Reinsurance Renewals Are Firming, Concludes Aon Benfield Report

January 9, 2009

Global reinsurance prices firmed for Jan. 1, 2009 renewals and are expected to remain firm for the April through July 2009 renewals, according to the January 2009 “Reinsurance Market Outlook” issued by intermediary Aon Benfield.

Aon Benfield said it 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, “assuming only limited additional turbulence in the financial markets and no significant reinsured catastrophe losses.”

However, the broker warned, U.S. hurricane dominated programs, especially those in 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 report says.

The impact on reinsurers of the financial and credit crisis and the 2008 hurricanes means reinsurers will enter 2009 with 15 to 20 percent less economic capital than in 2008, Aon Benfield estimates.

Reinsurers sustained more than $10 billion in ceded catastrophe losses in 2008, however they have nonetheless “maintained the core capital required to underwrite risk,” according to the report.

“Reinsurers have demonstrated prudent capital management during the recent financial crisis, particularly when measured against other financial institutions,” said Bryon Ehrhart, chief executive officer of Aon Benfield Analytics. “Despite significant investment related losses, equity capital remains at appropriate levels to support underwriting risk for reinsurers. 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, Aon Benfield said. However, the report maintains that the multiple year structure of catastrophe bonds has helped cedents “hedge capacity and price in the current firm market.”

Aon Benfield’s report also concludes that the impact of the credit and liquidity crisis has been “considerably worse” for insurers than for reinsurers and estimates that during calendar year 2008 insurer capital will have decreased by 25 to 30 percent.

But insurers are not in dire shape.

“Insurers, too, have maintained the core capital they need to continue their businesses,” Ehrhart said. “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.”

Aon Benfield’s 2009 Global Reinsurance Market Outlook report is available for download at: and

Source: Aon Benfield

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