Sea of change: Property and marine lines renewals

Pricing of property and marine lines experienced major changes as a result of the record storm activity of 2005 however, casualty and accident and health lines were predominantly spared, according to Guy Carpenter & Company’s report titled “U.S. Reinsurance Renewals at January 1, 2006.”
Published annually, the report is an “annual review of pricing, retentions and limits, capacity and terms and conditions covers the property, casualty, marine and offshore energy, accident and health and life and annuity lines of business.”
“Roughly half of the total insured losses, which reached an estimated all-time high of more than $50 billion, were absorbed by the global reinsurance industry,” the report notes.
Guy Carpenter the global risk and reinsurance specialist, which is a unit of Marsh & McLennan Companies points out if hurricanes Katrina, Rita and Wilma had not struck “the primary insurance industry would have reported a spectacular underwriting gain of $37.7 billion for 2005.”
However, the report also points out that the P&C industry has successfully transferred sufficient risk to the reinsurance market allowing profits to maintain positive.
As a result, Guy Carpenter says the insurance industry has “sustained the largest loss in its history, with 2004 and 2005 marking the first years since 1978 that the U.S. insurance industry as a whole has been able to post an underwriting profit.”
“On an industry-wide basis, it’s fair to say that the catastrophes of 2005 were an earnings event, not a capital event,” Sean Mooney, Guy Carpenter’s chief economist, observes. “It is unlikely that we will see a hard market across all primary lines of business, which one would normally expect to follow losses of this magnitude. As a result, many primary insurers have not been inclined to accept rate increases across the board for reinsurance protection, since it would be difficult to pass these costs onto insureds.”
The report also found that regarding property insurance, the storms of 2004 and 2005 had a major effect on property reinsurance renewals, with the majority of the impact being indirect. Insurers, reinsurers, modelers, rating agencies and regulators recognized that the existing viewpoint grossly underestimated both the frequency and severity of North Atlantic hurricanes. Reinsurers pressed for – and, in some cases, received – substantial rate increases on property lines at January 1, 2006 renewals.
In the realm of casualty insurance the report found that neutrality was the dominant theme in casualty renewals, with no pronounced effect of the storms on rates or capacity. Reinsurers tended to approach various casualty lines based on rate and claims trends particular to each line. In some instances, such as excess casualty, reinsurers looked to raise rates on the basis of the cost of the increased capital that they now need to protect their security ratings.
The 2005 storms, the report states, placed great pressure on the marine and offshore energy reinsurance markets. The remaining companies that have not left this class of will likely respond with a combination of price increases and a focus on retention levels.
Guy Carpenter also found that pricing for personal accident catastrophe reinsurance is still being driven by both the type of coverage sought and the concentration of exposures within a given portfolio. Negative profitability trends due to higher incidence, decreased terminations, lower investment income and other factors have resulted in disability rate increases and tightening contract terms. The consistent state of capacity has helped create a relatively stable and competitive pricing environment for medical reinsurance.