February 1st, 2012

January 2012 Reinsurance Renewal: Asia Pacific

Posted at 1:00 AM ET

Australia/New Zealand

Reinsurance rate increases at the January 1, 2012, reinsurance renewal in Australia and New Zealand continued the July 1, 2011 renewal trend. Half a year ago, rates were up more than 50 percent for property-catastrophe reinsurance in the region, due to unprecedented loss frequency and severity.

Recent loss activity in the Australia and New Zealand market tends to be shaped by a series of losses dating back to the Melbourne hailstorm of March 2010. With an estimated insured loss of AUD1.3 billion, this event was the first in a number of events - storm, hail, flood, cyclone, bushfire and earthquake - costing the insurance industry around AUD28 billion over the past 21 months. Approximately two-thirds of this loss total has been passed on to reinsurers.

The events that stand out most are the earthquakes in the Christchurch, New Zealand area in September 2010, February 2011 and June 2011. These catastrophes cost about AUD6 billion, AUD13 billion and AUD1.3 billion, respectively.

Additional regional losses in Australia included two separate flooding events that struck Queensland in December 2010 and January 2011. They cost the insurance industry a combined AUD4.5 billion (approximately).

For all of these losses, the economic impact has far outweighed the insurance loss.

As the market deals with losses - unprecedented in both frequency and severity - the Australian Prudential Regulation Authority (APRA) is continuing its review of capital standards for the country’s general insurers. The effective date for implementation of APRA’s new capital standards is January 1, 2013. In general, this latest set of capital standards is set to increase the overall level of capital requirements for the insurance industry.

Australia’s two major reinsurance renewal dates are January 1 and July 1. Renewals at the July 1, 2011, renewal reflected loss experience to that date, with price increases in the 20 percent to 100 percent range. Programs exposed to both Australian and New Zealand catastrophe events sustained reinsurance rate increases of more than 50 percent. This trend has continued into the January 1, 2012, reinsurance renewal. Rates increased considerably for lower layers as a result of loss experience. Upper layers also have experienced significant increases, as reinsurers reevaluated the cost of deploying their capacity to Australian and New Zealand catastrophe programs.

With no material change in modeled output being seen as a result of moving from RMS v9 to RMS v11, catastrophe limits remained fairly stable. While the lower layers of catastrophe programs were loss-affected, reinsurers preferred unchanged retention levels as they sought to maximize the reinsurance premium pool available to them.

With an eye undoubtedly on the capital changes being proposed by APRA, cedents continued to seek reinsurance support for aggregate and sideways loss covers.

Reinsurance capacity has remained largely intact - the capacity withdrawn represented reasonably small amounts. And, with prices increasing to what many reinsurers perceive to be a more sustainable level, some underwriters have taken the opportunity either to increase shares or to return to a market where the pricing had been too challenging before.

Property per risk reinsurance renewals also are consistent with the July 1, 2011, results. Reinsurers sought to limit the amount of catastrophe capacity they would allow within proportional treaties. With event limits coming under pressure, and commission terms being amended to reflect both recent loss activity and reinsurers’ increased cost of catastrophe capacity, there was a continued move from proportional to nonproportional risk protection. Within these excess of loss per risk structures, reinsurers again sought to limit the amount of catastrophe cover that was afforded. Reinsurance capacity supply continued to exceed demand for excess loss per risk covers with limited or no catastrophe cover included.

China

Primary rates in China were generally stable during 2011. No significant catastrophic events occurred in 2011.

Motor premium growth of 16 percent in 2011 was outpaced by other sectors within the Chinese non-life insurance business, which collectively grew 22 percent. The non-motor sector is expected to drive non-life insurance growth in the coming year as motor premium growth slows as more cities control car sales.

While the property catastrophe renewal was not affected by any major loss events in 2011, there has been notable increase in ROL, which is mainly due to an increase in net retained exposure. On a risk-adjusted basis, price movement is flat to a 10 percent increase with the exception of one capacity-required earthquake program, which had a higher increase.

For proportional treaty, some cedents elected to retain more risk because of the increase in capital. Commissions for most proportional programs remained at expiring levels, while profit commissions were added to a few programs. Proportional treaty capacity generally remained as expiring with some companies achieving modest increases.

AIR’s new CLASIC/2 V12.5 model, released in late 2010, led to typhoon annual average loss declining about 60 percent and earthquake annual average loss increasing by about 15 percent. In June 2011, RMS released its China typhoon model. The annual average losses are generally higher than those generated by the AIR model.

Available market capacity in China remains relatively stable. Notably, two Singapore¬† firms became more active this year, while Singapore-based Lloyd’s Syndicate 1965 stopped writing new business in Asia and entered run off.

India

The sole renewal date for India is April 1, with the exception of the National Reinsurer (GIC), which renews at May 1. The nonlife sector in India is expected to grow around 22 percent for the fiscal year ending March 31, 2012, with the automobile and health segments providing the major impetus. Momentum is likely to continue after that, at a decent pace, despite the global economic conditions. For the first eight months of the fiscal year, the general insurance segment grew 24 percent, with the subsequent fiscal year to post growth of approximately 15 percent to 18 percent.

Taiwan

In the Taiwanese primary market, rates stabilized in 2011, declining an estimated 5 percent on average. As of July 1, 2011, natural catastrophe reference rates formulated by local regulators have been applied in Taiwan, which has caused a significant increase in natural catastrophe pricing. It is expected that natural catastrophe rates will continue to rise next year. More facultative reinsurance will be placed into international markets (for the largest accounts). Most local insurers are expecting their natural catastrophe exposure to decline substantially as a result of the purchasing attitudes among original insureds in relation to price increases.

In general treaty reinsurance, exposure increased 20 percent with premiums remaining flat in 2011. This is changing, however, for 2012. Despite a benign loss year, per risk excess of loss working layer programs were flat to up 5 percent when loss-free and up 10 percent to 15 percent when hit by loss activity. Catastrophe excess of loss rates for loss-free programs increased at the January 1, 2012, renewal in a range from flat to up 20 percent on a risk-adjusted basis. Proportional treaty was stable both in terms of risk retention and capacity available. Treaties with losses led to reduced commission terms of 10 percent or more. Loss-free treaties enjoyed stable renewal terms, as most in Taiwan exclude natural catastrophe risks.

Due to the release of the new AIR CLASIC V2 model earthquake probable maximum loss (PML) increased 20 percent on average, with wind PML varying by portfolio - though it could drop by 10 percent to 30 percent.

Reinsurance capacity available in Taiwan declined slightly at the January 1, 2012, renewal, as reinsurers became more concerned with low-ROL higher catastrophe layers.

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