Global Reinsurance Review January 2009

Reinsurance rate increases were moderate on average at the January 1, 2009 renewal. The Guy Carpenter World Rate on Line (ROL) Index rose 8 percent, in response to the dual pressures of a financial catastrophe and the second most expensive property catastrophe year on record. The degree to which prices increased was tempered by large capital positions at the beginning of 2008, enabling carriers to absorb the year’s losses, but this is where the generalizations end. Loss history, geography, and line of business led to wide differences in pricing. Expectations of another above-average storm year and the uncertainty surrounding the credit crisis underscore the need for continued capital management discipline in the coming year.

Continue reading…

Fair value accounting - also known as “mark-to-market” - has appeared in the headlines quite frequently, largely because of the ongoing financial catastrophe. Recent statements by the Securities and Exchange Commission (SEC), Financial Accounting Standards Board (FASB), and International Accounting Standards Board (IASB) have fueled the debate, and the U.S. government’s USD700 billion bailout package requires that the SEC perform a study on the impact of fair value accounting on financial institutions … and suspend the practice, if necessary.

Continue reading…

Mark Shumway, Vice President
Contact

A sagging economy has pushed non-life insurer earnings lower in Japan. After-tax net income for the seven largest companies dropped 67.1 percent for the first half of fiscal year 2008 (April 1, 2008 to September 30, 2008) relative to the same period in 2007-after adjustments for contingency reserve movements.

Continue reading…

Book values ticked higher last week, as both the Guy Carpenter Global Composite and the S&P Banks Index showed signs of renewed hope. Gains were slight, but they emphasize the trend toward stability.

Continue reading…

Peter Zaffino, President & CEO
Contact

The imminent renewal is likely to be the most unusual in recent memory. The (re)insurance industry remains entangled in a global financial catastrophe, which makes any effort at forecasting the exact outcome very difficult. Cedents and markets are forced to navigate competing forces—all of which involve the availability of capital. Constraints in financial markets render cash difficult to acquire, but balance sheets in our industry remain relatively healthy. So, while we expect pricing to remain within a range of expiring rates, conditions are changing daily. New developments could change market conditions quickly and drastically.

Continue reading…

The Guy Carpenter Global Composite’s aggregate book value unchanged from last week. The measure is still down 18 percent for the year. Likewise, the aggregate book value of the S&P Banks Index is unchanged from last week-down 35 percent year-to-date.

(Chart after the jump)

Continue reading…

Sean Mooney, Chief Economist
Contact

Despite the ambiguity pervading financial and reinsurance markets, it is clear that systemic risk has increased. Unprecedented chaos in financial markets left investors more risk-averse than they were at the end of the summer. They are demanding greater returns on the capital they put at risk. A closer look at the economic conditions underlying the marketplace, however, suggests that an increase of 1 percent to 3 percent is warranted for catastrophe covers, which should result in a minor impact at the January 1, 2009 renewal. Other factors, including the impact of the global recession on premiums and claims, the collapse in equity values, a rising distrust of modeled results arising out of Hurricane Ike, increased demand by cedents seeking to preserve their diminished capital, and diminished supply of reinsurance capacity, are likely to have a much greater impact on rates.

Continue reading…

The Guy Carpenter Global Composite’s combined book value is down 18 percent from the beginning of the year, reflecting the continued pressure that carriers face as third quarter results are released. Meanwhile, the S&P 500 Banks Index has recovered slightly, with its year-to-date decline hitting 32 percent, compared to last week’s 37 percent.

Continue reading…

Christopher Klein, Global Head of Business Intelligence
Contact

The time-honored principle of diversification used in many areas of financial management applies equally well to reinsurance placements. From the ancient days of river commerce in China, where merchants divided their cargo between barges to avoid total loss, diversification has been a key principle of insurance and later reinsurance markets. Given the current financial turmoil in reinsurance markets, there is a legitimate pressure from investors, top management, and the rating agencies for cedents to seek only the highest rated of reinsuring partners. But this worthy objective needs to be balanced with the diversification principle, so that cedents can reduce their probability of zero recovery, as demonstrated in the above analysis.  

This series is limited to consideration of diversification among a panel of reinsurers. Cedents also have options to diversify to other forms of risk transfer, notably risk securitization. In particular, catastrophe bonds as currently structured may reduce the credit risk practically to zero, because they mandate a full collateralization of the limit at risk.

Continue reading…

Check out the following articles, which were published today:

Reinsurer Diversification: The Guy Carpenter Model >>

Chart: Shareholders’ Equity Changes at Nine Months >>

Solution Spotlight: i-aXs®: Life, Accident and Health >>