The US property catastrophe reinsurance renewal at January 2010 demonstrated a measurable decline in pricing overall compared with the renewal at 2009. Analysis of the complete January 2010 renewal dataset indicates the US catastrophe RoL index retreated by an average of 10 percent, allowing for the impact of the major prior adjustments to the catastrophe models. A reduction in the ratio of signed to authorized lines from 94 percent to 85 percent is a further sign that capacity is up and a more competitive market has emerged.
GC US Property Cat ROL Index retreats by 10%
The renewal took place in an orderly manner with average quotes in the range of -10 percent to +10 percent; quote spreads for individual reinsurers varied widely and several were outside this range. The 2010 quote spread was tighter than the spread of -15 percent to +15 percent in 2009. Last year’s responses showed greater variance following evaluation of the impact of the financial crisis on reinsurers’ own pricing methodology. The following chart shows overall quoting behavior with reinsurers represented by their A.M. Best ratings. While not specifically identified in the chart below, Midwest programmes saw the greatest spread around the means primarily because of adverse loss experience and wide variability in the impact of model changes. It is noteworthy that the rating quality of the reinsurers and level of average quotes appeared to be correlated at both ends of the X axis.
The renewal experience varied across the principal regional segments. The following chart shows the changes in risk adjusted pricing at January 1, 2010 before and after the effects of applying the changes in catastrophe models for those regions experiencing decreases.
The Midwest stood out as the only region where in the aggregate prices increased. Many programs sustained tornado losses in 2009 and as margins are very competitive the price increases were more pronounced in response to the loss activity. More than half of first layers were penetrated with an average loss of 55 percent to the layer’s limit, while a third of second layers were hit by average losses of 34 percent of the layer’s limit.
To better demonstrate the significant variability in the pricing change experienced between individual companies and even within programs, the chart below shows the average changes in pricing with and without the effects of the adjustments to the catastrophe models across a wide range of ROL to Loss on Line (LOL) datapoints. Since there was significant variability in the model impact for Midwest companies, the chart includes the shift in pricing for a model change of -10%, -20%, -30% and -40%.
Growth in Capacity
The increase in reinsurers available capital was a major driver of price movement at this renewal with total authorized aggregate capacity up by 18 percent as supply increased in line with the recovery in reinsurers’ balance sheets. The reinsurers were also willing to authorize larger lines with the theoretical maximum capacity per program increasing by 15 percent.