From the end of April to July, the (re)insurance industry steps through a rapid succession of renewals, leaving little time to turn lessons from one into an action plan for the next. April 1, 2009 is behind us, and the Florida renewal has nearly arrived — and it will shape worldwide market conditions for July 1, 2009. We’re halfway through this annual renewals gauntlet, but the continued push forward can obscure the considerable body of knowledge our industry has accumulated.
For the U.S. market, reinsurance rates increased at April 1, 2009, reflecting the continuation of a trend that began three months earlier. National programs sustained price increases of 10 percent to 14 percent on a risk-adjusted basis. Regional programs varied at April 1, 2009, largely because of the perils covered and program-specific loss histories. For everyone, however, capacity was a concern, particularly given the depletion of reinsurer capital over the past year. The latest estimates put the amount lost at approximately 25 percent, with cedents hit harder than markets, as retentions increased through 2007 and the first half of 2008. And, financial market turbulence continues, threatening further erosion.
Reinsurance rate increases were consistent with those at the January 1, 2009 renewal, suggesting that the challenges faced at the beginning of the year have persisted … but appear not to have deteriorated further. Further, competition in the U.S. national market has remained steady. Firm order terms (FOTs) settled at 94.8 percent of average quotes, which is roughly the same threshold seen three months earlier. For regional programs in the northeastern United States, where reinsurance rates increased by only 6 percent to 8 percent, discounts from average quotes were more pronounced (10 percent to 12 percent, on average).
As usual, loss history and the specific perils covered influenced the cost of risk-transfer pricing in the United States at April 1, 2009. Though there were differences by region and experience, though, every cedent had to contend with the implications of a global increase in the cost of capital as a result of the still ongoing financial catastrophe. The damage to (re)insurer balance sheets has been impossible to ignore, as capacity has become increasingly constrained. Further, some reinsurers had already used capital allocated for transactions other than reinsurance and thus had to cut renewal lines. Nonetheless, the situation remained stable in April; the erosion of surplus did not accelerate during the first quarter of 2009.
Capital is likely to remain constrained for the balance of 2009, and these conditions are expected to stretch into 2010, as well. The ultimate determinant will be the extent to which financial markets can find firmer footing this year. Volatility remains high, which imperils balance sheets and could result in the further degradation of capital. Yet, if markets grow calmer and lenders and investors open their wallets this year — and there are signs that this might be happening — (re)insurers will be able to access capital more easily, and reinsurance rate increases may slow down. For U.S. carriers, global financial market activity will have a profound local impact.
And, developments in the United States will have worldwide ramifications.
In the near-term, all eyes are on the Florida renewal. For most of the past year, the nearly universal loss of capital in the (re)insurance industry has led to concerns about the availability of capacity for this unique market. Several factors have been in flux, adding to the air of uncertainty around Florida pricing and capacity.
The primary concern following the April 1, 2009 renewal was what the ultimate structure of the Florida Hurricane Catastrophe Fund (FHCF) would be — as well as whether it would purchase its own reinsurance. The answers to these two questions were expected to have a profound impact on cedent decision-making and reinsurance rates. Though a decrease in the Temporary Increase in Coverage Limit (TICL) was not expected to be material, it was unfunded as of this writing.
Even with the results from Florida imminent, the market is already looking ahead to the July 1, 2009 renewal. The capital situation — barring a drastic shift in market conditions - is unlikely to change over the next month, limiting access to capacity in line with the previous 2009 renewals. Cedents and markets alike will have to refocus their efforts on managing the capital they have, rather than hope to replenish balance sheets with the ease experienced two years ago. Further, the advantages of getting into the market early are likely to be considerable, as limited capacity may be consumed before cedents biding their time are able to address their risk transfer needs.
The lesson at this point in the renewals gauntlet is clear: follow the 2009 trend. Capacity is constrained, and rates are moving higher. Using the U.S. experience as a proxy for the rest of the world, particularly with Florida as the midpoint in this triad of reinsurance milestones, cedents should be prepared for an increasing cost of cover — though not drastically so. Knowing the landscape will make your risk management plan more accurate … and more effective.
Originally published in Reinsurance magazine