January 17th, 2012

Guy Carpenter: January 2012 Reinsurance Renewal: US Property Pricing

Posted at 1:00 AM ET

While the United States did not experience a single large cat event in 2011 as occurred in some other regions, there was a high frequency of events that impacted many companies. In addition, the release of RMS v11 had an extreme effect on modeled results for many companies, leaving the United States just as exposed to the shifting market as elsewhere.

This more diverse view of risk impacted quoting behavior as well as ultimately the perception of risk-adjusted price change. Depending on how the price change was assessed, from the way the individual models were run to the blending of various model output and the weight given for methods outside of the cat models, the range of calculated price change for an individual contract could be extremely large, and in some cases was over 100 percent from the high to the low perspective. Because of this, providing one view of the change in risk-adjusted pricing can be somewhat misleading. Also, there was more pressure on minimum rate on line business this year due to both losses and model change. Very small actual increases in these layers can appear as large percentage increases, impacting the average.

It is critical in this environment to ensure that each company understands how best to navigate this marketplace with a thorough understanding of its own risk, as there is not as consistent an approach to measuring the value of the risk. In the past, using one method to analyze and track the markets’ renewal behavior provided a reasonable proxy for market movement. However, with the wide disparity in calculated results the underlying reasons for differences in perspective need to be considered. Historical market data does not have as much relevance, and real time market behavior analysis is essential.

January 1, 2012, Pricing

Please keep in mind when reviewing our reported pricing data that these are averages, and there will be wide variation in individual company experience. There is a significant range in individual company results depending on the region and characteristics of the program such as loss activity and coverage, but the range is further impacted depending on the way the risk adjusted change is calculated, as noted above.

As calculated based on the renewal data captured in our ROLePlay database, on average across US programs, overall movement in ROL at January 1, 2012, from January 1, 2011, was 8 percent.

FIG 4 US PROP CAT ROL INDEX

Note that while increases in pricing began mid-year 2011, overall pricing in 2011 was down as a more significant number of programs renew at January 1.

When reviewing data for national programs across all layers, on a risk-adjusted basis, and measuring the relationship between the rate on line (the amount charged) and the loss on line (the amount of risk) for both the January 1, 2011, renewals and the January 1, 2012, renewals, the comparison indicates an increase of 7.5 percent in the amount charged per unit of exposure.

While this represents an overall average, as noted, variation is substantial. Variability in regional programs was even greater with loss-free renewals averaging flat to up 15 percent and increases of 10 percent to over 40 percent for those that were loss-impacted.

Individual company factors such as geography, exposure changes, losses and model change had a substantial impact on each individual renewal, as did the market perception of original pricing. Also, as noted above, the calculation of regional pricing movement percentages in particular was impacted by fairly small increases in minimum rates on line. Because the base was very small to start with, the percentage increase is misleadingly large.

Click here to register to receive e-mail updates >>

AddThis Feed Button
Bookmark and Share


Related Posts