A number of developments in 2011 have created an uncertain market for the reinsurance industry as it begins to focus on next year’s renewals, according to 2011 World Catastrophe Reinsurance Market Report, released by Guy Carpenter & Company. These developments range from elevated global catastrophe activity to catastrophe model changes that have altered risk perceptions and changed expected loss amounts.
According to the report, the sector is in a period of heightened market uncertainty as it begins to focus on the 2012 renewals. The Guy Carpenter Global Property Catastrophe Rate on Line (ROL) Index was flat to up 10 percent year-on-year as of July 1 as the sector reacted to record-breaking catastrophe losses and a deteriorating capital position. However, widespread hardening in the broader reinsurance market has not materialized as rates in non-catastrophe lines remain flat to down. The report also found that the reinsurance sector remains adequately capitalized with a significant excess capital position, and that the quality and liquidity of overall dedicated reinsurance capital is strong.
The report, charts and graphs provide a detailed overview of the reinsurance market in 2011, with an analysis of global catastrophe activity, catastrophe model developments, catastrophe bond market developments, the impact of Solvency II and property casualty insurance mergers and acquisitions (M&A) activity.
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- Global insured losses sustained in the first half of 2011, estimated at USD70-75 billion, have already surpassed those recorded in 2010 and 2009 combined.
- The insured losses sustained in Australia, New Zealand and Japan have contributed to rate firming in other parts of the property catastrophe reinsurance market, breaking the historical trend of U.S.-based events dictating global pricing movements.
- Although it is still too early to calculate a final insured loss figure for both the Tohoku and Christchurch earthquakes, current estimates suggest the events may become the first and third most costly earthquakes on record, respectively.
- Catastrophe model changes have been disruptive to the industry, significantly altering risk perceptions and unexpectedly changing calculated loss amounts. (Re)insurers face a significant amount of work between now and the January 1, 2012 renewals in order to gain a better understanding of how the revisions will affect their business.
- Since the January 1, 2011 renewals, the reinsurance sector’s excess capital position roughly halved to about USD10 billion.
- During the first half of 2011, the Guy Carpenter Global Reinsurance Composite‘s dedicated capital position fell by 1.8 percent, to around USD168 billion.
Catastrophe Bond Market
- Revisions to catastrophe models, combined with high industry losses, have led to mixed catastrophe bond issuance so far this year.
- Twelve non-life cat bond transactions have been completed in 2011, with new bond issuance totaling USD 2.28 billion.
- In a break with the past, strong demand for diversifying peril-exposed transactions is contributing to an unusually active third quarter for catastrophe bond issuance.
- Issuance is expected to strengthen during the second half of 2011 as hurricane model changes become more integrated into cedents’ risk management processes. This, along with any 2011 U.S. hurricane losses, is likely to be a strong catalyst for issuance.
The Solvency II Impact
- Potential benefits of Solvency II include greater transparency and convergence in reporting among Solvency II and equivalent regimes (which helps to facilitate reinsurer financial strength analysis), improved reinsurance security and a stronger insurance-linked securities (ILS) market.
- Possible drawbacks posed by Solvency II include higher capital requirements and compliance costs for smaller reinsurers (which may force some consolidation), as well as more intense and volatile underwriting cycles.
Property-Casualty Insurance M&A
- Recent volatility in the financial markets, as well as the difficult operating environment in general, continues to stifle M&A activity.
- There were 22 announced and closed M&A transactions with an aggregate deal value of almost USD3.4 billion during the first half of 2011.
- Higher valuation levels in the first half of the year and a shaky economic recovery are affecting the current level of M&A activity. Solvency II, a hardening of the market and pressure on mutual insurance companies, along with macroeconomic developments, will influence the level of M&A activity over the next 12 months.
David Flandro, Global Head of Business Intelligence, stated, “The reinsurance sector faces several headwinds in the run up to the 2012 renewals. The macroeconomic environment remains challenging as subdued economic growth and low interest rates continue to depress investment returns. There is also a growing concern over the sovereign debt crisis in Europe and the economic consequences following the downgrade of the United States’ credit rating. Adding to the pressure on the market has been the impact of major catastrophe model releases, particularly for wind risks.”
Lara Mowery, Head of Global Property Specialty, added, “Market conditions at the January 1, 2012 renewals will be influenced by loss experience in the remainder of 2011, and the hurricane season in particular. Hurricane Irene marks the first U.S. land-falling hurricane since 2008, and while preliminary loss estimates do not indicate an event that will drive further market disruption, Irene does add to the continued accumulation of 2011 loss. All eyes are now firmly fixed on the North Atlantic as loss activity through the rest of the year will play an important role in determining the direction of the reinsurance market.”
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.
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