Reinsurers reacted to huge catastrophe losses last year by increasing rates for cedents, but an influx of capacity and light disaster losses this year have limited that trend.

John DeMartini, New York-based leader of the catastrophe risk management practice at Towers Watson & Co., said the market has largely recovered from the spate of catastrophe-derived claims that marked 2011.

“The loss experience has been good thus far” this year, Mr. DeMartini said. “We are seeing a fairly level market in terms of pricing and capacity. Reinsurers are looking for mid-single-digit increases, and buyers are in negotiation mode and trying to hold that to under the 5% mark.”

James Vickers, London-based Chairman of Willis Re International, noted that reinsurance rate increases are not universal.

“Where there are rate increases, they are all internally sensible and justified,” Mr. Vickers said. “Even in Florida, the peak catastrophe zone area, we've even seen some risk-adjusted rate reductions.”

David Flandro, New York-based global head of business intelligence for Guy Carpenter & Co. L.L.C., said 2011 was the first year since 1980 that most catastrophe losses were outside the United States.

“Reinsurance pricing depends to some extent on loss experience, and different geographies had widely varying loss experiences in 2011,” he said. “If you look at the renewals on April 1 and June 1, you see those loss experiences filtering through.”

Reinsurers' ability to pass higher rates on to the U.S. insurance market is indeed limited, said Bryon Ehrhart, Chicago-based chairman of Aon Benfield Analytics and Aon Benfield Securities.

%%BREAK%%

“Reinsurers figured out that U.S. insurers pay the highest reinsurance margins of anyone in the world,” Mr. Ehrhart said. “It didn't make sense for them to make even greater margins just because of international losses.”

Another mitigating factor has been an influx of capital into the market.

“We did see some international reinsurers come into the reinsurance market when companies...pulled back,” Mr. DeMartini said. “We even saw some Asian reinsurers come into the market. We also saw some domestic reinsurers who haven't traditionally written cat take advantage of the rising rates.”

While the capital infusion was substantial, it was relatively small compared with the year following Hurricane Katrina, Mr. Ehrhart noted.

“Following large losses in the past, you've seen lots of capital flow,” he said. “In 2006, you saw $35 billion in capital flow into the industry to support more catastrophe capacity that was needed. The largest ceded loss year was 2011, and the amount of capacity that we counted coming into the industry was $3 billion to $4 billion.”

Mr. Vickers said that much of the new capital entering the market this year came in through shorter-term alternative methods such as catastrophe bonds or sidecars.

“There are always moments when new capital flows into the market,” Mr. Vickers said. “What's interesting this time is that this new capital doesn't seem to want to get involved in the traditional reinsurance company model of backing and operating an insurance company for the medium to long term.”

%%BREAK%%

Thus, the geographic peculiarities of the 2011 losses paired with new capital in the market mean the hard market expected by some has not come to pass. “The market is stable and ordinary, but it is most definitely not a hard market,” Mr. Vickers said. “The industry absorbed $100 billion in losses in 2011, and it is still business as usual. Buyers that are able to articulate what their portfolios look like are in pretty reasonable shape.”

Nonetheless, Mr. DeMartini said reinsurance buyers need to be mindful of how reinsurers' methodologies, approaches and risk appetites have evolved in the past year.

“You can't assume that all reinsurers are modeling risk the same way and have the same appetite for the types of exposures that you have,” he said. “The capacity is there, but it's not a situation where everybody is writing everything.”

Mr. Flandro said he, too, expects greater caution on the part of reinsurers, especially in locations where risks may not be as well understood.

“Correlation and causation are not the same thing, but we do find it interesting that a lot of unmodeled events happened in developing markets such as Thailand and Chile,” he said.

Mr. Vickers said he expects a tighter focus on the risks that supply chains present to business interruption underwriters.

“Of all the losses that happened last year, the one that will have the longest-term impact on the way people underwrite is the flood losses from Thailand,” Mr. Vickers said. “What these losses are doing is forcing people to concentrate back on the original risk.”