January 18th, 2011

2011 Reinsurance Renewal Rates: United States Property

Posted at 1:00 AM ET

141x141jan1thumb13Property Catastrophe Market

Rates on line decreased by an average of 7.5 percent on US programs, but there were significant variations depending on cedents’ results, regional characteristics and coverage.

Catastrophe activity started off strong in 2010 with overall global losses in the range of double the average amount for the first half loss average since 2000. This activity included significant weather events in many parts of the United States. Even with these occurrences, rates declined through the July 1, 2010 renewals, primarily as the result of excess capital. As noted earlier this fall, this decreasing price trend was unlikely to change going into 2011 without a significant catastrophe event impacting the second half of the year. This did not occur, and as expected pricing decreased at the January 1, 2011 renewal on average at a risk adjusted rate of down 6 percent to down 10 percent.

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On a risk adjusted basis, measuring the relationship between the rate on line (the amount charged) and the loss on line (the amount of risk) for both the January 1, 2010 renewals and the January 1, 2011 renewals, the comparison indicates a decrease of between 6 percent to 10 percent in the amount charged per unit of exposure. Reviewing this relationship in the chart below, it is apparent that the amount of downward movement in pricing was not as significant in upper layers with low loss on line. This is in part due to minimum capacity charges.

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2011 quotes were on average 3 percent higher than 2010 firm order terms (FOT) but 5 to 8 percent lower than 2010 quotes. Overall, 2011 firm orders were approximately 90
percent of reinsurers’ average quote on a given program. Limits and retentions were relatively stable.

In reviewing how markets quoted relative to each other, the range around the average quote narrowed slightly from a year ago from up 10 to down 10 at January 1, 2010 to up 10 to down 5 for 2011 renewals. Market quoting behavior is similar to prior years, with similar markets providing the lowest quotes and similar markets providing the highest quotes.

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While substantial reinsurance capital continues to drive market behavior, there are factors that may begin to mitigate these current conditions, including continued pressures on earnings from low investment returns, diminishing reserve releases, inflation concerns and the impacts of Solvency II implementation, which may erode some available capital.The largest impact may still occur in response to catastrophe model changes.

Impact of Model Version Changes

Both AIR and RMS have introduced or will introduce new model versions significantly impacting US hurricane results. AIR released v12 in June 2010. RMS is due to release its v11 model update in February 2011. However, many reinsurers assessed changes to their pricing approach based on the RMS pre-release indications.

In the AIR v12 release, multiple components of the model were revised, creating a broad impact on results depending on the characteristics of the individual portfolio. Across Guy Carpenter’s book of business renewing at January 1 the average annual loss impact ranged from a decrease of 21 percent to an increase of 62 percent.

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While RMS is not due to release v11 until February 2011, this represents the largest version change in their history. Several reinsurers have advised that they are incorporating some adjustment for the new model output into pricing, before the model release. While no primary carrier, broker or market has a “beta” copy of the software, nor will any actual portfolio losses in the new version be provided by RMS before the model is released, RMS has provided indications of changes.

The range of change provided by RMS is based on its industry exposure database, not actual portfolios. When reviewing actual client portfolios, the change in loss can vary by over 100 percent. In addition, RMS has not completed testing, and the model does not yet meet quality standards for individual portfolio analysis. For these reasons, making assumptions before running the actual model is risky. RMS has indicated it will be providing greater directional detail in January when it is further along in the testing process.

Guy Carpenter has discussed the AIR and RMS changes with reinsurers and has learned that their approaches differ. Each reinsurer’s approach is heavily influenced by its own concentrations, the type of business it favors and the adjustments it was building into its previous pricing approach. Many reinsurers agree that several of the factors influencing increased modeled results have already been incorporated into their pricing methodology.

Analysis of the model version change shows a limited impact on the January 1 renewals. For RMS, reinsurers indicated they were building in adjustments before the version release demonstrated pricing behavior that was still largely in line with the rest of the market.

That said, due to the extreme difficulty in estimating changes to a given book of business, reinsurers have a very limited view of how their own PMLs will be impacted by the RMS v11 release. This, coupled with the potential need for some companies to evaluate the purchase of additional limit once they are able to assess their own new results, could result in a scenario with greater demand and less supply through the first half of 2011.

A.M. Best has indicated in a recent conversation that they will not grant a grace period in dealing with companies at risk when the impacts of the model version changes are calculated. AIR results have been available for some time, and RMS has provided the industry with enough information to shed light on the regions and types of business that will be impacted by the new version. A.M. Best expects that affected companies should anticipate the potential impact as they renew their 2011 catastrophe protections. In addition, these companies should be prepared to discuss with A.M. Best any risk management changes they have made in the event they have a meeting or call with their analysts prior to running RMS v11.

Click here to read the Executive Summary of Guy Carpenter’s report: Global Reinsurance Outlook: Points of Inflection; Positioning for Change in a Challenging Market >>

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