January 18th, 2012

Guy Carpenter: January 2012 Reinsurance Renewal: US Property Market Behavior and Program Structure

Posted at 1:00 AM ET

Market Behavior

Individual market quoting behaviors, as well as the quoting trends for the market as a whole, provide evidence for a more fragmented marketplace. In reviewing how markets quoted relative to each other, the range around the average quote increased from last year’s up 10 percent to down 10 percent for 2011 renewals to up 11.5 percent to down 13 percent. The size of the quoting range around the average for individual companies, another indicator of the degree of consistency in the market, increased over 15 percent in 2012 from 2011.

Additionally, in the past, individual market quoting position within the chart has generally remained consistent to prior years, with similar markets providing the lowest quotes and similar markets providing the highest quotes. This year, this consistency did not hold up, with many markets making fairly significant moves in position and/or volatility of their quotes from the average.

To illustrate this, we have selected five reinsurers highlighted by color in the charts below:

H_chart1

H_chart2

One of the clearest representations of the market shift created by reinsurers’ implementation of new pricing and underwriting approaches occurs with the light blue and red reinsurers highlighted above. In 2011 their average quote position was roughly equivalent. In 2012, their quotes are now 15 points apart at opposite ends of the chart.

4_US & Bermuda P&C M&A

Generally, as noted above, there is agreement that pricing was up overall. Looking at average quoting behavior, 2012 quotes for nationwide programs were up roughly 20 percent over 2011 firm order terms (FOTs) but only up 6 percent over 2011 quotes. Overall, 2012 firm orders were approximately 94 percent of reinsurers’ average quote on a given program. In 2011, firm orders were roughly 90 percent of average quotes. Reinsurers were more sensitive this year to the relationship of the firm order to their quoted price, cutting capacity more aggressively than in the past if pricing was below expectations. This pushed firm orders slightly higher as a percent of average quotes in order to secure adequate capacity.

Program Structure

Overall, there was not substantial movement in limits and retentions. This also had an impact on some programs being completed at more aggressive terms as the significant increase in demand that was anticipated from the incorporation of RMS v11 did not materialize. This was due to many reasons and varied by company but included capital adequacy for insurers, conservative buying behavior in the past and adjustments to risk measurement, including blended model views.

There were differences in limit behavior between nationals and regionals. Regional programs in the aggregate purchased roughly 10 percent more limit, driven as much by loss activity and application of this experience to future scenarios as model version change. There was generally less flexibility in renewal pricing for those companies looking to purchase more limit. This increase in demand was more than off set by reductions in some nationwide programs.

While the focus for renewal analysis is generally on the movement in pricing year over year, in 2012 there is evidence of an increased fragmentation in market behavior. As reinsurers take increasingly customized approaches to assessing companies’ risk, insurance companies and their brokers must maintain an understanding of the differences emerging in approaches and actively analyze behavior during the placement process. Placement strategies will continue to evolve as companies’ exposure profiles and approach to measuring risk are matched with the most appropriate reinsurance partners.

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