Reinsurance rates increased by 8 percent through the 2009 reinsurance renewals, as measured by the Guy Carpenter World Catastrophe Rate on Line (ROL) Index. Upward pressure came largely from the impact of the 2008 financial catastrophe on reinsurers’ balance sheets, which was exacerbated by the effects of Hurricanes Gustav and Ike. At the January 1, 2010 renewal, reinsurance rates are likely to show little movement, unless a major property catastrophe or financial shock occurs.
Retained earnings are increasing, and financial markets are improving, with reinsurer assets increasing in value. At the same time, cedents face pressure from policyholders to contain costs, as they struggle with the worst economic recession since the Great Depression.
The thawing of financial markets is also making it easier for reinsurers to transfer risk to capital markets. Though catastrophe bond issuances were down 42.5 percent year-over-year by risk capital (and 18 percent by the number of catastrophe bonds issued), the market continues to be active following a silent fourth quarter in 2008.
Given the 18 percent loss of capital sustained by reinsurers last year, risk-bearers are revisiting how they use catastrophe models, in order to manage their risk and capital more effectively. Model diversification and innovation have become particularly important since Hurricane Ike made landfall in Galveston, Texas a year ago. The use of several catastrophe models to inform risk manager judgment — enhanced with other tools, as well — has become crucial to protecting capital and achieving a company’s stated financial targets.
The rewards for prudent risk and capital management are profound, especially when one considers the size of the reinsurance industry in the broadest sense. The evolution of the reinsurance industry from a closed financial system to an open one will likely result in lower volatility. And, the opportunities afforded by new risks and emerging markets will likely lead to an increase in demand for reinsurance. Last year, 80 percent of insured catastrophe losses occurred in North America — compared to only 6 percent in Asia. Though reinsurers are likely to be cautious in covering newer risks (and those they are still beginning to understand), the low level of insurance penetration indicates a substantial potential revenue stream.
While there are reasons to be optimistic about the long-term growth of the reinsurance industry — particularly in emerging economies — reinsurance leaders have to operate and thrive in the present. This can be a difficult proposition. For most reinsurers it means aiming for success in a mature, competitive business that is based on a commodity product and is centered in North America and Europe. For cedents, however, the benefits are substantial. They can enjoy the prospect of a very competitive and innovative set of suppliers, vying energetically for their business.