance-Linked Securities (ILS) volume increased by 44% in 2010, with annual catastrophe bond issuance reaching USD4.9bn compared to USD3.4bn in the same period a year ago.