Analysis of the renewal data indicates pricing trends for June and July 1 non-Florida renewals are similar to the market behavior reported in the June 1 Florida renewal report. Pricing increased in the range of 5 percent to 10 percent on a risk adjusted basis as measured by RMS v9. This is in contrast to the January 1 renewals, which were down on average. The weighted change in pricing for the aggregation of renewals in 2011 ended down roughly 3 percent, due to the majority of renewals having anniversary dates at January 1. Historical pricing activity is shown below in Figure 1.
Evaluating the pricing behavior for national and regional renewals excluding Florida at June 1 and July 1, we see that the general market response in both groups was fairly consistent. Pricing for lower layers increased less significantly than upper layers. In both cases, there was some additional pressure on upper layer pricing due to demand for those limits. In particular with regional writers, there was an up tick in minimum capacity charges that had been pushed to fairly low levels in recent years.
The charts below represent the relationship between the rate-on-line (the amount charged) and the loss-on-line (the amount of risk) for the programs renewing at June 1 and July 1, excluding Florida-only renewals, using RMS v9 to measure loss-on-line. Upper layers have lower loss-on- line (the left side of the charts). Note that, while visually, the movement in the upper layers appears to be less significant than the lower layers, the percentage movement is greater, as the overall pricing is significantly less than the lower layers.
As reported in the June 1 renewal report, the calculation of risk adjusted pricing is dependent on the method used to calculate the “risk.” RMS v9 provides a consistent measure of the level of risk from 2010 to 2011. However, to some extent, reinsurers also assessed the results of the new version of AIR and the new version of RMS in making their pricing decisions. Consistent with the Florida renewals, the change in risk adjusted pricing is flat when using AIR v12 and down 15 percent when using RMS v11 to measure the amount of risk the reinsurer is assuming for a given price. Unadjusted change in rate-on-line increased approximately 3 percent to 6 percent. Quoting behavior did not demonstrate the same level of deviation from renewal activity seen at June 1 with the Florida renewals. The range in the June and July non-Florida renewals from the average quote for a program was up approximately 5 percent to down 10 percent. This is very close to the overall average for the 2010 renewal season.
Regarding capacity, a significantly larger percentage of authorized capacity was utilized to fill out the 2011 renewals as compared to 2010. April through June renewals in 2011 signed almost 95 percent of authorized capacity, as opposed to approximately 90 percent in 2010. That said, we are not experiencing any capacity shortage - rather, a more careful evaluation by reinsurers of where they will deploy their capacity in a transitional market.
Looking ahead, prior to the January 2012 renewal season, a significant amount of evaluation will occur within both insurance and reinsurance companies. For insurers, analysis of key drivers of the model version changes and assessment and validation of new risk management parameters is essential. This will allow an approach to the January 1 renewal season with a clear message to corporate stakeholders, rating agencies and reinsurers. While the view of risk the new model versions put forth is one component of this assessment, companies have also utilized additional methods to measure risk and manage portfolios. Decisions regarding reinsurance purchasing and risk management in light of the new model versions will also be influenced by other risk assessment factors.
Analysis of renewal data and discussions with reinsurers indicate that there are still some disparate views on the integration of the new models into pricing, as well as assessment on the impact of reinsurers’ own portfolios. Insurers’ ability to provide detailed reasoning for their own assessment of their portfolios, as well as reinsurers’ solidifying their position on metrics for deploying capacity, will be key factors leading into January 1. The catastrophe activity for the remainder of the year will also have a critical impact on reinsurer capital and the market position at January 1.