Due to the timing of factors impacting the April 1 programs, many of these renewals have been finalized very late. While the renewal data is still being assessed our current analysis of the U.S. property catastrophe market showed signs of a market in transition at this April 1 renewal, with pricing roughly flat to slightly up, as compared to down 6 percent to 10 percent at January 1, 2011.
Factors affecting the April 1 renewals included the release of RMS’s RiskLink v11 U.S. Hurricane model on February 28 and very heavy global natural catastrophe activity. Pre-release briefings on the RMS v11 model indicated the potential for material changes in results, and as the Tohoku earthquake in Japan occurred, many companies were in the process of assessing their firm order terms.
While it is still far too early to evaluate the ultimate impact of either of these factors, their occurrence during the renewal process led to a cautious marketplace. In general, as reinsurers have not yet had time to evaluate the impact of these events on their own capital, they have taken a position to renew at expiring terms.
Programs that were out early at terms measuring any notable price decrease were not supported at the lesser pricing, and a significant number of programs were repriced to reflect the changing circumstances. Capacity needs in excess of expiring were subjected to heavier scrutiny. Also, with the high level of uncertainty in the market, reinsurers were more willing to significantly cut back on their support of a program if pricing did not meet expectations.
In reviewing the relationship between the rate on line (the amount charged) and the loss on line (amount of risk) for the April 1, 2010 and 2011 renewals, pricing was flat to up very slightly.
The portion of Figure 1 showing the relationship between 2010 and 2011 quotes, tracks very closely with the January 1, 2011 renewal activity. The shift occurs in the firm order terms, where the spread between April 1, 2011 quotes and final terms is much tighter than in 2010 or at January 1, 2011. This leads to pricing being roughly flat as opposed to down as in the past several quarters.
The number of renewals at April 1 is significantly smaller than at January 1, and individual company results vary based on their own given set of circumstances. Factors impacting individual renewal results include modifications in structure, changing risk profiles and loss activity. While many companies renewed their existing structures there was some appetite for increased limit. For the most part, retentions were stable.
While factors in the marketplace have created an uncertain renewal environment at April 1, an abundance of reinsurance capacity was a critical element in companies’ ability to secure favorable terms and conditions in the 2010 and January 1, 2011 renewals. Alternatively, constrained capacity going into the 2006 and 2009 renewal seasons contributed to the realization of rate increases at those renewals. The degree to which capacity is impacted by recent events ultimately will play a substantial role in the market’s position in the coming months. To this point, the April 1 renewals provided no indication that there is currently a capacity issue for U.S. catastrophe placements, as reinsurers continued to provide substantial authorizations.