Catastrophe reinsurance rates declined for the second year in a row. Price competition intensified as a result of abundant capital, lower than average catastrophe losses, and strong overall profitability. But, reinsurance rates are projected to decrease at a slower pace in 2009 than in 2008, as reinsurers face earnings pressure from a number of sources.
According to the Guy Carpenter World Rate on Line (ROL) Index, rates declined by 10 percent on average in 2008. This compares to a 6 percent drop in property-catastrophe ROL for the same period in 2007.
The reinsurance environment has been affected by several factors this year. Events such as the meltdown of the subprime mortgage market and the subsequent credit crunch have had a profound impact on the industry. Insurers and reinsurers have suffered few direct hits from the mortgage crisis; however, the subsequent fall in stock markets has put pressure on reinsurers to offset investment losses by maintaining solid underwriting results.
Contagion effects from the subprime fiasco have seeped into the regulatory environment and may lead to calls for increased capital. This may have an adverse impact on property-catastrophe markets.
The convergence of capital and reinsurance markets continues. The reinsurance industry can no longer be viewed as a closed-loop system. The elasticity of capital supply has increased, and rapid inflows in response to mega-catastrophes may tame the excesses of hard markets and reduce market price swings.
Other developments could lead to substantial opportunities for primary carriers and reinsurers. Climate change may enable insurers to expand cover for “green” exposures on both the property and liability fronts. The development of models for the flood peril may widen the opportunities for insurers and reinsurers to cover more natural peril risks.