Reinsurance industry regains “calm” in 2007, Benfield says

The reinsurance market has regained “a universal, if fragile calm” in 2007, according to a report by reinsurance intermediary Benfield.
The report, entitled ‘Global Reinsurance Market Overview: Pick ‘N Mix,’ noted “an acute shortage of catastrophe capacity at U.S. mid-year renewals.” But in the second half of 2006, the report continued, “it was a case of ‘no wind, no problem.'”
Short-term alternative capital structures played a key role in U.S. mid-year renewals and continue to support the retrocession market, Benfield’s report notes.
Overall, more than US$30 billion of new capital in various forms has been raised since Hurricane Katrina struck in 2005. Cat bonds with a par value of more than $4 billion were issued in 2006, compared with the $2.4-billion par value issued in 2005. In 2006, more than US$3.6 billion worth of equity and loan capital was raised through sidecars.
“Despite the rapid growth of the catastrophe bond and sidecar market, the amount of capital raised in 2006 represents only 3% of the estimated US$330 billion capital of the global reinsurance market,” the report notes.
“The reinsurance market’s rapid recovery from major loss events in 2001 and 2005 suggests that, contrary to received wisdom, it is adapting to the demands imposed by escalating catastrophe losses,” the report concludes. “This is just as well, as most forecasts suggest that another benign year for catastrophes is unlikely in 2007.”
Diversification is a rediscovered orthodoxy in the post-Katrina world, the report adds, noting that ratings agencies are providing the incentive for such a rediscovery. One effect is that “some casualty writers are complaining about new entrants buying their way into the casualty market to diversify.”
To succeed, says Benfield, “diversification needs to be a properly considered and controlled medium to- long-term strategy and not a knee-jerk response to market conditions and fashions.”