September 28th, 2011

Sector Capital Position

Posted at 1:00 AM ET

The first increase in global property catastrophe pricing since 2008 has been driven by a range of factors, from the elevated global catastrophe activity outlined above to a moderation of global reinsurance capital growth. At the January 1, 2011renewal, 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 billion, when offset against premiums, investment income and other factors, have resulted in the reinsurance sector’s excess capital position roughly halving to about USD10 billion.

Figure 3 shows historical capital levels for the Guy Carpenter Global Reinsurance Composite beginning in 1998. From a pricing perspective, rates tend to rise when capital levels in the sector tighten. Conversely, reinsurance rates on line often fall when capital levels are above trend. The decline in capital growth witnessed so far this year goes some way towards explaining the building pricing pressures seen in property catastrophe lines.

Fig.3

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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. 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 4). This occurred as the decline in net income was mitigated by a significant cut in share buybacks and dividend payments.

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