The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2013

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From RIMS in April to the Florida renewals at 1 June it appears expectations of a harder market for (re)insurers in 2012 have proved to be a disappointment.

In the P&C market, carriers were heartened by the evidence in April of a transitioning market, with firming US commercial rates apparently matched by a growing acceptance of incremental rate increases amongst buyers as their own financial circumstances eased thanks to a slowly strengthening economy.

Flash forward, however, to mid-year renewals and any earlier optimism among the reinsurance community of rate increases for US catastrophe risks appears to have drained away, as underwriters expressed their disappointment at average risk-adjusted rate rises of 2.5-5 percent at the Florida-dominated 1 June wind renewal.

Flaccid Florida
The expectation of further buoyancy in cat rates following the global cat events in H1 2011 and the added impact of the RMS Version 11 wind model demanded increased appetite for reinsurance cover in the minds of many players, particularly in Florida.

However the expectation of a possible $1.5bn in additional limit being brought to the traditional reinsurance market from state-backed Citizens and private insurers looking to replace cat fund cover proved to wishful thinking. Click to enlarge

US heavyweights such as State Farm and Nationwide dropped additional cat cover at the 1 June renewals and Allstate is believed to have bought almost a third less in total limits on the reinsurance programme for its Florida insurer Castle Key.

Hopes among reinsurance carriers of achieving rate rises of 5-10 percent will have been dashed by the reduced demand from national carriers, while record cat bond issuance in the year-to-date has seen players in the alternative reinsurance sector emerge as the real winners at mid-year.

Great expectations
Back in April the picture was very different. Ironshore CEO Kevin Kelley, speaking at RIMS, told sister publication The Insurance Insider that there was a tangible change in sentiment from buyers. "Almost every meeting here has led to a financial deal, where we've been invited to come on an account or take a greater participation," he added.

And AJ Gallagher chairman, president and CEO Pat Gallagher told The Insurance Insider at the same time that the market was in a phase he hadn't previously experienced. "We don't have a balance sheet problem, but an income statement issue where people are saying 'I'm not going to put the balance sheet out at those returns'," he said.

Gallagher said with the exception of marine and directors' and officers' coverage, pricing was either stable or going up across the broker's book of business, with the increases led by workers' comp and property cat.

However, others in the broking community poured water on hopes of substantial rate increase, with Tom Fitzgerald, CEO of US retail at Aon Risk Solutions, reporting that while the firm had seen rate increases in property, they were "nowhere near" those being reported elsewhere.

And Dave Bidmead, CEO of Marsh US, suggested that while prices are up on cat exposed or loss-impacted accounts, a proportion of property renewals placed by the broker were flat, and a "significant proportion" were experiencing ongoing rate reductions.

"When you have somewhere between 20-30 percent of your overall renewal still enjoying reductions you can't describe the market as hard," he said.

Hard-faced casualty
Skip over to the excess casualty market, and the news in April was of a harder-faced approach to buyers, with some underwriters walking away from under-priced business.

According to Tim Ryan, chief excess casualty officer at Aspen Insurance, most carriers were pushing for rate increases ranging from 5 percent to as much as 25 percent for the most under-priced risks.

Ryan said that, in sharp contrast to 2011, when carriers pushing for increases would reluctantly quote flat rates or even cut prices to retain accounts, at this set of renewals they chose to walk away instead.

Ironshore's Kelly echoed this view, suggesting rates were up by between 7.5 and 10 percent.

Indeed, overall capacity for excess casualty cover was being squeezed, with a number of carriers either cutting back or even exiting the class.

This experience was also reflected by standard lines carriers, with a couple of high profile exits from the class, a substantial reduction in capacity across the board and a stream of non-renewing accounts flowing back into the excess and surplus lines market.

Aspen's Ryan also pointed to the dramatic increase in surplus lines submissions in the first quarter of 2012 as a further indication of firming conditions, explaining that "it's harder for the retailers to get the capacity filled out, so they're going to a wholesale broker to try and get it done".

Mid-year winners
Back at mid-year, according to The Insurance Insider, collateralised writers managed to increase their participation on traditional placements with competitively priced capacity, in addition to writing private layers and non-traditional covers such as Nephila's county-weighted industry loss warranty products.

And collateralised capacity from Aeolus and Nephila is also thought to have figured heavily on the cat programme bought by the Texas Windstorm Insurance Association, after the state suffered a tornado-ravaged first half of the year, with multiple counties experiencing high levels of property damage and total insured losses in the region of $1bn.

The CEO of one Bermudian reinsurer told The Insurance Insider that the collateralised industry has "won this hand" with its late flood of capacity.