The (re)insurance sector experienced historic catastrophe losses in 2011, many in areas not previously considered ‘peak’ risks. Devastating earthquakes in Japan and New Zealand, floods in Thailand and Australia and a record-breaking tornado season in the United States contributed to insured losses in excess of USD100 billion. As carriers continue to penetrate new growth regions, ‘cold spot’ losses are expected to increase.
In addition to heavy catastrophe losses, the sector was tested by a very challenging macroeconomic environment. The Eurozone debt crisis and accompanying global deleveraging together, with reduced gross domestic product (GDP) estimates, low investment yields and increased investment volatility, continue to exert pressure. Carriers can no longer rely on investment income or reserve releases to compensate for underwriting weakness. As a result, accident year underwriting is now crucial to achieving profitability.
Further complicating the situation, the sector was left to interpret important vendor catastrophe model changes. Fortunately for many companies in the United States and the Caribbean, the new model changes were already reflected in underwriting processes to varying degrees based on previous loss experience. By contrast, there was general agreement in Europe that the full impact of changes reflected in new versions was not fully integrated at year end.
Many reinsurers undertook a comprehensive review of modeling methodology and implementation in order to assess the changes. Most reinsurers are now making customized adjustments to model outputs, blending results from multiple models and, in some cases, building their own model view. This approach has created significant fragmentation in the market’s assessment and pricing of risk.
In spite of all of these challenges, underwriters have demonstrated their resiliency and remain well capitalized. Although much of the sector’s excess capital was reduced at mid-year, dedicated reinsurance sector capital finished 2011 near the same level where it began. Improvements in enterprise risk management (ERM) and effective capital management contributed to the success and strength of the industry. The sector is increasingly assessing non-traditional reinsurance products with growing interest in capital markets solutions. This trend is expected to continue in 2012 with significant growth anticipated in the catastrophe bond and industry loss warranty (ILW) markets.
2012 Renewal Outcome
Given loss experience and significant model version changes impacting the property catastrophe space, balanced by a healthy capital environment, reinsurers were in a position to undertake a major review of pricing and underwriting going into the renewals. This led to significant market fragmentation and increased market volatility at January 1.
While the market has tended historically to respond to loss activity or model change in a relatively uniform fashion, there was a much greater degree of customization in reinsurers’ responses at this renewal. As the level of sophistication increases, reinsurers are tailoring their pricing and capacity decisions to adhere to their own unique perspectives. This can lead to capacity shifts with some reinsurers increasing capacity in certain regions while others are pulling back. Additionally, pricing responses were varied due in part to loss activity but also to the very diverse treatment of the updated vendor catastrophe models.
There was a 9.5 percent average increase in global property catastrophe rates at January 1, 2012, as illustrated by the Guy Carpenter Global Property Catastrophe Rate on Line (ROL) Index. However, as is evident in the next section of the report, there were wide-ranging rate movements at national, regional and even local levels depending on loss experience and exposure perceptions.
The broader reinsurance market experienced mixed renewals. Despite the prospect of sustained low interest rates, rate movements for casualty lines continued to be subdued. Most other lines also saw moderate price changes, with increases and decreases in the single digits. Marine & energy once again saw rates increase while US surety saw a clear downward trend.
Achieving Success in 2012
The complex January 1, 2012 renewals were a culmination of a difficult 12 months, and the challenges for the coming year will undoubtedly be many. However, for companies equipped with the proper insights, tools and analysis, challenges can become opportunities. Towards the end of the report, Guy Carpenter identifies ten themes that the (re)insurance sector will face in 2012. We will discuss each theme with our clients through 2012 to highlight any opportunities they present.
- Aggregate covers
- Cat model changes
- Tightening reserves
- Rating agency assertiveness
- Solvency II
- Dodd-Frank Act
- FASB-IASB reconciliation
- Lloyd’s of London - Positioning for the Future
- Cold spots
We believe that with a thorough understanding of these critical issues, as well as the best tools and market insight, our clients can position themselves for success in this transitioning market.