Chicago and London —Assuming only limited additional turbulence in the financial markets and no significant reinsured catastrophe losses, reinsurance intermediary and capital adviser, Aon Benfield, expects that the April through July reinsurance renewal market will be similar to the Jan. 1, 2009, market with U.S. hurricane and earthquake reinsurance pricing rising modestly, and pricing of other global natural perils holding firm.

However, according to Aon Benfield’s January 2009 Reinsurance Market Outlook, U.S. hurricane dominated programs, especially those exposed in the state of Florida will likely experience more significant price increases than others due to the potential inability of the Florida Hurricane Catastrophe Fund (FHCF) to fully finance its projected 2009 capacity in the uncertain municipal bond market. The loss of significant optional FHCF capacity or less confidence in its claims paying ability may greatly impact reinsurance renewals for Florida residential property insurers.

The financial and credit crisis, as well as the severity of 2008 hurricanes, impacted reinsurers, and it is estimated that reinsurers will be entering 2009 with 15% to 20% less economic capital than in 2008. Reinsurers sustained over $10 billion in ceded catastrophe losses in 2008. However, reinsurers have maintained the core capital required to underwrite risk.

"Reinsurers have demonstrated prudent capital management during the recent financial crisis, particularly when measured against other financial institutions. Despite significant investment related losses, equity capital remains at appropriate levels to support underwriting risk for reinsurers," says Bryon Ehrhart, CEO of Aon Benfield Analytics. "Moreover, reinsurers have very low debt leverage and, comparatively, very low total asset leverage, relative to banks who have struggled greatly during this financial crisis."

Capital markets, which have played an increasing role in the mitigation of insurance risk, have also suffered from the recent financial turbulence. However, the multiple-year structure of catastrophe bonds has helped cedents hedge capacity and price in the current firm market, according to the report.

The impact of the credit and liquidity crisis has been considerably worse for insurers than for reinsurers, according to Aon Benfield, which estimates that insurer capital will decrease by 25% to 30% during calendar year 2008.

"Insurers too have maintained the core capital they need to continue their businesses,” Ehrhart says. “They may need additional capital to grow if growth opportunities materialize. Despite the erosion of insurer capital, only in limited circumstances have we seen the more stressed balance sheets driving additional reinsurance buying. Where reinsurance pricing has increased, cedents have, in some cases, tried to offset increased reinsurance spending through higher retentions."

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