The World Catastrophe Reinsurance Market 2010 report finds that surplus capital in the reinsurance market has been depressing prices, causing them to fall by 6 percent on average through the 2010 renewal season. Guy Carpenter estimates that the reinsurance market was overcapitalized by as much as USD20 billion, or 12 percent, at the beginning of 2010. While this amount came down to approximately 8 percent by the end of June, reinsurers’ excess capital continued to be the main driver of rate reductions at the 2010 renewals. If no market-changing event were to occur in the second half of the year, surplus capital is likely to remain the driving force behind continued rate softening at next year’s January 1 renewal, according to the study.
According to the Guy Carpenter World Rate on Line (ROL) Index, global catastrophe reinsurance rates fell by 6 percent on average through the 2010 renewal season. Although markets that suffered catastrophe losses in early 2010, such as Chile, saw prices increase, the underlying trend elsewhere was one of rate reductions. One of the main reasons for falling rates is excess capital in the reinsurance market. Guy Carpenter estimated that the sector was overcapitalized by as much as USD20 billion,or 12 percent, at the beginning of 2010. Although the overcapitalization fell back to around 8 percent by the end of June, the surplus capital among reinsurers remained the driving factor at the 2010 renewals.
So what does all this mean for the reinsurance market and pricing? On the back of the heavy losses in the first half of 2010, reinsurers were hoping to see an end to the soft market and for prices to rise. However, Guy Carpenter data shows the high payouts have generally been insufficient to turn prices. According to the Guy Carpenter World ROL Index, global catastrophe reinsurance rates fell by 6 percent on average through the 2010 renewal season (see Figure 2) as surplus capital and capacity drove down prices. This rate decline followed an increase of 8 percent in 2009 and a fall of 10 percent in 2008.
The increasingly complex nature of the reinsurance industry and the growth in alternative risk transfer instruments such as catastrophe bonds have reinforced the importance of catastrophe models and data management platforms in the risk management process. Such innovations have allowed (re)insurers to improve their understanding of natural perils while accurately estimating potential catastrophe losses to their portfolios and managing their exposures.
Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas,New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance, or insurance product.