Reinsurance rates were generally flat at the January 1, 2012, renewal for the UK property market. While there were no local events causing reinsurance treaty losses, the effects of global catastrophes and local retention losses, such as freeze and riot, did have an impact.
The UK property primary insurance market remains depressed due to ongoing (and intense) competition. Average calendaryear combined ratios for 2011 are expected to exceed 100 percent, and we expect that smaller carriers will be viewed as targets for merger and acquisition (M&A) activity due to low price-to-book ratios, pressures from Solvency II and the continuing struggle to lift operating margins in the original market. The perception in the UK property market is that rates will not increase significantly until 2013, but upward pressure on original terms and conditions are expected in 2012, as reserve releases dry up and margins are examined more closely.
In the reinsurance market, international catastrophe losses have led to increased focus on the underlying perils. The Dublin rainstorm in October 2011, freeze losses from December 2010 and January 2011 and riot events in August have contributed to this.
Subject base exposure relative to premium is fairly stable in the United Kingdom, with both essentially flat. For smaller carriers, where reinsurance premium is a significant percentage of subject premium, increased reinsurance rates are clearly inconsistent with a stagnant primary market.
Solvency II is, of course, among the regulatory developments being watched in this market. Larger composites are looking to take advantage of the diversity of their portfolios and are consolidating their operations in order to do so. Maximum diversity is achievable for the composite insurers - termed a “single integrated insurance business” (SIIB) in Solvency II parlance. The market is watching the emergence and performance of the SIIB as a Solvency II regulated entity.
Finally, the Association of British Insurers’ (ABI) “Statement of Principles” on UK flood is set to expire in 2013, and the UK government has recently indicated that it is unwilling to meet the ABI’s demands for a state subsidy on flood premiums. This is likely to mean that insurers may red line fl ood-exposed properties unless a market-led solution can be found.
Pricing for catastrophe excess of loss programs is estimated to range from risk-adjusted flat (for smaller programs) to up 4 percent (for larger programs) at the January 1, 2012, reinsurance renewal. We anticipate an average of around a 2 percent increase. While no programs were affected by losses in 2011 in the United Kingdom, there has been a noticeable tightening of capacity for worldwide and incidental cover. RMS v11 has not been fully adopted, but it is influencing quote terms in conjunction with international loss activity. In general, market capacity has been flat and sufficient.
Per risk excess of loss working layers were flat to down 10 percent, with high risk excess programs flat to down 5 percent. While there were no trends in changes to reinsurance structures or market capacity, reinsurers were more focused on overseas exposures and catastrophe perils.
There have been no changes to cedent retentions for proportional treaties in the past 12 months, and there has been significant pressure from markets to hold or reduce ceding commissions. While it is too early to tell whether capacity has changed, it appears to be flat.