April 15th, 2009

April Renewals Follow January Precedent, Despite Industry Capital Conditions

Posted at 1:00 AM ET

rains_david_bioDavid Rains, FSA, MAAA, Managing Director and Head of Life, Accident & Health Specialty
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Life and personal accident (PA) reinsurance renewals sustained significant rate reductions at the April 1, 2009 renewal — in some cases as low as 10 percent. Average rate on line (ROL) was down 3.8 percent, excluding programs with large rate changes for reasons not directly related to market conditions. For example, companies with reduced subject risk due to the impact of the global financial crisis had ROL reductions that were even greater. Even layers with light losses were treated gingerly, with level pricing or slight increases year-over-year. The markets remains tipped to the advantage of cedents, despite broader market conditions that might be expected to push prices higher.

Some Factors Should Push Prices Higher

In a vacuum, the evidence for price increases would be incontrovertible. Reinsurance capacity is allocated to lines of business with higher prices. Investment returns make capital scarce — a situation exacerbated by currency exchange movement.

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P&C Reinsurance “Gravitational Pull”: For the reinsurance market as a whole, and particularly at Lloyd’s, PA has to compete for capital allocations with other lines of business. Increasing property and casualty (P&C) prices (up 15 percent to 25 percent in key catastrophe zones) should be expected to drive up costs for other lines.

Diminishing Investment Returns: Many reinsurers — and some disciplined investors — sustained significant investment losses last year. These firms started 2009 at the back of the pack in regards to raising capital and are subject to increased costs of funds.

Exchange Rates: Within Lloyd’s, home to much of the capacity for PA catastrophe reinsurance, the need for capital has been exacerbated, where the strengthening dollar has restricted the ability of entities funded in British pounds to write U.S. business.

But … Prices Continued to Fall

Despite factors that normally would lead to increased risk-transfer pricing, the market still favors cedents. Pressure on capital has not been enough to outpace supply, the strength of existing relationships, and the impact of loss histories.

Supply and Demand: Despite significant changes in the market participants for catastrophe risk over the past year, there is ample capacity for the risks being written. A reinsurer making a strong move toward increasing prices risks losing to cheaper capacity.

Relationships: In a competitive market for near-commodity risk protection, relationships are surprisingly important. Incumbent reinsurers have access to emerging data, may be consulted for business decisions, and get first looks at new opportunities. Current reinsurers are motivated to improve terms to retain their positions (where possible).

Attractive Returns: Though there were a few isolated losses that penetrated covers, overall claims history in the space has been quite profitable for reinsurers. Life claims are not correlated perfectly with property claims, and the profitable diversification remains attractive for writers.

A Look to the Future

Though the cost of capital has increased for most reinsurers, it seems as though the factors that converged to push prices lower at January 1, 2009 are durable enough to keep prices low for life catastrophe cover a while longer. However, predictions in this market, though tempting, are imprudent.

Despite continued favorable developments for life and PA reinsurance, there remains a possibility that financial market developments could catch up with the availability of supply or erode carrier investment assets to the point where price increases become inevitable. Two renewals into the global financial crisis, however, rates for life and PA catastrophe cedents continue to improve. If financial market conditions stabilize — and insured losses are limited — the probability of a turn in pricing decreases, setting the stage for a long-term advantage for cedents.

Additional Contributors:

  • Dean Kidd, Managing Director
  • Jeff Krohn, Managing Director, CLU, CPCU, ARe
  • Agelika Kocoronis, Assistant Vice President, ARe
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