2011 has been another challenging year for the (re)insurance sector. The sector is in a period of heightened market uncertainty as it begins to focus on the 2012 renewals. The devastating earthquakes in New Zealand and Japan, along with damaging tornadoes and floods in the United States and Australia, have resulted in insured losses of around USD70 billion so far this year.
Elevated global catastrophe activity, combined with the challenging macroeconomic environment, has seen pricing pressures build in catastrophe-exposed markets as global reinsurance capital growth has moderated. According to the Guy Carpenter Global Property Catastrophe Rate on Line (ROL) Index, rates were flat to up 10 percent year-on-year as of July 1, 2011. However, widespread hardening in the broader reinsurance market has not materialized as rates in non-catastrophe lines remain flat to down.
It is important to stress that despite the difficult start to the year, the reinsurance sector remains adequately capitalized with a significant excess capital position. Furthermore, the quality and liquidity of overall dedicated reinsurance capital remain strong. Yet the sector faces several headwinds in the run-up to the 2012 renewals. The macroeconomic environment remains challenging, as subdued economic growth and low interest rates continue to depress investment returns. There is also a growing concern over the sovereign debt crisis in Europe and the economic consequences following the downgrade of the United States’ credit rating.
Adding to the pressure on the market has been the impact of major catastrophe model releases, particularly for earthquake and wind risks. These model changes have been disruptive to the industry and significantly altered risk perceptions and unexpectedly changed calculated loss amounts. (Re)insurers face a significant amount of work between now and the January 1, 2012 renewals in order to gain a better understanding of how the revisions will affect their business.
All of these factors have resulted in an uncertain market as the sector begins to focus on next year’s renewals. Market conditions at the January 1, 2012 renewals will be influenced by loss experience in the remainder of 2011, and by the hurricane season in particular. 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 additional strain on the sector’s capital position.
Guy Carpenter is actively engaged in helping our clients navigate this challenging market through superior placement and portfolio management services, industry-leading advisory and analytics, actuarial expertise and leading-edge business intelligence.