The property retrocession market renewal customarily closes late and the 2010 season was no exception. Buyers generally prefer to wait to ensure that they have the best possible view of their own inwards portfolio exposures before proceeding to purchase. A late, speedy renewal is possible because of a number of factors including uniformity of required data; the relatively small size of the market; a quick execution period and a reduced number of buyers coming to market at this time of the year.

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A massive explosion at an under-construction power plant in Middletown, Connecticut, on February 7 badly damaged the structure and killed at least five people. Fire officials said the blast occurred during testing at the Kleen Energy Systems facility, which was 95% complete and due to come online this summer as the largest electricity generating plant in the New England region. Flames and smoke shot up from the 620-megawatt gas-fired facility when the explosion occurred and windows were blown out by the force of the blast. Some people living up to 30 miles (50 kilometers) away said their homes were shaken by the blast. Reports said parts of the plant were badly damaged and surrounded by debris, but other areas of the structure, its roof and its two smokestacks were still standing. Some nearby houses were also reported to have sustained some structural damage.

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Rates Retreat as Capital Rebounds: Global Reinsurance Renewals at January 1, 2010:  Reinsurance rates for most lines of business decreased at the January 1, 2010 renewal. The Guy Carpenter World Catastrophe Rate on Line (ROL) Index decreased by 6 percent in response to a swift and substantial recovery in the capitalization of the reinsurance sector. The combination of the rally in investment markets, much reduced catastrophe loss activity and recessionary effects on demand resulted in an excess of supply and increased competition. This was reflected in a slow renewal in which many contracts closed very late in the season as buyers sought to gain maximum advantage. The overall movements in pricing have also occurred against a complicated background of exposure adjustments, model revisions, program changes and other market noise.

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Lloyd’s: A Resurgent Market, Part I: Overview, Underwriting and Operating Performance:   Lloyd’s, poised to strongly capitalize on opportunities as 2009 began, saw its competitive position continue to strengthen during the year. The resilience of operating performance and capitalization to the very challenging economic environment of the past 18 months, coupled with a continued reduction in the number of legacy issues, has been rewarded. Market share gains, rating affirmations and continued strong investor interest prevailed.

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Solvency II:  CEIOPS Third Set of Advice, An Overview:  The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its final and third set of advice to the European Commission (EC) at the end of January. The advice notably excluded final advice on non-life underwriting risk.

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Risk Profile, Appetite, and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness:  Prior to the recent turbulence in the financial markets, insurers and reinsurers were increasing their use of Enterprise Risk Management (ERM) to make risk and capital management decisions. While this was driven in part by rating agencies and regulators, many carriers began to recognize the value of metric-based frameworks and capital models in evaluating their portfolios.

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Solvency II - Gearing Up for Tougher Capital Requirements:  The development of Solvency II continues to be one of the most significant regulatory developments for the insurance industry applicable to both primary carriers and reinsurers. European insurers are starting to focus now on the risk-sensitive regime they will face in 2012, especially on the impact of the risk-based quantitative requirements for measuring financial positions and capital adequacy.

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Nine Months 2009:  Guy Carpenter Global Reinsurance Composite:   The members of the Guy Carpenter Global Reinsurance Composite (GCGRC) saw their total net income more than double to almost $10 billion thanks to strong underwriting results and a substantial recovery in asset values.

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Capital

Well over GBP1 billion of new capital was deposited at Lloyd’s in the first half of 2009, largely to address the movement in exchange rates. Net capital resources rose by 11 percent over the six months to a record high of GBP16.9 billion, represented by severally-held members’ assets of GBP14.9 billion and mutually-held central assets of GBP2.0 billion. Underwriting leverage across the market has declined dramatically since 2001, partly reflecting the increasing sophistication of the risk-based capital-setting regime.

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1. Rates Retreat as Capital Rebounds: Global Reinsurance Renewals at January 1, 2010: Reinsurance rates for most lines of business decreased at the January 1, 2010 renewal. The Guy Carpenter World Catastrophe Rate on Line (ROL) Index decreased by 6 percent in response to a swift and substantial recovery in the capitalization of the reinsurance sector. The combination of the rally in investment markets, much reduced catastrophe loss activity and recessionary effects on demand resulted in an excess of supply and increased competition. This was reflected in a slow renewal in which many contracts closed very late in the season as buyers sought to gain maximum advantage. The overall movements in pricing have also occurred against a complicated background of exposure adjustments, model revisions, program changes and other market noise.

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2. 2009 Catastrophe Update: Global Insured Losses in 2009: 2009 has seen an impressive recovery from last year’s financial crisis and the uncertainty caused by losses from Hurricane Gustav and Hurricane Ike. This recovery has been driven by the easing of financial markets and low catastrophe activity. A very quiet hurricane season, coupled with relatively low losses for other weather-related events, meant insured losses reached USD24 billion in 2009(1), the lowest figure since 2006 and a significant fall from USD52.5 billion(2) in 2008.

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3. 2009 Catastrophe Update: Outlook for 2010: Predictions that the El Niño phenomenon is likely to persist through the northern hemisphere winter and into spring could have a significant impact on natural hazards worldwide next year. El Niño events have historically produced floods and drought in the more impoverished regions of the world such as southern Africa and parts of South America. Prolonged dry periods may occur in Southeast Asia, Southern Africa and Northern Australia during an El Niño event, while heavy rainfall and flooding have hit Peru and Ecuador in the past. In the United States, El Niño’s potential impact includes above-average precipitation in the south, with below-average rainfall in the Pacific Northwest and the Ohio and Tennessee Valleys.

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Overview

Lloyd’s, poised to strongly capitalize on opportunities as 2009 began, saw its competitive position continue to strengthen during the year. The resilience of operating performance and capitalization to the very challenging economic environment of the past 18 months, coupled with a continued reduction in the number of legacy issues, has been rewarded. Market share gains, rating affirmations and continued strong investor interest prevailed.

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Frank Achtert, Managing Director, Financial Intelligence Team
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The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its final and third set of advice to the European Commission (EC) at the end of January. The advice notably excluded final advice on non-life underwriting risk.

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The Guy Carpenter Asia-Pacific Climate Impact Centre, a joint initiative of Guy Carpenter & Company, LLC, the leading global risk and reinsurance specialist, and the City University of Hong Kong, has published a new paper on how thermodynamic factors influence the development of intense tropical cyclones around the world. According to the paper, thermodynamic factors (the conversion of different forms of energy such as sea surface temperatures, temperature outflow and tropospheric energy) affect tropical cyclone intensity differently in each of the world’s ocean basins. Tropical cyclones are defined as being ‘intense’ when sustained wind speeds exceed 110 mph (177 kmph), and the report indicates that thermodynamic factors have a particular influence on tropical cyclone intensity in the Atlantic basin.

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During 2009 the Aviation market suffered two significant losses. Colgan Air, a US regional carrier crashed on approach to the Buffalo, New York airport and Air France crashed over the South Atlantic. These losses, which significantly impacted the reinsurance market, together with other losses generally contained within insurers’ retention, prompted the direct market to increase premium and rating levels in the second half of 2009.

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In a market with generally healthy conditions for (re)insurers, property catastrophe rates declined an average of 10 percent but accounts with losses showed average increases of 15 percent. Casualty rates were flat while accounts with losses showed average increases of 10 percent. Rate changes on risk were flat to declining five percent for cedants with no losses. The marine line rates increased an average of 10 percent and average aviation rate changes were flat. Overall capacity increased with the arrival of new Bermuda entrants in the region and Lloyd’s entrants in Brazil. Competition for market share heated up between established players and the new entrants. The withdrawal of one notable player from the surety line reduced capacity in that line just as large engineering/infrastructure projects are commencing. Ceding commissions increased one percentage point on property and changes were flat on other lines. We see original rates softening further, so the market could present challenges to insurers and reinsurers in the future.

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