The World Catastrophe Reinsurance Market 2010 report finds that surplus capital in the reinsurance
market has been depressing prices, causing them to fall by 6 percent on average through the 2010 renewal season. Guy Carpenter estimates that the reinsurance market was overcapitalized by much as USD20 billion, or 12 percent, at the beginning of 2010. While this amount came down to approximately 8 percent by the end of June, reinsurers' excess capital continued to be the main driver of rate reductions at the 2010 renewals. If no market-changing event were to occur in the second half of the year, surplus capital is likely to remain the driving force behind continued rate softening at next year’s January 1 renewal, according to the study.
Available at www.gccapitalideas.com, the annual report provides details about catastrophic events in 2010, including the Chile earthquake and Deepwater Horizon oil spill, as well as trends in (and the outlook for) the global reinsurance marketplace. The report also discusses updates in the catastrophe bond market, the impact of changing regulations (including Solvency II) and developments in catastrophe modeling.
Chris Klein, Director of Reinsurance Market Management, Guy Carpenter & Company, said: "On the back of heavy losses in the first half of 2010, reinsurers were hoping to see an end to the soft market and for prices to rise. Our data shows that the high payouts generally were insufficient to turn prices. However, were a sufficiently large loss to occur later this year, there of course would be some impact on pricing and capacity.”
“A loss in the range of USD20 billion to USD30 billion likely would not result in significant rate
hardening, but would decrease capacity and help stabilize the market. Multiple losses in this range likely would bring about significant change as retention levels would be hit. A loss greater than USD50 billion could prompt an immediate rate correction."
David Flandro, Global Head of Business Intelligence, Guy Carpenter & Company, said: "Surplus capital continues to be a drag on pricing. Market conditions through the rest of 2010 will clearly be shaped by the extend to which reinsurer capital is eroded by loss activity. The outlook for the cat bond market will also be influenced by catastrophe activity in the second half of the year."