Downward Pricing Pressure on Reinsurers and Marine Classes Abates

Most reinsurers remain within their annual catastrophe budgets and don’t face any material capital impact as a result of Superstorm Sandy, according to “Reinsurers Clear the Sandy Hurdle,” the January 2013 renewals report from Willis Re. As a result, rates on property classes have stabilized and there will be no blanket rate increases at January 1, 2013, the company said.

According to the report, natural catastrophe losses for 2012 are half of 2011’s $120 billion in losses; international rates for property catastrophe business are risk adjusted flat to -5 percent; U.S. rates for property catastrophe are risk adjusted flat to -5 percent on loss-free accounts and +10 percent on loss-impaired accounts.

“In the absence of Superstorm Sandy, reinsurers would have found it difficult to resist buyer pressure for further concessions,” said Peter Hearn, chairman, and John Cavanagh, CEO, in the report’s opening letter. “As such, Sandy’s impact has helped to stabilize market pricing on an overall basis and reinsurers have largely delivered to their clients in terms of capacity and continuity.”

Superstorm Sandy had little impact internationally, and despite new capital and promising underwriting results for 2012, repercussions from the global financial crisis continue to influence conditions and pricing. Investment returns are dwindling as a result of low interest rates and primary companies in mature markets find growth difficult; larger primary insurance groups are restructuring how they buy reinsurance, Willis Re said.

According to the report, 2012 was difficult for the marine market, which endured one of its worst underwriting years in recent history, having suffered the Costa Concordia and Rena losses from 2011. With large losses coming from yachts and pleasure craft, general cargo, imported cars, specie and inland marine, Superstorm Sandy is expected to be the largest ever marine loss, the report said, and Jan. 1, 2013 marine renewals are especially late.

To mitigate rate increases, which are a minimum of +15 percent, even on loss-free offshore energy excess of loss contracts, many buyers have increased retentions on loss hit programs. The P&I market is experiencing a minimum of 10-percent increases with International Group Reinsurance program +40 percent; P&I clubs are passing on increased reinsurance costs via original general increases ranging from +7.5 percent to +10 percent.

Additional highlights from the report include:

• The global reinsurance industry’s capital base remains adequate and benefitted from new capital, particularly from long-term investors drawn to event risk as an alternative noncorrelated investment class

• Catastrophe bond issuance is a competitive environment, as third-party capital activity is accelerating and widening as investor demand outstrips issuer supply

• In longer tail classes, frequency and severity of losses continue to decline, and buyers continue to retain more

• Superstorm Sandy slowed any potential downward rate movement. Risk-adjusted pricing was flat in general, and clients are buying additional vertical cover and also are willing to take higher retentions to maintain the same spend, limits, retentions

• The U.K. motor excess of loss market has faced very difficult and late renewals with substantial changes to both terms and conditions driven by loss activity and capacity withdrawal

“Overall, the global reinsurance market has maintained a measured and increasingly client-centric approach by providing adequate capacity to buyers, together with an increasingly differentiated approach at a client- and class-specific level,” said Peter Hearn, chairman, Willis Re. “Final terms and conditions have, in most cases, been in line with client expectations, as reinsurers largely delivered on the undertakings they made in the run up to renewal.”