February 9th, 2009

Life/PA Cat Down Slightly at 1/1

Posted at 1:00 AM ET

David Rains, Managing Director

Rates on line (ROLs) for the life and personal accident (PA) catastrophe reinsurance market dropped 1.5 percent on average. Seventy percent of layers had decreases year-over-year, and cedents taking advantage of private layer strategies enjoyed the greatest price reductions. At the other end of the spectrum, the highest ROL increases tended to be driven by loss history or the need to replace a financially impaired reinsurer.

Click chart for larger version

Click chart for larger version

Only 10 percent of renewing life and PA catastrophe layers were subjected to price increases, while 20 percent renewed at expiring terms. ROL changes ranged from -16.4 percent to 26 percent at the January 1, 2009 renewal, with an average change of -1.5 percent. Subject premium generally increased, making realized rate reductions somewhat higher.

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Capacity increased slightly, suggesting stability despite the effects of the ongoing financial crisis. However, this was achieved with several new entrants offsetting the lost access to capital resulting from market exits. As a result, many cedents have more markets participating on their programs, increasing their diversification of counterparty risk.

Life and PA catastrophe cedent retentions and limits showed little change at the recent renewal. Rather than buy down retentions in an advantageous market, insurers generally maintained expiring retentions. Likewise, most cedents did not change their overall program limits. In some cases, they used the cost savings to purchase additional coverage.

The financial crisis sparked some pressure on terms and conditions at January 1, 2009. Specifically, reinsurers pushed for more restrictive special termination triggers related to future rating or surplus changes, with mixed results.

Trends for 2009 include continued ample capacity relative to demand and steady-to-decreasing average pricing. With continued downward pressure on pricing, reinsurers may look to terms and conditions to find ways to reduce their risks. Meanwhile, cedents are improving their data for several reasons, including A.M. Best’s Supplemental Ratings Questionnaire. This should increase reinsurer comfort, which generally should help keep rates down in most cases.

Additional Contributors:

  • Jeff Krohn, CLU, CPCU, ARe, Senior Vice President
  • Agelika Kocoronis, ARe, Assistant Vice President
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