April 27th, 2009

Japan 4/1 Reinsurance Renewal: Windstorm

Posted at 1:00 AM ET

Ed Fenton, Managing Director

Capacity Purchased, Deductibles, and Pricing

In the face of a difficult market for capacity, the overall purchased limit actually increased at the April 1, 2009 renewal in Japan. This was not easy to accomplish, and cedents searched all available markets exhaustively to ensure that all capacity that could be bound at current pricing was bound. Buyers looking for significant increases in capacity had to pay relatively enhanced pricing to attract new support.


The overall market deductible level was unchanged, with companies focusing on co-reinsurance percentages and ground-up limit to manage price and capacity.

Average price for capacity was up very marginally, by just under 1 percent. This increase does not entirely reflect actual price movements, but does reflect the additional capacity bought at the higher ends of programs. On a risk-adjusted basis, reinsurance rates were up 2.5 percent to 12.5 percent, with a market average increase on renewal capacity of approximately 6.5 percent. Higher prices tended to be largest at the higher ends of programs.

All programs sustained some form of price increase. The degree depended on several factors — the most important of which were exposure movement and the market’s perception of existing price levels.

The Quoting Process

The range of quotes provided was wider than in previous years. Some London leaders started the season quoting for significant increases — up to 20 percent. Buyers tended to ignore the highest quotes, even if they came from existing leaders. Once terms stabilized, the high quoters were re-approached with firm order terms (FOTs) in order to bring them into line with broader market trends. There did not appear to be any benefit to seeking quotes from a wide range of reinsurers — no new quoting reinsurer apparently wanted to be seen undercutting existing leads.

Despite the perception of a hardening market, FOTs tended to be around the lowest first round quote. In fact several programs were able to complete placement successfully (without the loss of leaders) at terms less than the lowest first round quotation.

Terms and Conditions

As in the previous couple of years, the “hours clause” was at issue. A few buyers took the opportunity to move to 96 hours for windstorm perils. The market generally required that cedents sacrifice the right to reinstate in one event as a tradeoff for the extension, though this did not apply in all cases. In fact, some buyers kept a 72-hour provision while retaining the right to reinstate in one event retained.

The notion that an extension of hours clause provision should result in higher risk-transfer pricing is difficult to test, as reinsurers typically do not offer differential quotes on this basis. Our research indicates that this issue would not have been a significant factor in claims collections in any of the major typhoons in the past 50 years. In practice, proposed changes to a program’s hours clause would just be another factor to consider in the context of the overall price negotiation.


Reinsurers sought to manage the capacity they offered more carefully by setting written lines near the desired level of signed lines, continuing a trend that has developed over the past few years.


When taken in conjunction with a drive to increase purchased capacity by some buyers in the market, this behavior resulted in the degree of over-placement decreasing to its lowest level in recent years.

Capacity was tight for a number of reasons that were well-publicized before renewal. Exchange rate issues caused many British pound-denominated reinsurers (as well as some in U.S. dollars and Euros) to consider (and seek to reduce) their overall accumulations. Reinsurers relying on retrocession protection found that Japanese catastrophe perils had become a major exposure — sometimes to levels deemed too large by their own internal controls or the appetites of the retrocession providers. Offsetting these two negative factors was the increase in pricing that enabled reinsurers with spare capacity to justify deploying it within their own organizations.

Clearly, the two negative factors found their most telling combination in the Lloyd’s syndicates that rely heavily on retrocession to build their capacity. As a result, there was a shift in the proportion of overall capacity provided away from the London market to elsewhere in the world. Bermuda and the Asian subsidiaries - and branches of global reinsurers — benefited most.

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