Reinsurers stand their ground

Global pricing in the property catastrophe reinsurance market has been significantly influenced by extreme rate peaks in the U.S. and Mexico, which absorbed the majority of the losses from the 2005 storms, according to a recent report published by Guy Carpenter & Company.
The report “The World Catastrophe Reinsure Market: Steep Peaks Overshadow Plateaus” show rate increases in the U.S.and Mexico averaged 76% and 12%, respectively, compared with the 2% increase for the rest of the world.
“One promising development was that reinsurers have been willing to differentiate between loss-impacted areas and those regions where conditions have remained relatively stable,” David Spiller, president and CEO of Guy Carpenter, says. “This is a very positive sign for the future of the global catastrophe reinsurance market.”
Total insured/reinsured losses reached US$83 billion in 2005, with US$72.6 billion of the insured losses occurring in North America about 70% higher than the prior record of US$48 billion in 2004, according to the report.
“This past year saw unusually hard market conditions for a number of cedents, reflecting unprecedented catastrophe losses,” Tim Gardner, managing director and global leader of Guy Carpenter’s Property Specialty Practice, says. “Following the severe 2004 and 2005 hurricane seasons, changes by the modeling firms and the major rating agencies influenced the need for additional capital, which had a major impact on pricing and capacity.”

The report’s key findings include:

*Though ratings downgrades by A.M. Best and Standard & Poor’s were considered unlikely, reinsurers responded by reducing limits in high catastrophe zones and moving exposures via retrocession, sidecars and catastrophe bonds.
*Pricing was highly discriminating in 2006, not only on a country-by-country basis, but also regionally within countries.
*Markets reacted to the general expectation of increases in thefrequency and severity of North Atlantic storm activity, which has the potential to expose coastal regions of the United States, Mexico and the Caribbean to greater and more frequent losses. Accordingly, the major modeling companies revised or re-interpreted their tropical storm models, leading to higher probable maximum losses (PMLs) for cedents at the same return period.
*With the renewal of the Terrorism Risk and Insurance Act (TRIA)in the US for an additional two-year period through 2007, much of the pressure from policyholders and primary insurance companies has been relieved.
The report covers markets in 22 countries and four regions, which together account for more than 90% of the worldwide market for catastrophe reinsurance. In addition to reviewing catastrophe exposures and the availability of catastrophe insurance from private and government sources, the study summarizes respective market conditions in catastrophe reinsurance, taking into account natural catastrophes caused by perils such as typhoons and earthquakes, as well as acts of terrorism.