Predicting reinsurance renewal pricing is never an exact science. This year the task is further complicated by the rampant uncertainty in European markets and economies. Still, we expect that overall, on a risk-adjusted basis, prices at the 2012 renewal will be flat to down for European insurers.
We are paying particular attention to a host of factors this year that could affect renewal prices in January. Reinsurers faced a challenging environment this year. The heavy losses sustained during the first half of 2011 led to a deterioration of the reinsurance sector’s capital position. Prior to the hurricane season, Guy Carpenter estimated that 2011 reinsurance sector natural catastrophe losses were more than double natural catastrophe budgets. Clearly, catastrophe activity for the remainder of the year will have a critical impact on reinsurer capital and the market position at January 1, 2012 renewals.
Catastrophe model changes have contributed to this year’s volatility and uncertainty, with major revisions by RMS to its European windstorm and U.S. hurricane model. AIR also updated its pan-European earthquake model in July. These model changes significantly altered risk perceptions, leading to a wide-ranging impact on loss estimates - and a significant burden on companies struggling to incorporate them.
The Solvency II initiative - and its attendant administrative and potential capital burden — also continues to present challenges. Finally, the Eurozone fiscal crisis - which, so far, has managed to remain contained - has created a chronic undercurrent of uncertainty this year.
Despite this volatile and uncertain environment, we see a number of factors that could subdue upward price movement at the January 1, 2012 renewal. First and foremost, we note a material degree of industry overcapitalization. We estimate the global reinsurance sector’s dedicated capital position to be about USD10 billion above historical averages, given risks assumed. Although this excess capital position fell from an estimated USD20 billion at the start of 2011, the quality and liquidity of overall dedicated reinsurance capital remains strong.
We also note that this year, to date, Europe has seen very little catastrophe loss activity. Despite rate increases elsewhere, prices were flat to down in Europe. In the absence of significant losses in Europe, we continue to expect subdued pricing pressures in the region.
While both catastrophe model changes and Solvency II have created challenges for companies this year, we don’t expect either to lead to higher pricing at renewal time. We believe the industry is (and should be) starting to consider model changes as enhancements to supplemental tools, not market-leading events. Solvency II preparations, for all the hand-wringing around the regime’s final form and implementation timeframe, are, for most companies, underway and under control.
We believe that, barring late-year catastrophes or sustained upward revisions of early-2011 loss estimates, these factors will keep aggregate risk-adjusted rates in Europe flat to slightly down at the 2012 renewal.