Reinsurance renewals - how was it for you?

The only sectors with a clear upward bias were marine and energy, credit, bond and political risk, brokers say.

As Guy Carpenter points out in its report, Points of Inflection - Positioning for Change in a Challenging Market, early predictions that reinsurance renewal rates were likely to fall were correct.

The Guy Carpenter Global Property Catastrophe Rate on Line (ROL) Index lost 7.5% – the second consecutive annual decline - due in large part to moderate loss activity and abundant levels of industry surplus.

Although the year began with significant cat activity (windstorm Xynthia in Europe, the Deepwater Horizon oil rig loss and the Chile earthquake, plus the New Zealand earthquake in the second half) the year finished with relatively low insured cat losses after an unexpectedly low-loss US hurricane season.

These subdued losses, combined with unrealised investment gains, led to record levels of capital, which in turn drove reinsurance pricing lower at the renewal, Guy Carpenter notes.

Willis Re’s report, titled Keep Calm and Carry On, says that despite the continued softening and the worst ever first quarter for nat cat losses on record, the global reinsurance market emerged from 2010 relatively unscathed, aided by recovering investment positions and continuing strong reserve releases.

It said price reductions at the January 1 2011 reinsurance renewals averaged between 5% and 10%.

According to Willis Re, reinsurers’ 2010 underwriting results are lower than the exceptional ones achieved in comparatively loss-free 2009, but they are much better than initially feared after the disastrous first quarter.

With the industry overcapitalised, Willis Re reckons that reinsurers may implement more aggressive capital management strategies through share repurchases, dividend payments and other similar measures.

Aon Benfield’s analysis of the reinsurance renewals highlights that for the first nine months of 2010 total global reinsurance capacity increased by 17%, reaching a record high of $470bn by Q3 2010. Its report, Partnership Renewed, says that reinsurers are virtually in lockstep with their clients and both parties are now lowering prices at the same rate.

That’s because although both reinsurers and insurers are enjoying fully recovered balance sheets there is quite limited growth in demand for their products.

The report points out that the major developed markets in the US and Europe are facing their second or third year-on-year of non-life market-wide premium declines, even as gross domestic product figures return to sequential growth. 

Aon Benfield advises insurers and reinsurers to work together to create demand by generating new products and/or innovations on existing products.

Looking at the prospects for 2011 and what would turn the market, Guy Carpenter says a sufficiently big cat could reverse the direction of rates. It believes a $50bn loss event could stem the decline for a year while a $100bn loss could lead to “outlier” reinsurance failures. But it will take a $150bn insured loss event to produce a sustained turn in the market, the broker says.

Guy Carp is also monitoring reserve releases, looking for signals that the sector has entered the “cheating phase” and asking how much longer favourable development can be expected to prop up calendar year results.

Willis Re agrees. Commenting on the conclusions of his company’s report, Peter Hearn, CEO at Willis Re, warns that the global reinsurance industry faces a tough time in 2011: “Thin investment returns and declining back year releases provide little cover for declining underwriting returns. In such an environment, any shock to reinsurers’ capital base, either through underwriting losses or other capital events, is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear.”

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