Guy Carpenter notes ratings, reinsurance changes post-Katrina

Unprecedented catastrophe losses in 2005 were true ‘market-changing’ events for the property segment, with substantial short- and long-term consequences for pricing, capitalization, reinsurance and insurance ratings, according to Guy Carpenter & Company Inc.
The 2005 catastrophes “have led reinsurers to readjust historical catastrophe reinsurance ratings, which in their view had underestimated both the frequency and severity of hurricane activity,” Timothy Gardner, global leader of Guy Carpenter’s property specialty practice, observed. “Rating agencies have also begun to reassess catastrophic risk and the capital required to support it, and this will continue to be a pressure point well into 2006.”
A global risk and reinsurance specialist, Guy Carpenter & Company Inc. recently published its report entitled Property Specialty Update – 1 January 2006 Renewal Season Overview. The study provides a detailed assessment of reinsurance renewals in Europe, Asia Pacific and the United States. It covers the areas of property catastrophe, property risk excess of loss, proportional treaty, retrocession, rating agencies and modeling, catastrophe bonds and new market capital.
Among the study’s highlights:
Property Catastrophe Preliminary estimates show prices rising for the first time in two years, to mid-1990s levels, with massive increases on some U.S. renewals. A reassessment of rating agency capital requirements, readjustment of catastrophe models and the rising cost of capital influenced pricing decisions, although there was no shortage of capacity.
Risk Excess of Loss Pricing changes in the per-risk market were less substantial. However, a number reinsurers did seek to limit the amount of catastrophe limit provided on per-risk treaties, with others excluding critical catastrophe in the renewal of worldwide risk excess of loss treaties.
Retrocession Retrocession programs with U.S. exposures generally experienced a total loss in 2005. Consequently, Jan. 1, 2006 renewals saw limited capacity and relative price increases in the region of 100%.
Rating Agencies In the wake of the 2005 hurricane season, rating agencies immediately downgraded a number of reinsurers. They have since been aggressive in instituting stricter capital adequacy requirements and new measurement standards for catastrophic risk.
New Market Entrants In reaction to the 2005 losses, US$8.5 billion of new capital entered the market, anticipating rising reinsurance rates. Though they did not play a major role at the time of the Jan. 1, 2006 renewals, these new reinsurers are expected be a more significant factor later in 2006.
Catastrophe Bonds and Alternative Risk Transfer A record amount of nearly US$2 billion of catastrophe bonds were issued in 2005, and this segment should continue to thrive in 2006. Meanwhile, the market for structured risk products remains challenging, with accounting and regulatory issues troubling buyers and sellers.