Reinsurance rates for 2011 are falling at the same or greater pace than traditional insurers and further softening of the market is to come, according to two industry reports.
For the second year in a row, global reinsurance property catastrophe rates for most lines of business declined for the Jan. 1, 2011 renewals, says risk and reinsurance specialist Guy Carpenter & Company, a member of Marsh & McLennan Cos. In a new report, The report, titled “Points of Inflection: Positioning for Change in a Challenging Market,” Guy Carpenter said that with few exceptions, the reinsurance industry will see further softening of the property reinsurance market in 2011.
“We expect 2011 to be a challenging year in terms of global macroeconomic issues and insurance underwriting,” said Bill Kennedy, CEO of Global Analytics and Advisory, Guy Carpenter.
Aon Benfield, the global reinsurance intermediary and capital advisor of Aon Corp., also reported in its “2011 Reinsurance Market Outlook” report, that until insurers and reinsurers start to show a reasonable level of traction of new demand, the reinsurance market outlook will continue to reflect a global softening.
Aon Benfield’s outlook for renewals at the important April, June and July 2011 dates is for softening at a pace similar to the January 2011 renewals. According to Aon Benefield, the January 2011 renewals are at the upper end of the range of softening projected in September 2010.
The Aon Benfield report said U.S. catastrophe programs that include hurricane exposure, which is the peak reinsured global peril, fell by 5 to 10 percent. Reinsurance rates for property and casualty per risk and per occurrence programs also fell. The report also noted that these programs saw terms and conditions including ceding commissions and other features changed to reflect a net price decrease of a further 5 to 10 percent.
The Guy Carpenter report also revealed further price softening for renewal rates in 2011. The report also estimates dedicated reinsurance sector capital to be $19 billion (11 percent) in excess of historical levels given risks currently assumed, with a defensible range of between $14 billion (8 percent) and $26 billion (15 percent).
The Guy Carpenter Global Property Catastrophe Rate on Line Index also dropped 7.5 percent in 2010, as moderate loss activity, high levels of industry surplus and other factors contributed to the decrease. Structures did not change significantly, with cedents buying amounts of cover comparable to last year.
The Aon Benfield study says 2011 renewals will decrease in all major catastrophe reinsurance segments in the United States, adding that for the first nine months of 2010 total global reinsurance capacity increased by 17 percent, reaching a record high of $470 billion by Q3 2010.
Aon Benfield said that the major developed markets in the United States, Germany, France and the U.K. are facing their second or third year-on-year of non life market-wide premium declines, even as gross domestic product figures return to sequential growth. “Therefore, both insurers and reinsurers now need to partner to create new demand generating products and innovations on existing products,” the report said.
The Guy Carpenter report added that the Solvency II regulatory capital regime is making a profound impact on the industry far beyond the European jurisdiction, and re/insurers worldwide should be prepared to identify, understand and manage these risks associated with Solvency II changes.
“With capacity at record levels, pricing has been reduced to allow reinsurance to be the most accretive form of underwriting capital for insurers in 2011,” said Bryon Ehrhart, chairman of Aon Benfield Analytics. “With insurer valuations at levels that don’t allow for much underwriting volatility, we believe cedents will benefit from executing reinsurance transactions that provide working capital in addition to tail capital relief.”
Source: Aon Benfield, Guy Carpenter