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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Guy Carpenter reports that the reinsurance sector enters 2013 equipped with ample dedicated capital and stable pricing. In its 2013 global renewal report, The Route to Profitable Growth, Guy Carpenter finds that the January 1, 2013 renewals took place against a stable backdrop, with only loss-affected lines and select regions experiencing price volatility. The market was supported by a combination of factors including lower than normal catastrophe losses during the first nine months of 2012, new reinsurance capacity and record-high levels of capital.
Guy Carpenter has published a new briefing: Superstorm Sandy: Initial Impacts and Implications
The property risk market in the United States has historically been less impacted by market forces but influenced by specific exposure and experience, making it more difficult to point to a clear pricing trend in the marketplace. Reinsurers also utilize a diverse array of proprietary actuarial models to price per risk programs, resulting in a wide range of views as to the risk adjusted pricing of treaty renewals. For programs with good loss experience, risk adjusted pricing was flat to marginally down. Programs with more significant recent loss activity generally saw risk adjusted price increases in a range of 10 percent to 50 percent.
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.
The July 1, 2012, renewal took place against a backdrop of plentiful reinsurance capital. During the first quarter of 2012, the Guy Carpenter Global Reinsurance Composite’s capital position increased by 4 percent to USD184.5 billion (see Figure 1). Dedicated reinsurance capital has continued to strengthen through the second quarter, moderating pricing pressures. One important factor driving these trends has been benign catastrophe activity. Although there have been upward revisions to the catastrophe losses that hit the United States during the first quarter and more US storm and wildfire activity in the second quarter, insured losses during the first six months of the year totaled about USD11 billion. (1) This is significantly below the USD76 billion recorded during the same period of 2011.
July 1 Reinsurance Renewals Reveal Plentiful Capacity amid Benign Catastrophe Activity, According to Guy Carpenter
Catastrophic losses in 2011 had an acute effect on Lloyd’s and European reinsurers. Writers of property facultative cover whose books of business are heavily weighted towards the United States did not incur the same level of loss as those who suffered from last year’s significant international losses and associated contingent business interruption losses. There was nevertheless a concerted effort to increase rates in the first quarter of 2012 by all property facultative underwriters. This was particularly true of placements with significant catastrophe exposure.
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.
The upwards pricing movements seen in the retrocession market during the January 1, 2012, renewals continued into June both in terms of direction and magnitude. Hardening rates reflected the unprecedented run of international losses in 2011 and the continuing uncertainty surrounding ultimate loss numbers from these events, particularly the Thailand floods.