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Fast-growing capacity helps lower P/C reinsurance rates

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Reinsurance rates for January renewals declined across most property/casualty lines as capacity grew faster than demand, resulting in what many observers called a “disciplined softening” of the U.S. market.

“This is a very functional market. Clients have been able to enter the market, find the capacity that they need, at terms and conditions that are even more attractive than they were last year,” said Bryon G. Ehrhart, CEO of Aon Benfield Analytics at Aon Benfield in Chicago, who estimated rates for U.S. peak-peril zone capacity fell 5% to 15%.

“Reinsurers are giving back a very good portion of the rate increases they were able to achieve last year,” Mr. Ehrhart said.

However, reinsurers “are desperately trying to hold the line. I see very few quotes showing a reduced absolute cost, but ultimately people will accept final terms which are lower than their quoted terms,” said Steven K. Bolland, president of New York-based intermediary Gill & Roeser Inc., who estimated rates declined 5% to 7% overall.

Light catastrophe losses in 2009 and improved conditions in the capital markets have enabled reinsurers to swiftly recapitalize, observers say.

Aon Benfield said global catastrophe reinsurance capacity is near its all-time peak—$411 billion in December 2007—and is “meaningfully higher” than a year ago.

At the same time, “we are still seeing lingering recessionary effects on demand,” said Chris Klein, London-based global head of the business intelligence group for Guy Carpenter & Co. L.L.C.

He said a “slow renewal” process in which “many contracts closed very late in the season as buyers sought to gain maximum advantage” reflected the competitive conditions.

Global property catastrophe reinsurance rates declined an average of 6% for policies that renewed Jan. 1, reversing increases reported last year. Higher property cat reinsurance rates in 2009 “proved to be a temporary interruption to the downward trend that started in 2007,” Mr. Klein said.

U.S. property reinsurance rates fell 6% on average for the most recent renewals, however rates declined as much as 11% when factoring in recent modeling adjustments, Mr. Klein said.

North Atlantic storm activity in 2009 was lighter than forecast and the United States escaped hurricane damage, with only two tropical storms, Ida and Claudette, making landfall.

However, property rates in the tornado- and hail-prone Midwest proved an exception during 2010 renewals.

Pina Albo, president of Princeton, N.J.-based Munich Re America's reinsurance division, said Midwest treaties that experienced weather-related losses saw rates rise by double digits.

In continental Europe, property rates were flat to 5% lower. In the United Kingdom, prices dropped 5% to 10%, according to Guy Carpenter.

Exceptions included programs with first layers penetrated by Windstorm Klaus in France, which saw rates increase an average 10%. In Austria, hailstorms produced a fourth consecutive year of frequency losses that resulted in restricted capacity and rate hikes up 30% on some accounts, according to Guy Carpenter.

Most observers described limits and deductibles as “fairly stable” and said primary insurer retention levels are largely unchanged, although there were some exceptions.

“On the property side where insured exposures are down due to recessionary factors, we are seeing some cedents restructure their programs a little and seek less capacity in the higher layers because they have lower exposures,” said Jim Hinchley, chief operating officer for Liberty Mutual Reinsurance, a unit of Liberty Mutual Insurance Co. in Boston.

Meanwhile, Aon Benfield's Mr. Ehrhart noted that budget concerns have led some primary insurers to raise retentions slightly and place less coverage in lower layers “because they are watching their reinsurance spend very closely.”

Rates for U.S. casualty lines were flat to down 10%, although there were some pockets of resistance such as financial institutions professional indemnity, particularly in London, that had single-digit increases, according to Guy Carpenter.

Rate changes for aviation risks were essentially flat, and increases depended largely on the size of losses, exposure changes and overall program size, observers said.

Marine rates were down an average of 5% with additional price cuts for non-Gulf of Mexico business, Mr. Klein said.

Some risks continue to be difficult to place, particularly on the casualty side, Ms. Albo said.

For example, “portfolios with certain product exposures that are more subject to systemic risk problems were a little harder to get done,” Ms. Albo said.

Several observers said inflation also could become an issue over the longer term, particularly for multiyear coverage.