Willis Re: Overcapacity Keeps Renewal Rates in Reinsurance Down

December 31, 2010

“Overcapitalization in the reinsurance market continues to gradually push rates downwards with price reductions at the January 1, 2011 reinsurance renewals averaging between 5 percent and 10 percent, according to the latest assessment of the state of the marketplace for renewals reported by Willis Re, the reinsurance broking arm of Willis Group Holdings.

Titled “Keep Calm and Carry on,” the Willis Re 1st View report concludes that “despite the continued softening and the worst ever first quarter for natural peril losses on record, the global reinsurance market has emerged from 2010 relatively unscathed, aided by recovering investment positions and continuing strong reserve releases.

According to the report, reinsurers’ 2010 underwriting results are lower than the exceptional ones achieved in comparatively loss-free 2009, but they are much better than initially feared after the disastrous first quarter.

As a result of the industry’s overcapitalized state, Willis Re said it “anticipates that reinsurers may seek to implement more aggressive capital management strategies through share repurchases, dividend payments and other similar measures.

“Findings in the Willis Re report point to a challenging 2011 for the global reinsurance market with strong premium growth in emerging markets proving insufficient to offset continuing sluggish premium growth in the mature markets. According to the reinsurance broker, the pricing gap in most classes between reinsurance and primary business shows no signs of narrowing. As a result, Willis Re says that primary carriers are purchasing less, particularly in casualty lines, and reinsurers are seeing reduced premium volumes.

“Other renewal trends highlighted in the report include:
— Despite predictions to the contrary, there is only limited evidence at the January 1 renewals of forthcoming changes in insurance regulation in non-U.S. markets bringing new opportunities for reinsurers.

— Updated catastrophe models showing dramatic changes in modeled loss outputs are presenting an increasingly common challenge. In particular, the forthcoming RMS Version 11.0 release for U.S. Hurricane, with its revised treatment of inland losses, is resulting in substantial increases in modeled loss outputs for many carriers and a corresponding elevation of reinsurers’ capital charges.

— Unlike most other classes, pricing for Marine has been flat. Additionally, although the ultimate loss to the global reinsurance market from the Deepwater Horizon spill still remains unclear, marine accounts which include energy exposures and pure energy accounts are seeing significant rises with some prices increasing by more than 30 percent.

— The third and fourth quarter of this year saw a dramatic increase in new deals in the catastrophe bond market. 2010 has seen $4.8 billion of new natural catastrophe bond capacity issued compared to $3.4 billion in 2009 and $2.7 billion in 2008. At year end, outstanding natural catastrophe bond amounts total $12.2 billion, roughly in line with the 2009 figure of $12.3 billion.

Willis Re CEO Peter Hearn commented: “The global reinsurance industry faces tough prospects for 2011. Thin investment returns and declining back year releases provide little cover for declining underwriting returns. In such an environment, any shock to reinsurers’ capital base, either through underwriting losses or other capital events, is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear.”

Source: Willis Re

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