February 3rd, 2012

January 2012 Reinsurance Renewal: Property Retrocession

Posted at 1:00 AM ET

jan2012cover_gcciIn the global property market, several factors affected reinsurance rates at the January 1, 2012, reinsurance renewal. RMS v11 had an impact, as did a very active catastrophe year, with major events occurring around the world. While it is too soon at time of writing to determine where reinsurance rates will settle, initial quotes showed increases on last year’s pricing for loss-free working layers, with those hit by losses quoted even higher in some cases. However, Guy Carpenter hopes to mitigate these initial price rises, along with increased client demand, through a combination of new capacity and delivering a wider range of products.

Clients have been concerned by these increased costs as they relate to their own portfolio rate movements. While primary rates showed some signs of improvement in the second and third quarters of 2011, mainly as a result of loss activity, once again reinsurance markets have been able to react faster to the changing market environment. Cedents’ planned rates for 2011 almost uniformly showed decreases of 5 percent to 10 percent, but this was counteracted by rate increases in the last two quarters of the year, particularly for non-US business and those driven by international losses.

Premiums relative to base exposure have increased slightly, as the majority of cedents were able to achieve better rates than expected through the second half of 2011 and saw some new opportunities in areas affected by the run of natural catastrophe events. Looking forward to 2012, cedents are typically looking to build premiums facilitated by new opportunities and possible further upward price changes. There are also a number of exceptions, however, particularly where cedents have identified minimum ROL business as being unviable. These cedents have instead been cutting off major blocks of aggregate as they look to reshape their books.

The introduction of RMS v11 has had some impact on the pricing of reinsurance renewals in 2012. Although reinsurers have chosen not to base their modeled analyses entirely on this version, the majority have used a blend including other vendor models and their own adjustments. The actual price implications of the model change are difficult to quantify, given the losses and changes to underlying portfolios in 2011.

As a result of the model changes, along with above average natural catastrophe losses and a declining global economy, retrocessional reinsurance structures are changing. The increased peak exposures produced by RMS v11 along with current experience-driven changes to the perception of risk have induced many carriers to purchase more limit at the top end of their programs.

In order to meet the additional demand for limit on the retrocession side, there has been a marked increase in capacity as several sidecars and funds have been implemented, with reinsurers trying to take advantage of what they perceive to be an opportunity for rate increases.

For per risk excess of loss work layer programs, rates have remained relatively flat so far (on a risk-adjusted basis). This is the case for high risk excess layers, as well. The excess product supplied by Lloyd’s and the London market, being mainly exposure driven and largely excluding natural perils, has been immune to some extent from the upward pressures on price in the catastrophe business. Both retentions and capacity have been stable.

More cedents have been willing to consider quota share capacity at the January 1, 2012, reinsurance renewal because reinsurers have sought to take advantage of potential increases in reinsurance rates. Cedents with quota shares have looked to cede more. This dynamic has coincided with a marked decrease in the availability of quota share capacity, with many markets withdrawing from the sector as a result of international losses that were larger than expected. As a result, quota share capacity has decreased, with US markets leaving and Asian markets holding back.

Reinsurers with the remaining capacity have been seeking increased event or loss caps, particularly for collateralized business. There is pressure on commissions as reinsurers look to de-risk their quota share offerings as much as possible.

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