The trend of hardening rates continued in 2012 although at a slightly lower pace. Risk adjusted rate increases were between 3 percent and 11 percent. Companies whose lead terms were agreed prior to the Tohoku earthquake last year had to accept a steeper increase.
The Japanese liability landscape underwent fundamental change. The traditional European-based market leader lost its long standing dominance and found its market share reduced to a fraction of its former levels. Prices were modestly increased, by about 1.5 percent to 5 percent. Terms and conditions were unchanged for 2012.
Engineering pro rata treaties generally enjoyed a fairly smooth renewal. However, treaties did see some changes to terms and conditions, with earthquake event limits being incorporated on those treaties where they did not previously exist. Capacity was sensitive to treaty balance and this caused downwards pressure on some event limit levels. Commission levels remained, for the most part, unchanged from 2011 levels. This class remains the province of specialist underwriters and the market is limited. Lost capacity was not easily replaced.
Credit and Bond
The April 2012 credit and bond renewal confirmed that this remains a buyer’s market. Credit and bond portfolios in Japan remain attractive to the reinsurance market, continuing as good diversification credit. It remains to be seen if this dynamic will change through the challenging combination of bond capacity demand increases, relatively flat original premium volumes and the impending Solvency II regime. Bond cession increases may be requested in 2013 by some, testing capacity further.
The renewal went broadly at expiring terms and conditions in respect of cessions, commissions, automatic limits and tenor provisions.
Japan marine excess of loss rate changes varied at the April 1, 2012 reinsurance renewal according to the quantum of loss from the 2011 natural catastrophes in Japan and Thailand. In general, both proportional and non-proportional cargo reinsurers sought more information from cedents, especially concerning long-term storage risks.
Hull Pro Rata
Continuing difficult results in hull forced companies to accept a variety of changes. The changes included commission levels and the adoption of a new blend of excess of loss and pro rata capacity into a combined treaty in order to improve reinsurer results.
Furthermore, enhanced cessions of more profitable sectors of the primary insurers’ portfolios were sometimes required by the market. The more profitable medium-sized companies’ treaties, with less blue water business, managed to maintain their existing pro rata capacity with little change in commission. Nevertheless, this continues to be a challenging market.
Cargo/Specie/Fine Art Pro Rata
For the first time some leading reinsurers secured event limits on treaties. Nevertheless, in general, reinsurers supported cargo sector treaties because of favorable loss histories. Markets required greater transparency into long-term storage risks, and primary insurers were willing to provide the necessary information to support the placement process.
Energy Pro Rata
Commissions were reduced for all treaties, and reinsurers demanded more information about the ceded risks.
Excess of Loss
Rate changes varied according to programs’ loss activity, as well as changes in exposure and premium income estimates. Some cedents were impacted by the earthquake, tsunami and Thailand floods - and had to accept higher pricing at this year’s renewal. Losses from the floods actually had a greater effect on some programs than the earthquake and tsunami. As was the case with cargo/specie/fine art pro rata renewals, markets required that cedents provide much more information on known storage risks.
Some rate reductions were secured for cedents that felt they were forced to accept unnecessarily high pricing in 2011 because their earthquake/tsunami losses turned out to be lower than expected.