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.

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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.

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Julian Alovisi, Assistant Vice President, Instrat®
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A record-setting Atlantic hurricane season and above-average manmade catastrophe losses put 2008 among the costliest years on record. While the economic downturn dominated the headlines throughout the year, lurking in the shadows was one of the most active hurricane seasons on record. Hurricanes Ike and Gustav, combined with other weather-related events and several large manmade catastrophe losses, triggered insured losses of USD50 billion in 2008.[1] Although weather-related events remained the largest source of losses (USD43 billion in total), several manmade catastrophic events triggered insured losses of USD7 billion, significantly higher than the annual average of USD4.8 billion.

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Ian Wrigglesworth, Managing Director, Aviation
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The aviation renewal came without surprises and generally without change. After years of cedent-advantaged market conditions, pricing stabilized. Terms and conditions showed little (if any) change, and quoting was timely and disciplined. The market for aviation reinsurance appears to have reached a natural bottom, given the lack of movement in both reinsurance rates and terms and conditions. Neither was influenced substantially by loss history, reinforcing the notion that the pricing floor is natural.

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Mark Shumway, Vice President
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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.

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Gary Venter, Managing Director, Instrat®
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Property catastrophes make the news. Tangible and visual, the carnage can be conveyed with ease, and all can grasp the direct implications immediately. Yet for (re)insurers, there’s another type of catastrophe that could be far more destructive to balance sheets. This threat, which can remain hidden in a portfolio for decades, can arise with little warning and have profound consequences.

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Peter Zaffino, President & CEO
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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.

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Sean Mooney, Chief Economist
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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.

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By David Priebe, Chairman of Global Client Development
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The climate change debate is likely to continue unabated well into the future. Even if it is not settled anytime soon, the debate itself has already begun to affect the (re)insurance industry. Risk-bearers deal in probability routinely, making climate change another likelihood to consider. In this manner, it has entered natural peril models, risk management assumptions, and risk transfer strategies. Consequently, climate change has become part of the (re)insurance lexicon, despite the fact that scientific, sociological, economic, and political authorities have not reached a universally accepted conclusion. The absence of a definitive answer does not preclude the use of climate change-related information in risk portfolio management.

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By GC Securities, a division of MMC Securities Corp.*

The far-reaching effects of the ongoing global financial catastrophe have led investors and catastrophe bond sponsors to question the status quo. While the (re)insurance industry has persevered (particularly relative to the banking industry) it is evaluating the true extent of the risk that it has assumed. For sponsors of catastrophe bonds, this includes the reliability of the total return swap counterparty used to guarantee the collateral backing the risk transfer protection and the catastrophe bonds—as well as the quality of the collateral itself. While four catastrophe bond issuances have been affected by the bankruptcy of its swap provider, there are several areas on which sponsors and investors can focus to bolster the strength of their collateralization.

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