The report, Remarkable Recovery, highlights that insurer and reinsurer capital increased dramatically from the lows experienced in March 2009, and that the January 1 catastrophe reinsurance renewals were focused on rate decreases in the market’s peak zones of U.S. hurricane and U.S. earthquake.
Rate on line (ROL) decreases were in line with Aon Benfield’s “light” catastrophe season scenario published in September 2009, which stated that rate decreases for these perils, adjusted for changes in exposure, ranged from -5% to -15%. The ROL decreases seen at January 2010 renewals were very similar to the ROL increases observed on January 2009 business.
Capacity for the global catastrophe reinsurance market has been restored to near its all time peak of December 2007, and is meaningfully higher than the levels witnessed throughout the January 2009 renewal season.
Global reinsurer capital, which drives capacity and price, increased by 16.6 percent through September 2009, likely fully recovering from the 16.9 percent capital decrease experienced in 2008 by the end of 2009.
Aon Benfield’s outlook for the April, June and July renewal seasons reflects the firm’s expectation that the pace of reinsurer capital growth will decrease, due to share repurchases and more stable investment prices. The reduced pace of reinsurer capital growth is still likely to outpace the growth in insurer demand for reinsurance. Therefore Aon Benfield forecasts continued softening over these upcoming renewal periods, assuming no significant reinsured catastrophes occur prior to final negotiations.
Andrew Appel, Chief Executive Officer of Aon Benfield, said: “Aon Benfield continues to redefine the role of a reinsurance intermediary and capital advisor by providing and publishing forward-looking expectations months in advance of key renewal dates. Our size and unmatched level of investment on behalf of our clients allows us to provide this type of advocacy and advice. We believe our insight on risk, foresight, and understanding of the market creates better outcomes for clients of our firm. This level of advocacy has helped Aon Benfield work with clients to develop placement strategies to maximize the capital benefit for their reinsurance spend.”
Other major reinsurer catastrophe zone exposures such as European windstorm, flood and earthquake are reinsured for substantially lower margins than U.S. peak zone exposures. Rates achieved tended to reflect experience, and changes in exposures and modeling, rather than being tied to fluctuations in reinsurer capital. Layers impacted by European windstorm Klaus generally saw experience-based ROL increases, while unaffected layers generally held ROLs stable or were reduced by as much as 6 percent.
Bryon Ehrhart, Chief Executive Officer of Aon Benfield Analytics, said: “At January 2010 renewals, reinsurers showed markedly less anxiety than last year and were more focused on gaining the largest possible signings on their reinsurance program authorizations. The market is again competitive as capacity growth outpaced demand growth, and the global catastrophe reinsurance market softened; however, the market is not soft. Renewal rates reflected a disciplined view by reinsurers on the balance of risk and return on capital deployed. Reinsurers had the necessary capacity to renew all their cedents’ programs, but could also maintain higher levels of capital if reasonable demand were present.”
Aon Benfield estimates that significant reinsurer capital will not be deployed during the January 2010 renewals, and forecasts that significant reinsurer share repurchases in 2010 will fall in the range of USD10bn to USD15bn. The growth of government sponsored insurers and reinsurance-like entities continues to erode the opportunity for private reinsurers to deploy capacity.
Casualty and specialty insurers continued to benefit from an abundance of reinsurance capacity. Experience-based rates were the main driver behind most of the renewal pricing, and continual decreases in loss frequency paired with reasonable increases in loss severity meant that insurance and reinsurance rates per unit of exposure continued to decrease.
In some lines, such as directors’ and officers’ liability, there have been historical differences of opinion between insurers and reinsurers over original rate sufficiency. Reinsurers have substantially erred on the side of safety and priced or structured themselves out of a material segment of casualty business.