Capital management discipline has guided the (re)insurance industry through a turbulent year. Volatile financial markets, capital constraints and general uncertainty caused many carriers, a year ago, to fret over the coming renewal and the availability of capacity. Some were calling for sharp increases in reinsurance rates, and concerns of a capital shortfall were widespread. As we have seen, however, this did not occur. Despite the calamity visited upon the global financial services industry, (re)insurers have persevered, and the coming renewal is likely to be notable for its stability.
In September 2008, (re)insurers were forced to cope with simultaneous catastrophes. As Hurricane Ike made landfall in Galveston, Texas, the financial crisis struck New York, London and major financial centers around the world, ultimately spreading past financial markets to affect almost every business. Shareholder value was destroyed, credit markets ground to a halt and anxiety was endemic. Yet, these developments did not drive reinsurance pricing to the levels that some forecasted. Rather, the January 1, 2009 reinsurance renewal was relatively muted.
Some lines directly impacted by the financial crisis — such as financial institutions directors and officers and professional indemnity — and hurricanes did sustain considerable reinsurance rate increases. In general, though, most price increases were contained, with the Guy Carpenter World Rate on Line Index up only 8 percent. In the United States, property-catastrophe rates were up on average only 10 percent to 15 percent, based on the implications of Hurricanes Ike and Gustav. Capacity tended to be available for most cedents, and expectations of an upsurge in pricing were unfulfilled, as supply was generally adequate to meet demand.
The primary reason for the orderly renewals throughout 2009 has been capital availability. At the end of 2008, the Guy Carpenter Global Reinsurance Composite showed a decline in shareholders’ equity of 18 percent. While this amount is far from trivial, it was not enough to impair the ability of reinsurers to assume cedent risks. Because they started last year with robust capital positions — which allowed dividends and share buybacks through the summer — reinsurers were able to absorb the consequences of the financial crisis without jeopardizing their role in the risk-transfer process.
Early efforts to raise new capital this year were challenging, but by the end of the second quarter, it was clear that capital was flowing back into the (re)insurance industry. The Global Reinsurance Composite posted a shareholders’ equity increase of 8.2 percent, most of which came from investment and underwriting earnings. Little outside capital was raised, with only an isolated instance worthy of note, but the use of earnings to support increases in capital suggests that a recovery may be in progress, a stance supported by the 316 percent aggregate cash increase by the companies in the Global Reinsurance Composite. With cash and capital on hand, (re)insurers have alternatives at their disposal, allowing them to turn their attention from surviving difficult market conditions to pursuing premium and market share growth, either organically or through mergers and acquisitions.
The January 1, 2010 renewal is only two months away, and cedents and markets are already well into the underwriting and negotiations that will define the year. Capital is certainly available, and the fears seen at this time last year are behind us. A mild catastrophe year has coincided with the rebuilding of balance sheets, so unless a major catastrophe strikes before the end of the year, reinsurance rates are likely to be flat. The lessons of last year, however, remain with the (re)insurance industry. Even with this newly regained stability, carriers will manage their capital carefully, seeking the opportunities most likely to be shareholder value-accretive.