Cedents took advantage of a buyer’s market. Many 2008 renewals closed late as cedents held out for lower rates in the continuing soft market. Reinsurers were rewarded not only with lower rates, but often smaller lines. The absence of large catastrophe losses was a key factor in the softening of reinsurance markets. Barring large catastrophe losses in 2008, the downward drift in rates is expected to continue through 2008 and into 2009.
According to the Guy Carpenter World ROL Index, prices are down approximately 9 percent on average worldwide. Conditions appear to be the direct result of excess supply, fueled by strong profits and low losses. The situation could have been much different, though. Frequency of catastrophes was high, but the industry was spared losses through several near misses.
Despite excess supply, capital market capacity continues to be attracted to the sector by the lack of correlation with other sectors, volatility and low entry barriers. USD7 billion of publicly disclosed issuances in 27 transactions made 2007 the most active year in the history of the catastrophe bond market, setting a record for the third year in a row. This record volume represented a 49 percent increase over the previous record performance of USD4.7 billion in 2006, and a 252 percent increase over the USD2 billion placed in 2005.
Capitalization of the Bermuda Reinsurance Composite increased by 20.4 percent in 2007 to stand at USD129 billion at the end of 2007Q3 due to strong retained earnings. Consequently, reinsurers returned USD9.4 billion to shareholders in 2007, up nearly 200 percent from 2006. Buybacks abounded as well, particularly in Bermuda where more than USD2 billion in share repurchases were executed. Another symptom of excess supply was consolidation, as some
Bermudians took positions in Lloyd’s.
The collapse of the subprime mortgage market did not impact reinsurers as deeply as might have been anticipated. But, as the situation continues to develop, the full extent of the impact to reinsurers — and other affected industries — is not likely to be evident until 2009. While analysts expect the total damage resulting from the subprime mortgage meltdown to reach USD400 billion, Guy Carpenter estimates that the directors and officers (D&O) impact will be a more modest USD3 billion.
Low and falling interest rates reduce incentive to engage in the sin of cash flow underwriting, and the emphasis on managing capital is curbing reinsurers’ interests in taking on more inadequately priced business. External capital may also help flatten the peaks and valleys of the insurance cycle.