Guy Carpenter & Company reports that the reinsurance sector has witnessed dynamic capital growth in 2012 and 2013, spurred by an influx of capital from alternative sources. In its June 2013 renewal briefing, Guy Carpenter finds that this surge in alternative or “convergence” capital has changed the nature of the sector’s capital structure, as investors grow increasingly comfortable with supplying capacity through a convergence of both traditional and alternative vehicles. This market dynamic has also begun to impact significantly reinsurance pricing for peak property catastrophe risks in the U.S., with surplus capacity and lower target returns driving downward pressure on pricing for June 1 renewals and likely through the remainder of 2013.

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Hurricane Sandy poses a significant threat to the Atlantic Coast from North Carolina to Newfoundland this weekend into next week. The interaction of Sandy with a cold frontal system will lead to a historic “nor-easter” type cyclone. Threats include storm surge, tropical storm or hurricane force winds, and excessive rainfall. Power outages, coastal damage, with downed trees and power lines are possible over a very large area from North Carolina to Nova Scotia. The exact track is still very uncertain, and interests along the entire Atlantic East Coast should closely monitor the progress of this system.

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Hurricane Sandy has the potential to interact with a frontal system leaving the U.S. coast, causing the development of a “nor-easter” type of post-tropical cyclone. The feature could then drift westward into the northeastern United States this weekend into next week. Interests along the U.S. East Coast should monitor this system closely. A more imminent threat is already underway for Jamaica, Cuba, Florida and the Bahamas.

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Tropical Storm Isaac continues to intensify as it continues its slow trek through the Northern Gulf. Isaac threatens the Northern Gulf seven years following the landfall of Hurricane Katrina, and marking what will be the first U.S. landfalling hurricane in the area since 2008.

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Tropical Storm Isaac is presently moving west, to the south of Puerto Rico, following several days of westward motion at the base of the subtropical ridge. The National Hurricane Center (NHC) anticipates that this motion will continue for the immediate-term, followed by a gradual turn to the west-northwest this evening. This motion is expected to continue through Saturday. The center of circulation should pass to the south of Puerto Rico today, and then near or over the south coast of the Dominican Republic and Haiti on Friday. Gradual intensification is expected by the NHC over the next 48 hours, and Isaac could well become a hurricane as it approaches the Dominican Republic and Haiti.

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As the 2012 Atlantic Hurricane season kicks off, we present our multi-part review of hurricane forecasts.

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Analysis of June 1, 2012, leading markets’ quoting behavior reveals a continued shift in the once cohesive view of Florida pricing, reflecting markets’ more precise focus on individual company characteristics and variation in risk measurement as a result of customized use of model output. However, this year’s renewal does not reflect the degree of variation that was evident a year ago when reinsurers had to respond in a very shortened timeframe to conditions impacting their view of risk and capacity deployment tolerance.

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David Flandro, Global Head of Business Intelligence and Lara Mowery, Head of Global Property Specialty
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Inactivity in the traditional ultimate net loss market during December 2011, led many buyers to look early to the industry loss warranty (ILW) arena. Their objective was to secure reinsurance/retrocession protection in advance of January 1. Some large deals were bound supported by limits from the usual carriers as the anticipated influx of capacity from new entrants failed to materialize. ILW pricing was up significantly year on year in all territories and for all perils, other than in Europe, but down slightly from the high levels seen in mid-2011. As normality returned to the traditional market, the usual take up of ILWs in the early weeks of the new year was less apparent with no shortfalls to fill or program gaps to plug. Activity increased during the last weeks of the first quarter as cedents secured significant limits, predominantly for Japan earthquake cover, ahead of the April 1 inwards renewal. Another period of relative inactivity was followed in recent weeks by a further uptick in activity. Selected buyers secured significant U.S. wind protection in the ILW market. During all these peaks and troughs there has been ample capacity to meet buyer demand.

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David Flandro, Global Head of Business Intelligence and Lara Mowery, Head of Global Property Specialty
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Reviewing the amount of capacity authorized in relation to the amount taken up over the last three years, there is a clear indication that in 2012, where reinsurers deemed pricing to be adequate, they were willing to authorize significant participations. This is a return to the behavior of most of the recent renewal periods where very small adjustments in price may bring in significant additional capacity, creating something of a feast or famine dynamic. Notably, for Florida programs there were more reinsurers willing to deploy capacity at lower layers than we have seen in the past. These lower layers have typically been more capacity constrained as there have been fewer reinsurers in the broader market willing to participate particularly below the Florida Hurricane Catastrophe Fund layer.

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David Flandro, Global Head of Business Intelligence and Lara Mowery, Head of Property Specialty

Heavy insured losses sustained during the first five months of last year created a turbulent Florida renewal at June 1, 2011. Catastrophe model changes and global loss activity in the run-up to last year’s renewal created a firming and volatile market with market quoting behavior and individual program pricing showing a wide range of outcomes. There was general agreement that the market ended up 5 percent to 10 percent on average.

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