November 10th, 2009

Stability Returns

Posted at 1:00 AM ET

keeling_henry_141x141Henry Keeling, President and CEO — International Operations
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At the end of 2008, the normal pre-renewal uncertainty was magnified by the effects of the most severe financial crisis in more than 70 years. Financial markets were in turmoil, and the cost of capital was rising. Yet, these pressures were counterbalanced by capital positions that remained sufficient, despite the impairment of investment assets. The outcome was relatively benign, but anxiety was endemic before the January 1, 2009 reinsurance renewal. Now, 12 months later, the marketplace is much different, indicating the remarkable recovery that has occurred in 2009.


Worldwide, property-catastrophe rates increased by only 8 percent on average. Even an 18 percent loss of capital for the Guy Carpenter Global Reinsurance Composite was insufficient to cause a spike in reinsurance pricing. Despite an escalating cost of capital last year and into the first quarter of 2009, reinsurance capacity remained ample to meet cedent demand. This was due largely to the fact that reinsurers entered 2008 with what was considered to be excess capital. The events that transpired — augmented by insured losses from Hurricanes Gustav and Ike — showed that these capital levels were not excessive at all. Rather, they were necessary to absorb the shocks of 2008 and prevent the substantial disruption of the reinsurance industry.

In the first quarter of 2009, (re)insurers gained their bearings, which is what facilitated the signs of recovery evident in the subsequent quarter. By the end of June 2009, the Global Reinsurance Composite’s aggregate shareholders’ funds gained 8.2 percent, most of which was caused by a recovery of investment values and buoyant underwriting earnings. Efforts to raise fresh capital from financial markets remained limited, but this is likely to change in 2010 as a broader economic recovery cautiously takes shape. This year’s momentum should continue, and while capital levels are unlikely to return to 2008 levels in the near future, the tenuous stability attained in 2009 is expected to result in ample capacity next year.

As a result, reinsurance rates are expected to be flat at the January 1, 2010 renewal in the absence of major catastrophe or financial losses. There are some obvious hot spots in lines that have been hit hard by losses, but overall, the increases achieved this year did not fully replace the discounts realized in 2008. Consequently, 2010 reinsurance rates are likely to stay below 2007 levels, with the net effect that the global financial crisis will have been absorbed by the reinsurance industry and with only a small impact on cedents’ abilities to transfer risk. The uncertainty caused by the events of September 2008 will have been purged from the reinsurance industry in one season … though the lessons will endure.

As cedents and markets advance their discussions of the January 1, 2010 reinsurance renewal, price will continue to be the top priority. Market security and counterparty credit risk, however, will reflect their increased importance as cedents seek diverse and secure sources of capacity. Cautious capital is the goal, and the discipline maintained by reinsurers over the past few years — and particularly in 2009 — will result in its availability in terms equivalent to those expiring.

Favorably priced reinsurance brings insurers an opportunity beyond cost containment. Rather than renew at coverage levels similar to those of this year, cedents may want to secure additional reinsurance to increase protection or free capital for use elsewhere. The industry’s perspective is shifting from perseverance to expansion. Making additional resources available for strategic alternatives, from acquisitions to premium growth, can lead to a competitive advantage, ultimately driving market share gains and increases in shareholder value.

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