Slower growth in primary medical insurance rates had implications through the reinsurance sector at the January 1, 2012, renewal. Loss-free life and accident catastrophe programs sustained risk-adjusted price decreases of 5 percent to 8 percent on average, and rates for medical per member excess of loss working layer programs were down around 5 percent.
In the primary medical insurance market, rates were up less than 5 percent, which is historically low. Usually, they are up 10 percent to 15 percent. Claims frequency has fallen, with severity increasing. For programs with significant membership, layers starting at USD1 million often have some experience that can be rated and are, effectively, working layers in many cases.
An active year for disasters, life, accident and health reinsurance programs emerged largely unscathed. That said, much LAH reinsurance is written by multi-line companies. Property writers had a relatively challenging year and are looking to firm up pricing across the board - including their LAH lines. That said, loss-free programs with exposure to Japan and New Zealand were treated fairly by reinsurers.
Life and accident catastrophe reinsurance appears to be poised for growth. New capacity has been coming into the market for the past few years. Now, demand is starting to move upward as well, due to a net positive change in total coverage bought. On one side of this movement, some buyers are looking to control spending wherever they can, and they are buying more limited programs. On the other hand, many current buyers are looking for larger programs or extra protection for particularly large or sensitive concentrations of risk. Clients buying programs near the limit of available capacity have mitigated pricing concerns by involving previously unused new players for significant shares and/or taking vertical retentions.
Subject premium is up for medical reinsurance, and it is expected to continue this way in the short term as the impact of the Patient Protection and Affordable Care Act (PPACA) continues.
Most loss-free personal accident catastrophe excess of loss programs experienced some underlying growth in subject base premium, either organically or by including more geographies into the cover.
With markets looking to firm up pricing, many buyers were still able to secure decreases, including programs with some loss history, although most were modest. ROL decreases were flat to up 5 percent on average. Clients with peak nuclear, biological, chemical and radiological (NBCR) exposures in the United States and United Kingdom, where there is limited supply of reinsurance aggregate, had the lowest ROL decreases. Only programs adding significant subject risk experienced small increases.
Looking at rate rather than ROL - to get a sense of risk-adjusted pricing year over year - programs saw more significant decreases, with 5 percent to 8 percent common and outliers going as high as 15 percent.
Significant exposure in the United States and United Kingdom led to firmer pricing, while programs with concentration elsewhere sustained the greatest decreases year over year at the January 1, 2012, reinsurance renewal. For the past few years, London markets (including Lloyd’s) have been price leaders. That changed at this renewal - different dynamics are in effect. London sought firmer pricing, but domestic markets have significant capacity, little exposure to the 2011 disaster events and an appetite for growth. Thus, they were able to keep pricing as low as it was, but it was counterbalanced by the tremendous capacity in London required for large programs.
For the most aggressively priced programs, markets, particularly London, offered limited lines. Overall, market capacity has been sufficient to fully place programs regardless.
There were structural changes for life and accident catastrophe programs. Post-September 11, 2001, catastrophe covers included significant surcharges for NBCR terror risks. This additional premium has dropped substantially, to the point where almost all programs today include full terror coverage. Thoughtful terror is almost always included, and Lloyd’s is leading a movement to fully define the terror risk covered in the contract. Another important contract change being pushed is to explicitly exclude war risk. Cover that does not exclude war risk can be placed but attracts significantly less capacity.
Medical per member excess of loss programs exposed to loss below USD1 million were again the subject of fierce competition, with hunger for new business matched only by an unwillingness among incumbents to surrender their positions. Competitive behavior combined with medical trend in the mid-single digits resulted in some programs receiving rate decreases. For those programs receiving a reinsurance rate increase, they tended to be below levered medical trend.
High excess medical layers (excess of USD5 million per member up to and including unlimited coverage) generate more margin, with the very highest layers being “theoretically” almost all margin. With companies feeling the possible effects of unlimited annual/lifetime maximums, they are recognizing that this margin is appropriate, given the extreme volatility of the higher layers.
Pricing differentials among/across program layers don’t always seem intuitive and vary widely by reinsurance market. For some working layers, reinsurers’ pricing margins seems to be negative, highlighting the competitiveness and desire to capture share of this growing market. The pricing spread between reinsurers compresses significantly when all layers are considered together in a complete reinsurance program.