Reinsurance industry seeing selective rate firming: Aspen Re

The reinsurance industry is benefiting from rate improvement post-Hurricane Sandy and is seeing evidence of selective rate firming, especially in the United States, James Few, CEO of Bermuda-based Aspen Re, said during a reinsurance renewal conference call on Jan. 1.

Commenting on the reinsurance market as a whole, Few noted that the reinsurance market responded efficiently to Sandy-related losses in the northeast U.S., according to the conference call transcript. With regard to property reinsurance, he pointed out that the storm brought with it a positive impact on pricing. Rates in the U.S. have improved 10% to 30% on accounts that have been directly affected by the storm.

“Given that the majority of these programs have only been partially impacted, these increases seem reasonable and resulted in attractive renewals that were previously expected to be slightly disappointing,” Few said.

“Sandy has all but eliminated price reductions on loss-free business and resulted in renewals at low single-digit rate increases. Additionally, retentions are remaining largely consistent with expiring levels,” he said.

European renewals were typically flat to down 5%, while “in Asia, the market is disappointing, especially given the magnitude of loss suffered in 2011. Pricing inconsistency continues and improvements post-2011 have not been sufficiently widespread. Again, local knowledge is essential to appropriate risk selection.”

Few noted that, overall, “the market is mixed, but is showing signs of building on some of the rate improvements of 2012.”

The reinsurance industry has experienced a level of unprecedented natural catastrophe activity, resulting in five of the most expensive loss years on record in the past nine years. It is adjusting to lessons learned from Cat events over the 2010 to 2012 period, notably with regard to new insured values in Cat-exposed regions of the world; modelling and data calibration around earthquake and flood; and increasing concerns about ever-changing climate patterns, Few said.

“As a result, price adequacy for peak zone property Cat business is attractive, but successful underwriting requires extensive research and development as well as detailed knowledge of original risk,” he added.

“There seems to be recognition in the U.S. that the combination of record-breaking Cat losses, historically low investment yields, and current rate levels that are still near the bottom of the last soft market are too much for the market to withstand, leading to some attractive opportunities,” Few said.

The level of market turn is not yet sufficient to improve rates in all segments, he said, but added “it appears the market is moving towards a steady, less dramatic but more prolonged hardening in several key areas. Continued steady rate improvements, rather than spikes in pricing, should result in a more sustainable hard market which may be a better outcome for buyer and seller alike.”

Few predicted that reinsurance companies that are well-capitalized and well-diversified will fare best.

“January 2013 has continued the trend of greater price attractiveness in the U.S. market than elsewhere and this is likely to be reflected in capital allocation by leading underwriters,” Few added.

Guy Carpenter & Company, LLC, which released its 2013 global renewal report, The Route to Profitable Growth, this week, reports that the reinsurance sector enters 2013 equipped with ample dedicated capital and stable pricing. Jan. 1, 2013 renewals took place against a stable backdrop, with only loss-affected lines and select regions experiencing price volatility.

The market was supported by a combination of factors, including lower than normal Cat losses during the first three quarters of 2012, new reinsurance capacity and record-high levels of capital, notes Guy Carpenter, a leading global risk and reinsurance specialist and member of Marsh & McLennan Companies.

“Any upward pressure on property catastrophe pricing generally came from programs impacted by Superstorm Sandy in the U.S. and other smaller, local events,” notes a statement from the company. “Programs not loss impacted were overall flat to down. Price movements for non-catastrophe lines were also mixed, with marine and energy lines seeing noticeable rate increases while many other lines experienced reductions.”

Even with Sandy pushing global insured losses to more than US$50 billion in 2012, likely causing capital levels to stagnate in the fourth quarter of the year, losses were significantly less than the US$120 billion sustained in 2011, the statement adds.

“One area of ongoing development was growth in the number of participants and capital provided by non-traditional markets, a critical factor in the marketplace’s continuing evolution,” says Lara Mowery, global head of property specialty for Guy Carpenter.

Guy Carpenter cautions, however, that the “challenges of weak economic growth, lower investment returns and reserving adequacy remain. Risk carriers require sophisticated solutions to identify, mitigate and transfer an evolving range of risks to overcome these issues.”

The report identifies six key areas that carriers can explore to help enhance profitability in 2013 and beyond, including optimal capital management, clear and consistent communication to rating agencies and regulators and appropriate domicile selection.

Also this week, Willis Re stated in its January 2013 renewals report that most reinsurers are not facing any material impact and remain within their annual catastrophe budgets. In general, international rates for property catastrophe business are risk adjusted flat to -5% and U.S. property catastrophe rates are risk adjusted flat to -5% on loss free accounts, and +10% on loss impaired accounts, notes the report, Reinsurers Clear the Sandy Hurdle.

“Sandy’s impact has helped to stabilize market pricing on an overall basis and reinsurers have largely delivered to their clients in terms of capacity and continuity,” Willis Re chairman Peter Hearn and company CEO John Cavanagh note in the report’s opening letter.