Insured losses for the first half of 2012 totaled $11 billion, declining dramatically from $76 billion for the same period last year. Consequently, pricing for reinsurance renewals has moderated and capital has continued to strengthen, according to “Strong Risk Assessment Focus amid Plentiful Capital during 2012 Renewals,” a briefing released by Guy Carpenter & Company LLC.
“Catastrophe losses have been relatively limited for the reinsurance sector to date in 2012,” said David Flandro, global head of business intelligence for Guy Carpenter. “As a result, we have seen a continued improvement in the sector's dedicated capital position, which has mitigated price increases. As we enter hurricane season, we will continue to track catastrophe activity, reserving and asset-side issues in our analysis of pricing trends for the remainder of the year.”
According to the brief, the Guy Carpenter Global Reinsurance Composite’s capital position increased 4 percent to $184.5 billion for the first quarter; pricing pressure also has been subdued, largely due to benign catastrophe activity, continued reserve releases and falling yields on high-grade fixed income securities. Those conditions are likely to persist until Jan. 1, 2013, according to the brief.
“In 2011, the industry experienced one of its most challenging years, due to the tremendous volume of catastrophe losses across the globe,” said Lara Mowery, head of global property specialty, Guy Carpenter & Co. “With light losses to date in 2012, July 1 property renewals are marked by disciplined underwriting amid plentiful capacity. Based on the impact of July increases in 2011 and available capacity, pricing trends have moderated.”
• The global property market saw unprecedented losses last year, however, entered 2012 in roughly the same capital position as the start of 2011. With a benign start to 2012, July 1 renewals show plentiful capacity and moderated pricing trends.
• In the United States, analysis to date indicates overall pricing for 2012 was up 6.5 percent over 2011. Reinsurers’ implementation of risk management changes brought about by global loss activity and new model version releases (particularly RMS v11) that impacted mid-year renewals in 2011 continued to have an effect through this year.
• In Latin America and the Caribbean, renewals generally continued trends seen at Jan. 1, 2012, renewals. Latin American catastrophe excess of loss business rates increased from flat to up 5 percent, while the Caribbean market experienced slightly higher increases between 3 and 7.5 percent.
• Property retrocession activity continued the trend toward the rate increases seen throughout 2012, particularly on loss-affected programs. The magnitude of these rate rises year-over-year was lower than those in earlier 2012 renewals due to the rate increases seen in Q2 2011.
Industry Loss Warranties and Catastrophe Bonds
• ILW prices did not change appreciably from the June 1, 2012 renewal.
• Catastrophe bond issuance has been particularly robust, with 15 transactions totaling $3.4 billion coming to market in the first half of 2012.
• Risk principal outstanding for the first six months of 2012 stands at $13.5 billion, a 113 percent increase from the same period in 2011. This is approaching the 2007 high water mark of $14 billion that followed an issuance surge after Hurricanes Katrina, Rita and Wilma.
Global Marine and Energy
• Primary rates on global marine and energy covers were flat for the July 2012 renewals.
• Pricing and attachment levels for marine ILW contracts increased, however, primarily driven by losses sustained from the Costa Concordia event (estimated at $1 billion)
• A notable change that marked the July 2012 renewals is the limited availability of retrocessional capacity.
• At July 1, the major risk sector of aviation reinsurance, including airline and aerospace covers, showed a marked reduction on pricing of 3 percent to 5 percent on like exposures.
• While the overall reinsurance market remains stable, the direct market saw significant rate reductions on all sectors of aviation, primarily due to over-capacity and the absence of significant losses since mid-2010.
• Capacity in credit reinsurance remained abundant.
• Credit reinsurance rates were flat which, when applied to a rising income base and exposure that are up approximately 20 percent, resulted in a marked reduction in a rate on exposure measurement.
• Overall, US casualty lines showed an improved underlying pricing environment, with rate increases across casualty lines.
• Commercial primary casualty pricing improved during the second half of 2011, with an acceleration of this upward trend in the first six months of 2012.
• Of all U.S. casualty lines, workers compensation showed the most evident rate hardening, while general liability rates were up slightly.
• In the UK, 2012 saw a flattening in original private motor rates after a sustained period of increase. Commercial rates in the region, however, continued to trend upward, with a year-on-year increase of 10 percent.
• Reinsurers in Australia and New Zealand were constrained in their efforts to increase rates to offset declines in investment income.
• Most programs in China experienced flat or minor decreases in pricing ranging from 0 to 5 percent.
Life, Health and Accident
• The market for medical reinsurance remains highly competitive.
• For personal accident catastrophe, excess capacity continued to push rates down and, in turn, alleviated most rate increase pressures.
• Although disability claims historically have been correlated with the economy, claims have held steady throughout the financial crisis until recently when, as a result of the persistent economic stagnation, claims incidence is up and termination rates are down across the industry.
• Regarding healthcare reform, most (re)insurers appear to be moving forward in a “business-as-usual” fashion amidst uncertainty over the U.S. operating environment.