The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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Veterans often observe that there is nothing new under the sun in this industry.

But as underwriters and brokers work to put the final touches to their 1 January reinsurance renewals, even the staunchest of adherents to this philosophy might be forgiven for reflecting that 2011 has been a year with more moving parts and conflicting pressures than ever seen before.

Click to enlarge The industry has been left reeling by a litany of catastrophic events, an unprecedentedly weak investment environment squeezing returns, a constant sense of macroeconomic crisis after the financial crash, regulatory uncertainty and catastrophe model changes that have shifted assumptions on loss estimates.

And to muddy the water even further, an unclear and unmodelled loss scenario in Thailand late in the year has added to the uncertainty as brokers and underwriters enter the ring for their annual clash.

But what is clear is that this year's negotiations have been as keenly contested as ever, with market sources suggesting they have been fierce, messy and prolonged.

Under-pressure reinsurers have been wounded by a sequence of global catastrophes that have pushed insured losses towards $100bn, with a fair portion of this passed on as reinsurance losses. Unsurprisingly, they have responded with talk of higher prices for their product, yet it is far from clear whether primary carriers have the budget to match such demands.

One upside for primary players is that, after an agonising eight-year wait, commercial rates in the US seem to have rebounded. Over the past several months several surveys and reports have pointed to a modest upswing of commercial rates in the US, while a growing chorus of industry executives has cautiously predicted the end of the soft insurance cycle.

The RIMS/Advisen benchmark survey of US risk managers found that commercial rates in three of the four segments it monitored - workers' compensation, property and general liability - had registered positive year-on-year growth for the first time in eight years.

And a report by the Council of Insurance Agents and Brokers in October said that average US commercial P&C rates had increased 0.9 percent year-on-year - again the first time in eight years that the study had observed an uptick.

Monthly monitor MarketScout has also reported rate increases in primary lines, while broker Willis has outlined a comprehensive breakdown of the market which shows prices flat to modestly up.

However, it should be remembered that the modest price rises have come after eight long years of rates being slashed and then troughing.

But perhaps the major factor limiting insurers' budget for reinsurance protection is that the primary industry has suffered from many of the same factors that have put upwards pressure on reinsurance rates.

While the year passed without a giant US hurricane loss, events such as Hurricane Irene, Tropical Storm Lee, wild fires and hailstorms have added to an extremely expensive tornado season that is thought to have ratcheted up more than $20bn of insured losses in H1 - which are mostly retained at the primary level.

"Some of these largely unmodelled perils have created a reaction from insurers. Rather than treating them as pure attritional losses, there is a more proactive move to rate these perils," said Patrick Hartigan, head of treaty at Lloyd's (re)insurer Beazley.

"Talking to some of the primary companies, it looks as if they are putting in rate increases to residential and commercial insureds." Hartigan said the trend is expected to continue through 2012.

Such a trend in isolation would tend to push demand up for reinsurance products. And yet property cat underwriters are also being squeezed by the impact of the updated Version 11.0 RMS wind model, which has increased modelled loss estimates for many carriers exposed to peak-zone wind risks.

As such, many carriers are also under pressure to purchase higher layers of cover to protect against higher exposures.

Click to enlarge Combined with the longer-term trends of a perennially (so it seems) weak investment environment and diminishing reserve releases from prior years, primary carriers are feeling pressure from all sides. And thus far they have achieved only modest rate increases that could fund additional protection purchases.

"This increase in exposure and the desire for additional protection has caused primary insurers to evaluate the accuracy of their rates," said Martin Neuhaus, president of national clients underwriting at Munich Re America.

Overall, property catastrophe rates are expected to see the strongest reaction. Market sources suggest property catastrophe will lead rate rises at 1 January in the US. Incremental increases of around 5 to 10 percent are expected on average - in line with the mid-year renewals - in response primarily to cat losses and the RMS update.

Tempering these forces in the US is the fact that executives in Europe are expecting a flattish renewal process, according to discussions at the reinsurance meeting in Baden-Baden.

While companies in Europe have felt the pressure of the financial market volatility perhaps more than anyone over the past year, the continent has enjoyed a period of benign catastrophe losses, with the modest flood events in Denmark (EUR1bn) and France (EUR600mn-EUR800mn) the only real pressure points.

Furthermore, market sources suggest that the updated RMS Version 11.0 European windstorm model will not be used by most parties in the renewal process, which will delay the expected pressure for rate rises. Overall, a smoother outcome is expected from the European renewals, with rates expected to average out around flat to single digit increases, according to market sources.

And against the constant rhetoric of the necessity for rate rises from reinsurers, brokers have been consistently outspoken in insisting that sufficient capacity remains in the sector despite the potentially record-breaking catastrophe losses.

In October, Guy Carpenter said that excess capital in the reinsurance sector above risks assumed had mostly recovered back to the $20bn level seen at the start of the year, having been slashed in half by events in H1.

Speaking before the floods in Thailand, David Flandro, head of global intelligence at Guy Carpenter, predicted that if there were no significant cat events in the fourth quarter, the industry's excess capital would probably increase over the full year.

Market sources suggest that with capacity in surplus but available rates at levels that do not generate adequate returns, the messy 1 January renewals may just be the first stage of a new and complicated market dynamic, with more nuanced and granular sub-cycles than in previous hard cycles.