David Flandro, Global Head of Business Intelligence and Lara Mowery, Head of Property Specialty
Differentiation by company continued to be a noticeable theme in this year’s renewal process. It is now much more difficult to categorize the market’s pricing behavior with generalizations. Overall renewal pricing at the beginning of 2012 was up year on year as early renewals were not subject to risk assessment changes that occurred later in 2012. As pricing trends have moderated throughout the year, significant up or down adjustments were still present for certain companies depending on individual circumstances.
Based on early calculations, overall pricing for 2012 as compared to 2011 was up 6.5 percent, depicted in Figure 3, below. While market price changes have in the past been fairly consistent through the renewal cycle from January through July, 2011 and 2012 have been exceptions to this trend. The global loss activity and model version changes that impacted the direction of renewals mid-year in 2011 have also had an effect this year. It is also important to mention that the overall pricing movement in 2012 was more heavily impacted by behavior at January 1 as that is the renewal date for a larger percentage of programs.
Quoting behavior was less volatile at July 1, 2012, when compared to the corresponding period in 2011, with a range around the average quote for lead markets of down 6 percent to up 6 percent. The range in 2011 was approximately up 5 percent to down 10 percent, which was very close to the overall average for the year.
In Figure 4, the 2012 average quote across all July programs is represented by the line at 0 percent, while the red dots indicate the reinsurers’ distances from the average across all the programs that they quoted. The size of the line represents the variability from the average for all quotes provided by the reinsurer. Each reinsurer is represented across the bottom of the chart by its A.M. Best rating.
The July reduction in quoting volatility continued the trend seen in the latter half of the 2012 renewal season. Indeed, a marked decrease in quoting volatility was seen at the June renewals. For 2012 overall, quoting behavior fell within a range of down 12 percent to up 10 percent.
The improving capital position of the reinsurance sector in 2012 has played an important role in reducing quoting volatility. The current situation is very different to the conditions at the June and July renewals a year ago when capital was noticeably impacted by losses and reinsurers were uncertain as to how they would ultimately deal with the unquantified magnitude of the RMS v11 change. These factors created an overall cautiousness in the market even as pricing was firming.
Now that reinsurers have had time to assess and implement their response to market conditions, there has been more willingness generally to deploy significant capacity where terms have met reinsurer requirements, particularly as renewals in May, June and July were impacted by pricing adjustments in 2011.
Figure 6 tracks the amount of capacity utilized to complete programs in relation to the amount of capacity authorized. The impact of the 2011 loss activity, particularly the Tohoku earthquake and the RMS v11 release on reinsurers’ willingness to deploy capacity is significant. Immediately after these events, capacity utilization spiked to almost 100 percent and stayed above 90 percent through April 2012. After this point, the majority of renewals had already been impacted by some level of adjustment in 2011. This, coupled with favorable experience to date in 2012, has seen the level of utilization drop closer to 85 percent.