February 9th, 2010

Credit, Bond and Political Risk Renewals

Posted at 11:00 AM ET

Credit and Bond 

The market conditions for 2010 are fundamentally different from the 2009 renewal season. 2009 saw very tough conditions with capacity scarce and placements taking much longer to finalize. In 2010, we have seen continuing hardening of terms, but a general abundance of capacity and much quicker response times from reinsurers. The loss of capacity from Swiss Re was comfortably exceeded by increases from existing and new reinsurers.  

Proportional Treaty

Recognising that the 2009 treaties are generally projected at a marginal technical result, buyers have mainly adopted a realistic approach to 2010 terms. As a result, reinsurers see the 2010 outlook much more positively and are prepared to commit significant additional capacity. 

A number of new reinsurers entered the market seeking to reap the rewards of the changing market. However, because of the general increase in support offered by existing reinsurers, new reinsurers were most likely unable to write as much premium as their budgets allowed.  

Similar to the situation seen in 2004, the surplus of capacity did not have the effect of softening pricing. In contrast, commissions continued to reduce to pay back losses from the 2008 year in particular, which deteriorated during 2009. On average, ceding commissions, the majority of which are on a sliding scale, reduced by around 2-3 percent. We saw the biggest reductions on the maximum commissions as the market seeks to generate higher returns in the best years of the cycle.  

A new dynamic for 2010 has been the introduction of differential terms - for those reinsurers who experienced the highest losses in the recent downturn, commissions are lower (potentially materially). While this secures capacity in the short-term, we have yet to see if it has longer term negative impact on the ability to negotiate better terms at the positive time in the cycle.  

Further, the trend continued in the market among some cedants to accept restrictive conditions (such as loss ratio caps, loss corridors, etc.) in a bid to ensure that the programme was placed. However, these attracted far more capacity than was needed - even to the extent of a 200 percent placement. This suggests that not all the restrictive terms were required in order to complete the program. 

Non-Proportional Treaty

Excess of loss prices continue to rise, although not to the same degree they did in 2009. Typically, the monetary spend has increased between 10 to 20 percent for the same structure if there were no losses. Some reinsurers have greater concerns about severity losses as the economic cycle turns, and this impacts excess of loss pricing more than it does proportional. 

Most programs, while remaining loss free, have seen prices increase due to changes in exposure levels. On average, exposure levels have come down slightly, but the quality of the exposure has decreased due to a general downgrading of risks in the portfolio and a rise in the default probabilities. This increases the prices of lower layers significantly, causing some cedants to retain the first and even second layers rather than paying extremely high rates on line for clean layers. 

Political Risk 

The Political Risk market is experiencing issues similar to those of the Trade Credit market, but with a delay of 12 months. Significant losses impacted the market mainly during 2009. Most problems are seen in the Structured Trade Credit (STC) sector, especially relating to Bank/Letter of Credit business, as opposed to pure traditional Political Risk.  

As a result, the reinsurance market for STC has contracted significantly with some reinsurers withdrawing entirely. The knock-on effect is that many insurers are contracting their accounts even to the extent of limiting their writing to only on a net line basis. Certainly all insurers are now reviewing their original underwriting guidelines to reflect the dynamics of recent claims experience.  

Proportional reinsurance programs have mainly renewed as expiring, even those with loss ratios greater than 100 percent. The rationale for this development is that original premiums, in concert with terms and conditions, have increased considerably. This will quickly feed through to reinsurers.  

Non-Proportional reinsurance renewal terms have increased considerably, driven mainly by payback considerations. The increased prices have caused a contraction in demand for capacity and a consequent reduction in available insurance capacity.  

The pure Political Risk market remains attractive for insurers and reinsurers.

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