David Flandro, Head of Global Business Intelligence
The first six months of 2011 experienced heavy losses from an exceptional accumulation of global natural catastrophes. A series of powerful earthquakes in Japan and New Zealand, combined with multi-billion dollar payouts from tornadoes and floods in the United States and Australia, meant the (re)insurance sector experienced the costliest first half on record in accident-year terms. Insured losses of about USD70 billion are estimated for the period. These losses are more than five times higher than the first-half average for the past 10 years and second only to the full 12-month loss of 2005.
Losses Exert Upward Pressure on Property Catastrophe Pricing
The heavy losses have had an impact on capital levels and pricing in the reinsurance market. Since the January 1, 2011 renewal, the decline in the capital positions of some reinsurers has exerted pricing pressure on catastrophe-exposed markets. Indeed, according to the Guy Carpenter Global Property Catastrophe Rate on Line (ROL) Index, rates were flat to up 10 percent year-on-year at July 1 (see Figure 1). However, rates in non-catastrophe lines continued to experience downward pressure.
Figure 1: Global Property Catastrophe ROL Index 1
Source: Guy Carpenter
Sector Capital Position
The first increase in global property catastrophe pricing since 2008 has been driven by a range of factors, from the elevated global catastrophe activity, to a moderation of global reinsurance capital growth. At the January 1, 2011 renewal, Guy Carpenter estimated that the global reinsurance sector’s dedicated capital position was about USD20 billion above historical averages, given risks assumed. Since then, the catastrophe losses of around USD70-75 billion, when offset against premiums, investment income and other factors, has resulted in the reinsurance sector’s excess capital position roughly halving to about USD10 billion. Adding to the pressure on the market was the impact of the new Risk Management Solutions (RMS) U.S. hurricane model release.
Despite the difficult start to the year, it is important to stress that the reinsurance sector remains adequately capitalized with a significant excess capital position. Furthermore, the quality and liquidity of overall dedicated reinsurance capital remains strong. During the first half of 2011, the Guy Carpenter Global Reinsurance Composite’s dedicated capital position fell by only 1.8 percent, to around USD168 billion (see Figure 2). This occurred as the decline in net income was mitigated by a significant cut in share buybacks and dividend payments.
Figure 2: Evolution of Guy Carpenter Global Reinsurance Composite’s Shareholder Funds
Source: Guy Carpenter
Market conditions at the January 1, 2012 renewal will be influenced by loss experience in the remainder of the year, particularly the 2011 hurricane season. A quiet hurricane season with no damaging landfalls could enable reinsurance capital to resume growth, while a busy season with at least one significant landfall will put an additional strain on the sector’s capital position.
How companies integrate the various new catastrophe model releases into their businesses will also have an impact. As the industry absorbs several major model updates in the remaining months of the year, we expect to see increased demand for reinsurance cover and further pockets of price firming during the 2012 renewals.
(1) All renewals shown in Figure 1 are at January 1 of the indicated year, except the date labeled June 1, 2011. As the relationship between exposure and rate-on-line differs from January to June renewals, the final data point represents a best estimate of the sequential change in the cost of property catastrophe cover.