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Reinsurance rates drop on fewer catastrophes, more capacity


A relatively quiet catastrophe season so far this year and abundant capacity have industry experts foreseeing pricing drops of as much as 20% for the June 1 reinsurance renewals, which are primarily Florida wind exposures.

“It's been a modest start” to the 2014 catastrophe season, said Tom Larsen, senior vice president and product architect at Oakland, California-based Eqecat Inc., a catastrophe modeling unit of CoreLogic Inc.

Despite some headline events such as a series of winter storms and extreme cold at the start of the year that affected much of the U.S., a deadly multiday April tornado outbreak in the South and Southwest, and an unusual series of twisters that struck the Denver area last week, key metrics are off substantially from 2013.

“When you look at this year's tornado count, we're way below average,” said Scott Stransky, manager and principal scientist at Boston-based catastrophe modeling firm AIR Worldwide (see box, page 1). “So it's a very slow season in terms of actual counts.”

Only recently have there been any major insured losses, according to Aon Benfield's Impact Forecasting.

“Following a quiet start to the 2014 severe weather season in the United States, the month of April marked multiple events that combined to cause billions of dollars in damage,” Impact Forecasting said in a report. Insured losses from the tornadoes and flooding that affected 20 states “will be at least in the hundreds of millions (of dollars), and possibly higher.”

Combined with abundant capacity, however, the general lack of severe events has market players looking at a soft market for June 1 reinsurance renewals.


“It's definitely buyer's market,” said Phil Campbell, executive vice president at Edina, Minnesota-based reinsurance broker BMS Intermediaries Inc. “It's been a pretty quiet beginning to the storm season.”

Mr. Campbell said he expects the June 1 reinsurance renewals to yield rates that are down 10% to 20% on a risk-adjusted basis, “with most people falling in the smaller double-digits and maybe mid-teens” in percentage declines expected.

“Overall, the Florida renewals market is looking at price declines of up to 20%,” Bill Fischer, chief underwriting officer at Bermuda-based Axis Re, said in an email.

“In many ways, it's the old law of supply and demand at work. We are simply seeing a notable increase of capacity coming into the market from a variety of capital types, including cat bonds, that collectively are driving prices down. Interestingly, when it comes to cat bonds, the market has also evolved to the point where many smaller companies are now issuing them given their attractive pricing and flexibility,” Mr. Fischer said.

“What we're looking at is an abundance of capacity for clients, and it's obviously a buyer's market for reinsurance cover,” said Bryon Ehrhart, CEO of Aon Benfield Americas. “You've got alternative capital from hedge funds; got alternative capital from pensions and high-net worth individuals; and record traditional capital from traditional reinsurers,” he said.

Growth in the insurance-linked securities market is likely to result in a record year in issuance value, and is producing some of the lowest pricing and margin per unit of risk transfer since Hurricane Andrew in 1992, Mr. Ehrhart said.

Overall, first-quarter 2014 insured U.S. catastrophe losses totaled $2.75 billion, said Thomas Holzheu, Armonk, New York-based head of economic research and consulting for North America at Swiss Re America Holding Corp., which is virtually flat compared with the first quarter of 2013. “In terms of the numbers, it was a totally normal season.”


That, however, could change.

“I would really just drive the point home that a quiet start to 2014 does not ensure a quiet end to 2014,” said Megan Linkin, Armonk, New York-based natural hazards expert at Swiss Re America. “So everybody from insurers to reinsurers to governments should be prepared for hurricane season and have an emergency plan in place.”