Reinsurance Renewal July 1, 2010: Capital Cushion Continues to Impact Pricing, Part I: Introduction and US Property
Further erosion of rates was evident at the July 1, 2010 reinsurance renewal. Property rates were down by as much 15 percent despite substantial catastrophe loss activity in the first half of 2010. Heavy losses from the Chilean earthquake were insufficient to turn prices outside the areas immediately affected by the earthquake, despite the announcement of large increases in estimates from the largest European reinsurers. In the energy and casualty sectors, conditions were flat or down, but the Deepwater Horizon rig disaster may exert upwards pressure as more information emerges. Excess capital remains available to absorb losses as evidenced by continuing share buy-backs and the substitution of equity capital with less expensive debt.
The market’s direction for the remainder of the year is more difficult to forecast. Excess supply continues to depress pricing, but the substantial depletion or even exhaustion of reinsurers’ catastrophe loss budgets in the first half of 2010 may help to stabilize the market. For the medium term, pressures on earnings from low investment returns, diminishing reserve releases, inflation concerns and, in Europe, Solvency II continue to build. Consolidation would be a logical response, but depressed price-to-book values are an impediment. Increased volatility in the investment markets, widening credit default swap spreads and European sovereign debt worries also point to wider economic concerns. Meanwhile, the hurricane season is predicted to bring elevated storm activity. If these forecasts are right there is an even greater chance that the marketplace will look very different at the January 1, 2011 renewal.
US Property Catastrophe
The rate decreases seen were as expected across the July 1 renewals. Preliminary analysis of the renewal data shows that pricing was down in a range equal to earlier renewals on a risk- adjusted basis, decreasing 10 percent to 15 percent. Overall, pricing for the year ended down 12 percent.
Market behavior is similar to earlier patterns. Overall 2010 quoting behavior was less volatile than 2009 with average quotes in the range of declines of 10 percent to increases of 10 percent versus 2009 when the range was declines of 15 percent to increases of 15 percent.
Reinsurers have continued to present the position that those companies that are more highly rated should seek to have that financial strength recognized by commanding a higher price. However, until this year, we have not seen strong evidence for their attempting to achieve this outcome in the quoting behavior. Throughout 2010 there is more evidence of a relationship between reinsurers’ rating and their average quotes than previously displayed. The following chart shows overall quoting behavior through 2010 with reinsurers represented by their A.M. Best ratings.
While catastrophe losses in 2010 have had only a very localized impact on pricing, storm activity is up and January 1 market conditions will be influenced by the amount of reinsurer capital eroded by loss activity through the rest of the year. The predictions for a very active hurricane season appear to have had a slight impact on June and July renewals with quoting behavior firmer than expected and some mention of wind aggregates filling up. While there is still an abundance of reinsurer capital, there is clearly weight being given to the potential for large hurricane losses this season and possible firmer pricing opportunities in the aftermath.
One significant unknown is the impact the oil from the Deepwater Horizon event will have on losses from storms in the Gulf. Preliminary analyses from various sources suggest that it will be necessary to better understand the applications of the covered cause of loss determination and existing pollution or contaminant language.
US Property Risk
Risk renewals have reflected individual treaty experience in 2010 with loss-affected renewals experiencing firmer pricing. Overall, risk treaties have seen pricing shifts in a smaller range than property cat, having not experienced the level of increase due to financial market conditions in 2009 and also seeing less of a decrease in 2010.
For those treaties not experiencing loss activity, pricing on a risk adjusted basis decreased 5 percent to 10 percent on average. Risk programs having a loss at least into the second layer saw firmer pricing with an average increase of 2 percent to 7 percent.