Hurricanes put property catastrophe reinsurance in the spotlight

Two new reports look at emerging trends in property catastrophe reinsurance, just as the U.S. awaits the arrival of Ivan, the third major hurricane of the year.
Rating agency Standard & Poor’s notes that the onslaught of new property catastrophe reinsurance capacity since September 11, 2001, combined with the emergence of vendor risk modeling systems has increased the commodity-like nature of this line of reinsurance. However, some areas remain where writers can differentiate themselves, including proprietary risk modeling and underwriting capabilities, data management, long-term relationship and consistency of management, and claims-paying ability.
These factors may become more important as the property catastrophe market softens. Prices decreased 5-10% generally at July 2004 renewals, although this softening tide may to some extent be mitigated by Hurricanes Charley, Frances and Ivan. As well, reinsurers are facing increasing pressure to loosen terms and conditions, S&P notes. Terrorism coverage (with exclusions for nuclear, biological or chemical risks) is increasingly being included.
As well, other lines such as per risk, personal accident catastrophe and workers’ compensation are facing pressure to see looser underwriting. Unlike major property risks, which can often include a slate of reinsurers who compel one another to maintain discipline, these other lines are more company specific, S&P notes, “therefore the terms and conditions can deteriorate by contract and a reinsurer would not have the strength in numbers to decline the proposed terms and conditions without potentially losing the account”.
The S&P report follows a paper by reinsurance broker Guy Carpenter outlining trends in the global property catastrophe market. Speaking of Canada specifically, the Guy Carpenter report notes this country faces a host of catastrophe threats hurricanes, flooding earthquakes and ice storms, as well as forest fires. It notes that a major earthquake event in B.C. could cause $30 billion in insured damage, while one in Quebec or eastern Ontario could reach $5 billion. Nonetheless, catastrophe covers remain readily available.
While property catastrophe reinsurance rates followed the worldwide trend to hardening since 2001, these rates leveled off and even dropped in some cases for 2004.
“For most reinsurance buyers, the quality of the security purchased remains a key concern. Buyers continue to pay close attention to the solvency and claims paying ability of reinsurers,” the report notes.