Europe in 2011 is a tale of two continents. For reinsurers it has been a period of calm. Elsewhere, however, it has been a time of tempest as the financial crisis has increased in uncertainty and intensity. Under such circumstances, trying to provide a forecast of market conditions for the January 1, 2012 renewal is especially challenging. Nevertheless, Guy Carpenter expects prices to drift or decrease at the January renewal.
The reason, as is often the case, is simply a matter of supply and demand. Despite a record accumulation of catastrophe losses in Australasia and the United States during the first half of 2011, reinsurers’ balance sheets remain solvent and liquid. Earnings have been wiped out and capital has been trimmed, but these occurred from a position of strength and excess capital that existed when the year opened. Less than a handful of reinsurers have seen their capital eroded by 15 percent or more in 2011, compared with at least 14 losing more than 25 percent and three over 50 percent in 2005.
The catastrophes have led to some localized price increases - though not in Europe, which, apart from a vicious summer storm in Denmark, has been spared large losses this year. Meanwhile, harsh economic conditions continue to suppress demand in the primary market, making it difficult for reinsurers to push through price increases. There remains no immediate sign of the general, market-wide increase in prices.
It has not been so calm elsewhere. Catastrophe model changes have contributed to uncertainty, with the revision of RMS’s European windstorm model and AIR’s pan-European earthquake model. RMS v11 indicates higher losses for lower return periods, with implications for lower layer loss costs. At the higher return period, losses generally decrease, except in the British Isles, France and Germany. The introduction of storm clustering also has significance for tail risk. These model changes may influence negotiations, but complexity could mute the impact at January 2012.
Solvency II preparations progress and could affect pricing if the burden exceeds expectations. The focus of companies’ preparations is shifting from capital to risk management, governance and disclosure requirements, all of which could increase administrative costs. This should become clearer in coming months, but procrastination over implementation continues to delay the big day.
It is the financial crisis that dominates Europe. Stock markets saw extreme volatility during the autumn as the Greek debt debacle rolls on. A worsening of the crisis could affect reinsurance pricing - and the industry as a whole - in many ways. Increased solvency pressure as asset values fall or defaults occur, increased counterparty credit risk and potential difficulty refinancing short-term debt are all possible results. Meanwhile, central banks keep interest rates low to avoid stifling anemic economic growth, putting pressure on insurers’ earnings.
Despite the economic and political turmoil, Guy Carpenter believes there is adequate capacity in Europe if it is approached sensibly and carefully. Aside from the impact of loss experience and model changes on individual accounts, barring late-year catastrophes or sustained upward revisions of early 2011 losses, aggregate risk-adjusted rates in Europe are expected to be flat to slightly down at the January 1, 2012 renewal.