October 25th, 2011

Reinsurance Capital, Analytics and Market Intelligence: Three Parts of a Successful Renewal

Posted at 1:00 AM ET

flandro_davidDavid Flandro, Global Head of Business Intelligence

A year busy with global catastrophe activity will undoubtedly affect the January 1, 2012 reinsurance renewal. Whether high catastrophe losses around the world will counteract the effective management of capital remains to be seen and many factors will be brought forward on both sides of the negotiating table. Cedents are well-positioned to renew at favorable rates and conditions, as long as they bring the right information to bear. The savvy use of analytics and market intelligence can make a significant difference in the cost of cover. It pays to be prepared.

Catastrophe budgets were hit hard - and early - this year. Worldwide, carriers have sustained USD80 billion in losses, with the Tohoku and Christchurch earthquakes, Australian floods and U.S. wind events contributing the most damage. At the beginning of 2011, dedicated reinsurance sector capital stood at USD20 billion excess of USD170 billion. By the middle of the year, however, this excess was roughly halved.

Nonetheless, the reinsurance sector has been able to persevere - and it is likely to see its aggregate capital grow by the time the January renewal arrives. According to extensive analysis conducted by Guy Carpenter on reinsurance counterparty security, the reinsurance sector will be solvent and liquid heading into the renewal. While the risk of a financial catastrophe as a result of the European sovereign debt crisis needs to be taken seriously, as it could impact the capital position of the sector, it currently appears manageable for most reinsurers. Guy Carpenter continues to monitor the situation regularly.

Given the state of the market, with sufficient capital having been available to address heavy catastrophe losses, the outcome of the January 1, 2012 renewals is likely to be driven by negotiation on the merits of a particular program. And the principal way to influence the result is to prepare: analytics and market intelligence will be the drivers of reinsurance renewal rates this year.

For Guy Carpenter and our clients, this means understanding the characteristics of each program that markets will find unique. We focus on using our best-in-class analytics and market intelligence to differentiate our clients in a way that helps identify the negotiating levers we can use to secure favorable pricing and terms relative to peer programs.

With a full understanding of a cedent’s exposures and potential model change implications, it’s possible to ensure that they are presented fairly to reinsurers. This provides a foundation for discussing market direction, the availability of capacity and a customized placement strategy. In particular, this includes using RMS v11 results prudently. The change will affect the January 1, 2012 renewals, but integrating the results out of the box is not appropriate: our detailed analysis of the model’s methodology provides specific guidance for using the model’s results optimally.

To bolster the results of the catastrophe model, Guy Carpenter includes a capital modeling component. Clients will be able to learn the implications of different capital allocation decisions with MetaRisk® and deploy capital in ways that are more likely to help attain return on equity targets and grow firm value. It is also possible, at this point, to improve counterparty selection and use cutting-edge market intelligence and business intelligence to facilitate optimal strategic decision making.

At the coming renewal, catastrophes and capital alone won’t determine the direction of reinsurance rates. Rather, it will come down to cedents and brokers, and how they prepare for the negotiations. With the right data, tools and intelligence, insurers will be able to make the right decisions for their capital - and their shareholders.

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