April 1st, 2010

April 1 Reinsurance Renewals: Rates Lower; Returns Under Pressure

Posted at 1:00 AM ET

Chris Klein, Global Head of Business Intelligence
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The April 1, 2010 reinsurance renewals are dominated by Asia, but were conducted with one eye on the catastrophes that occurred elsewhere in the world. Reinsurance rates in most cases continued the decline experienced at January 1, 2010 which occurred largely because of the effects of healthier (re)insurer balance sheets. The large earthquake in Chile, and, to a lesser extent, windstorm Xynthia in Europe, both striking in the first quarter of 2010, caused pause for thought. There are several significant renewals at April 1 in the US, which did not show signs of any impact from the recent global loss activity. There was some evidence of price tightening in parts of Latin America. The Chile situation remains uncertain and earthquake losses generally develop more slowly than wind events. Up to half of catastrophe loss ratio budgets were consumed, causing reduced headroom for a larger catastrophe later in the year. This scenario, along with buoyant balance sheets, lower investment yields and thinner reserve releases will put pressure on returns, sustaining active capital management and perhaps, in time, stabilizing the market.

Japan

Reinsurance rates in Japan at the April 1 renewal showed a declining trend in most classes. Specific changes varied by line of business and there were occasional exceptions on problematic lines, such as marine hull proportional treaties.

Total capacity sought by buyers for their major catastrophe exposures was similar to the expiring year, though within this headline figure lie reductions by some cedents and increases by others. The reasons for such dynamics within the overall number are varied, but included in the reasons for reductions were a perception of improved economic and capital market conditions. Reasons for increases included revisions to internal risk management models and potential future regulatory and accounting changes.

The effect of the Chilean earthquake was limited, though it is possible that timing issues may have played a part: many of the major placements were quoted, priced and in some cases completed before the effects of this loss could be fully realized.

Overall the renewal was smooth and perhaps easier for buyers than in many previous years, reflecting a generally softer market. With few major issues or changes to terms and conditions renewals were completed within similar timetables as compared to prior years.

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Earthquake Lines

Pro rata treaties

Terms remained unchanged from 2009. There have been modest increases in capacity sought overall by the market. Reinsurer capacity grew to match the increased demand, but there was limited evidence of a tightening market later in the season following the Chile earthquake, as reinsurer managements began to scrutinize earthquake exposures around the world. There was some signing down of placements for the first time in several years.

Excess of loss (XOL)

Price declines averaged 5 percent. Earthquake XOL remains a popular class with reinsurers and there was continued overcapacity. There were no capacity issues on the major placements.

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Fire and Windstorm Lines

Windstorm XOL

Lead reinsurers were fairly firm in the first round of quotations and buyers were made to work hard for reductions. After several rounds of negotiation, firm orders were generally set at modest reductions over 2009 pricing within a range of down 2.5 percent to down 6 percent on a risk adjusted basis, with an average reduction of approximately 4.5 percent. The market that resulted was tight and price sensitive. Reinsurers were willing to cut lines if reductions were seen as too great or in cases where they perceived pricing was already competitive.

Fire pro rata

Good results for the past few years and unchanged structures coincided with an unchanged or slightly increased offer of capacity from reinsurers. Most treaties renewed with unchanged terms.

Fire per risk

There has been a gentle softening in this market, with risk adjusted rates down by an average of 5 percent. No changes in structures were seen and reinsurer capacity was stable. If required there was potential for increased capacity as reinsurers looked to diversify away from the core catastrophe lines.

Mutual Companies

Catastrophe XOL

Rate decreases were possible for mutual buyers and typical savings were 5 percent. The overall amount purchased in this sector increased and reinsurer capacity was available to fulfill this requirement.

Other Non-Marine Lines

Personal accident XOL

Personal accident XOL rates were reduced by small amounts. Capacity is stable and generally plentiful though the extension of coverage for infectious disease meant a few reinsurers were forced to withdraw from the market. Standard terms achieved for infectious disease gave cedents the right to define an “event” as a 60 day period.

General third party liability XOL

No changes to terms and conditions were seen and pricing was flat. Reinsurer capacity was basically stable. The trend of new entrants to the market seen over the past few years continued, though overall new capacity offered was limited.

Engineering pro rata

No general market changes to terms and conditions were seen with individual treaties making specific amendments according to individual circumstances. Reinsurer capacity has grown, which has consequently made placements easier than in prior years.

Credit and Bond

The proposed reduction in this market by its incumbent leader was well publicized in advance and cedents responded accordingly to attract new capacity. In the final event there was ample capacity and most programs were heavily over-subscribed. New reinsurers therefore faced significant signing down or in some cases were unable to access the business.

Marine

Marine cargo XOL

The impact of the worldwide economic slowdown continued to affect shipping volumes which in turn reduced reinsurance exposures. Reduced exposures brought rate reductions of between 7 percent and 15 percent on loss-free renewals according to exposure and premium income levels. Structures remained largely unchanged from the previous renewal. Capacity was widely available for this popular class of business and most placements were completed in good time.

Marine hull XOL

Not many hull XOLs are placed by the market. Pricing of loss-free renewals was as expiring or in some cases very slight rate reductions were possible. Structures were mostly unchanged from the prior year and capacity was widely available for this popular class of business.

Marine hull pro rata

Continued poor results have forced reductions in ceding commissions in most cases. Structures were largely unchanged from the previous renewal, but one cedent reduced its limit and purchased additional capacity on an XOL basis. Most placements were completed prior to renewal. Capacity continues to be available but some reinsurers have declined support in light of the poor results that have been seen.

Marine cargo/ Specie / Fine art pro rata

This class of business has performed well, which enabled cedents to secure some increases in ceding commissions levels. Also, capacity was more plentiful this year due to a less volatile Yen rate of exchange. Structures were mostly unchanged from the previous renewal and most placements were completed in a timely fashion.

US Property Catastrophe

US property catastrophe reinsurance pricing at April 1 saw the continuation of the decreasing pricing trend in evidence at January 1. Capacity continued to be plentiful, a critical element in companies’ ability to secure favorable terms and conditions. It is important to note that individual renewals vary significantly based on each company’s own experience and positioning.

US catastrophe pricing for nationwide companies decreased 8 percent, when not considering the impact of the catastrophe model changes and by 13 percent on average when adjusted for the change in catastrophe models. In addition, 2010 firm order terms were 83 percent of the maximum quote and 90 percent of the average.

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The pricing change in the Northeast was within a similar range with an average decrease of 6 percent without adjustment for the catastrophe model change and 12 percent when considering the impact of the model change. Firm order terms also bore a similar relationship to the nationwide renewals with final terms at 84 percent of the maximum quotes and 91 percent of the average.

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Breaking the quoting behavior down by region, Continental European reinsurers were consistently competitive on average across all renewals, while the domestic markets provided generally less competitive pricing. Bermuda and London took opposite positions between the nationwide and Northeast renewals with Bermuda providing more favorable pricing on the Northeast programs and London more competitive on the nationwide renewals.

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Latin America

Although Latin America is not a significant source of April 1 renewals, Guy Carpenter is focusing on the region in order to get an early appraisal of the implications of the Chilean earthquake for pricing and terms and conditions. Preliminary estimates of the aggregate loss arising from the Chilean earthquake vary widely and some senior industry figures warn that losses could creep much higher as more information emerges over a protracted period of time. The market may continue to evolve going into the July 1 renewals. Overall terms and conditions in the region as a whole appear to be only modestly affected and in some cases unchanged by the earthquake. However, pricing varies by country.

In the Central American region, loss free catastrophe excess of loss (XOL) accounts, influenced by the Chilean earthquake, saw price increases between 2.5 percent and 5 percent. Risk XOL programs tended to be flat on a risk adjusted basis and thus not affected by the earthquake as such.

The Chilean earthquake’s influence caused an increase in catastrophe XOL rates of around 5 percent in smaller catastrophe territories such as Ecuador.

In Colombia, some catastrophe XOL rates were flat to slightly down, as reinsurers were forced to commit to pre-Chilean earthquake pricing. Guy Carpenter foresees increases at the July 1 or January 1 renewals, as reinsurers will have had time to more fully digest the impact of the Chilean loss.

Chile saw the greatest impact from the earthquake. Extensions of one month to three months on excess of loss contracts due for renewal saw increases in pro rata premium of between 20 percent and 100 percent depending on whether they were for the lower end or the top end of the programs and the extent of the loss. Although it is still generally too early to understand true pricing increases, early indications are for price increases of 50 percent or more, with higher increases expected on programs having sustained large losses.

For Caribbean territories, we saw rates on line renewing at expiring levels on a risk adjusted basis. The impact of the Chilean earthquake seemed to be curtailing price declines but did not influence price increases.

Republic of Korea

The Korean renewal process was characteristically late. Proposals were submitted with ample time for quoting, but significant changes to program structures, especially for property catastrophe, resulted in a protracted underwriting and quoting process.

In the property catastrophe segment, price changes ranged from decreases of 7.5 percent to increases of 2.5 percent. This range reflected the variety of changes and experiences that included increased aggregates, deductibles and, in some cases, limits. The situation was further complicated by the separation of overseas exposures making like-for-like comparison more difficult.

The property risk segment was affected by the Samsung loss of late March 2009, which occurred too late to be reflected in the April 1, 2009 renewal. There was a second large loss in November 2009. Both losses were factored into the April 1, 2010 renewal and loss affected treaties sustained increases of 10 percent to 15 percent. For loss-free treaties, rates were down by 5 percent to 10 percent.

Pricing was down by 10 percent to 20 percent in the liability market. Loss experience has been light, increasing the attraction of the business to underwriters. More interest was shown by indigenous Asian reinsurers and those non-native companies with a physical presence in the country or region.

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