The first quarter of 2011 was challenging for reinsurers. Predicted as the industry’s most costly first quarter on record, the past four months produced insured losses from catastrophes in Australia, Japan and New Zealand and political unrest in the Middle East and North Africa. The earthquake and subsequent tsunami in Japan alone is likely to make the event history’s most-expensive insured loss outside of the United States—current modeled estimates predicted at an insured loss of between $12 billion and $30 billion.
These challenges were top of mind when global risk and reinsurance specialist
“The timing of the earthquake and tsunami in Japan with respect to this year’s April 1 renewal negotiations certainly slowed down the quotation process, as reinsurers’ expectations were impacted to different degrees,” says David Flandro, global head of business intelligence, Guy Carpenter. “While the actual impact that first quarter losses will have on dedicated reinsurance sector capital for the full year remains to be seen, many reinsurers’ 2011 natural catastrophe budgets have been exhausted, and a portion of the sector’s excess capital has been absorbed. While any future significant losses in 2011 could put additional strain on reinsurers’ capital, the industry is well positioned to deal with this scenario, given our estimates that total dedicated reinsurance sector capital currently ranges between $160 to $180 billion.”
While the implications for the June and July reinsurance renewals later this year are unknown, Guy Carpenter expects to see increased demand for reinsurance cover. At the same time, share repurchases are likely to be scaled back or suspended until a clearer picture emerges.
At the April 1 renewal, the U.S. property catastrophe market showed signs of being in transition, with renewal pricing roughly flat. Timing of these events in the marketplace helped create a status quo renewal environment, with reinsurers generally renewing at expiring terms.
“While factors in the marketplace have created an uncertain renewal environment at April 1, an abundance of reinsurance capacity was a critical element in companies’ ability to secure favorable terms and conditions in the 2010 and Jan. 1, 2011 renewals,” the report states. “Alternatively, constrained capacity going into the 2006 and 2009 renewal seasons contributed to the realization of rate increases at those renewals. The degree to which capacity is impacted by recent events ultimately will play a substantial role in the market’s position in the coming months. To this point, the April 1 renewals provided no indication that there is currently a capacity issue for U.S. catastrophe placements, as reinsurers continued to provide substantial authorizations.”
Key findings in other markets include:
JAPAN
• Companies renewed unchanged capacity for earthquake pro rata treaties, despite the occurrence of the Tohoku earthquake at a time when the renewal process was only partially completed. In most but not every case, ceding commissions on this business were reduced by up to 3% in order to achieve placement goals.
• For earthquake excess of loss covers, there was more of a mixed picture. Many of the larger programs, particularly the large mutuals, opted to extend their programs for up to three months, while the remainder opted for the usual 12-month renewal. Rates for renewing treaties varied from increases of 15% to 50%, depending on individual circumstances.
• Windstorm cat excess of loss rates increased by 3% to 10%, largely as a result of reinsurers honoring quotes given before March 11, 2011. There is limited data for programs priced after March 11, but rate increases for these buyers were likely greater than for those that went earlier.
• Renewal rates for personal accident excess of loss reinsurance were flat to an increase of 15%.
• Credit and bond treaties renewed with plenty of capacity available, while engineering pro rata treaties enjoyed smooth renewal.
AUSTRALIA/NEW ZEALAND
• The heavy catastrophe losses incurred over the past 12 months in the region led to some rate increases, although the introduction of annual aggregate deductibles and higher retentions helped offset this rise.
• Flooding in Australia in December 2010 and again in January 2011 has led to considerable debate with respect to flood as a peril, with coverage definitions varying widely between insurers.
REPUBLIC OF KOREA
• Many of the large property per event programs saw rate increases in excess of 15%, mostly driven by prior year rate reductions and overseas exposures.
• In contrast, the majority of per risk treaties continue to secure rate reductions, with renewals in the range of flat to 5% down.
• For property proportional treaties, renewal terms have been relatively unchanged from the previous year, with some requests for small improvements in terms, such as increased event limits and commissions.
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