Guy Carpenter has collaborated with Mercer to survey insurance equity analysts to understand the possible objectives and aspirations of insurance company shareholders. Incorporating or at least considering the views of various stakeholders will be critical for insurers in ensuring that they are moving along the right path, especially in this uncertain environment.

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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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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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Only two companies, including the Lloyd’s of London market central assets, saw an increase in equity over the period. The simple average of changes reported to date is -10.1 percent.

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David Piebe, Chairman of Global Client Development
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(Re)insurers have come to expect that alternative sources of capital will always be available. Private equity funds, hedge funds, and other alternative investment vehicles have contributed copious capacity to risk-bearers since the turn of the millennium, and especially following the 2005 storm season. The well, however, may be at risk of running dry.

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David Priebe, Chairman of Global Client Development
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Earlier this year, the (re)insurance industry celebrated an abundance of capital. Buybacks and dividends were common, as carriers struggled to find productive uses for their extra cash. Only a few months later, we are in the midst of a financial catastrophe that is wreaking havoc on balance sheets and constraining carrier access to capital. And, the situation could worsen. A major catastrophe event could place substantial demands on (re)insurer capital in a climate where replenishment would be both time-consuming and costly.

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Nick Frankland, CEO of European Operations
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The (re)insurance market is fraught with uncertainty. As the next renewal looms large, buyers and sellers are attempting to find common ground for risk-transfer pricing, particularly in the wake of a high-frequency hurricane season and a severe financial catastrophe with implications for both sides of carrier balance sheets. While it is too early to tell if reinsurance rates are turning, it is clear that continued substantial declines are unlikely.

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Christopher Klein, Global Head of Business Intelligence
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The ongoing financial catastrophe is already shaping the market’s perception of the next reinsurance renewal. A unique confluence of factors has complicated the annual ritual of anticipating the direction of reinsurance rates. Though a number of factors have coalesced to prevent the continued rapid decline in risk-transfer pricing that characterized 2008, pricing on average at January 1, 2009 renewals is likely to remain within a narrow range of expiring rates. Nonetheless, the global credit crisis is far from over. Conditions are changing daily. New financial developments—or a mega-catastrophe—could change market conditions substantially and with little lead time.

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The world’s 10 largest reinsurers have been hit hard by the financial catastrophe. At the beginning of 2008, they held a combined USD68.4 billion in equities. If the value of these assets fell by 30 percent—the rate at which the broader equity market declined—their holdings would lose USD21 billion in value. This translates to an aggregate surplus of USD73 billion (from USD94 billion at the beginning of the year). Yet, the premium-to-surplus ratio is slightly above 1:1, indicating that the industry’s stability is not in jeopardy.

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On the asset front, the majority of insurers and reinsurers have reported minimal direct exposure to mortgage-backed securities, while a few large global players have reported losses in the USD billions. Indirectly, the weak economy, compounded by fears of global financial collapse, is leading to a bear market in equities. This is putting pressure on reinsurer finances. Given the standard definition of a bear market as a 20 percent decline in price, both France and Germany are experiencing bear market conditions, which are also reflected in the UK FTSE 1000.

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