September 15th, 2009

World Catastrophe Reinsurance Market 2009: Reinsurance Rates in 2009

Posted at 1:00 AM ET

worldcatChristopher Klein, Global Head of Business Intelligence
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Global property-catastrophe reinsurance rates increased by 8 percent on average through the 2009 renewal season, according to the Guy Carpenter World ROL Index. This follows declines of 6 percent in 2008 and 10 percent in 2007. In the United States, the world’s largest reinsurance market (geographically), increases were fairly uniform at the January, April, June, and July renewals, moving in a channel of 10 percent to 15 percent, depending on region, exposures, and loss history. Even with this reversal in the property-catastrophe reinsurance pricing trend from the past few years, rates have not returned to 2007 levels, despite the financial catastrophe of a year ago and the impacts of Hurricanes Gustav and Ike.

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The U.S. increases were highest, though this was neither unexpected nor unreasonable. Reinsurance rates were up an average of 12 percent for the year, largely because of loss histories and exposures (e.g., in the Gulf of Mexico). The upward moves were lower in Europe and Asia, 7 percent and 2 percent, respectively. Again, these increases were not sufficient to offset the previous years’ price declines.

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In addition to the insured losses from Hurricanes Gustav and Ike - which amounted to USD13.9 billion — the financial catastrophe had a profound impact on reinsurer balance sheets, which in turn affected the rates they charged cedents. Shareholders’ equity fell 18 percent, as measured by the Guy Carpenter Global Reinsurance Composite, mostly because of realized and unrealized asset-side losses. The full effects of these shocks were realized well into 2009, as a result of financial reporting cycles and continued upward revisions of losses attributable to the September 2008 storms. Insurance and reinsurance markets were not operating in a vacuum. Policyholders in the commercial sector were suffering through a global recession — the most significant since the Great Depression — and were resistant to price increases for all products and services, including insurance.

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Given the record losses in investment asset values, the rate of return on equity (ROE) for the GC Global Reinsurance Composite dropped from 13.4 percent in 2007 to 10.4 percent in 2008. The decline continued into the first quarter of 2009 — dropping to 7.8 percent. Reinsurers felt under pressure to produce higher returns, and so pushed for rate hikes.

Outlook for 2010 Renewals

Barring a major physical or financial catastrophe, reinsurance rates are likely to remain flat in the near future. Demand is likely to be flat, reflecting the weak global economy, while reinsurance supply is expected to increase. The thawing of financial markets will support balance sheet growth, and underwriting gains will contribute to stronger capital positions as well.

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