Guy Carpenter Unveils Report on Jan. 1 Property Reinsurance Renewals

January 31, 2006

Guy Carpenter & Company Inc. reported the publication of Property Specialty Update – 1 January 2006 Renewal Season Overview, an in-depth report on the Jan. 1, 2006 property renewal season.

The study, which significantly expands on the property findings of Guy Carpenter’s recently published U.S. Reinsurance Renewals at Jan. 1, 2006, provides a detailed assessment of reinsurance renewals in Europe, Asia Pacific and the United States. The report covers the areas of property catastrophe, property risk excess of loss, proportional treaty, retrocession, rating agencies and modeling, catastrophe bonds and new market capital.

“The unprecedented catastrophe losses of 2005 were true ‘market changing’ events for the property segment, with substantial short- and long-term consequences for pricing and capitalization,” said Timothy Gardner, Global Leader of Guy Carpenter’s Property Specialty Practice. “They have led reinsurers to readjust historical catastrophe reinsurance ratings, which in their view had underestimated both the frequency and severity of hurricane activity. Rating agencies have also begun to reassess catastrophic risk and the capital required to support it, and this will continue to be a pressure point well into 2006.”

The report closely examines recent pricing trends, capacity availability and marketing issues surrounding the recent renewal season. In addition, it provides commentary on the recent actions of rating agencies and the probable implications for insurers and reinsurers as a result of their reassessments of catastrophe risk and loadings attributed to modeled losses.

Among the study’s highlights:

* Property Catastrophe – Preliminary estimates show prices rising for the first time in two years, to mid-1990s levels, with massive increases on some U.S. renewals. A reassessment of rating agency capital requirements, readjustment of catastrophe models and the rising cost of capital influenced pricing decisions, although there was no shortage of capacity.
* Risk Excess of Loss – Pricing changes in the per risk market were less substantial, however, a number reinsurers did seek to limit the amount of catastrophe limit provided on per risk treaties, with others excluding critical catastrophe in the renewal of worldwide risk excess of loss treaties.
* Pro Rata – For most reinsurers, this remains a less attractive line of business than excess of loss. In terms of both the number of participants and capacity, this segment of the market was relatively stable in 2005.
* Retrocession – Retrocession programs with U.S. exposures generally experienced a total loss in 2005. Consequently, Jan. 1, 2006 renewals saw limited capacity and relative price increases in the region of 100 percent. Reinsurers also sought to separate U.S. and non-U.S. coverages.
* Rating Agencies – In the wake of the 2005 hurricane season, rating agencies immediately downgraded a number of reinsurers. They have since been aggressive in instituting stricter capital adequacy requirements and new measurement standards for catastrophic risk.
* New Market Entrants – In reaction to the 2005 losses, $8.5 billion of new capital entered the market, anticipating rising reinsurance rates. Though they did not play a major role at the time of the Jan. 1, 2006 renewals, these new reinsurers are expected be a more significant factor later in 2006.
* Catastrophe Bonds and Alternative Risk Transfer – A record amount of nearly $2 billion of catastrophe bonds were issued in 2005, and this segment should continue to thrive in 2006. Meanwhile, the market for structured risk products remains challenging, with accounting and regulatory issues troubling buyers and sellers.

Property Specialty Update – 1 January 2006 Renewal Season Overview is available for download at www.guycarp.com.

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