Fresh capital eases reinsurance pricing with few surprises

Reinsurance buyers are paying less for coverage this summer than they did a year ago as reinsurers have replenished their capital and fresh capacity continues to enter the market.

Rates are generally softening, though they are eroding less than some had expected, market observers say.

In contrast to last year's crunch, sufficient capacity is available for most cedents--even for many property catastrophe risks that faced capacity problems last year, they say.

"There's been a perceptible shift that we've noticed in the market," said Richard DiClemente, president of New York-based brokerage THB Intermediaries Inc. "The cycles are clearly becoming much short-er...It's now clear that no hard market cycle is likely to last more than one year before conditions are created that lead to another soft market."

For June 1 and July 1 accounts, there is "more or less of a general overall softening with no material surprises for buyers or sellers," said Jay Woods, global business development officer for the reinsurance business of Towers Perrin in Stamford, Conn.

As capacity increases with no material change in demand, there is pressure on terms and conditions with most reinsurance underwriters looking to relax price rather than expand coverage, Mr. Woods said.

There is "certainly some softening, but not as much as you would have thought," said Eric Brosius, senior vp and managing director, reinsurance, for Liberty Mutual Insurance Co. in Boston, which buys and sells reinsurance. "The pressure on capacity is nothing like it was a year ago," though, Mr. Brosius said.

"Capacity has really come back in a big way....We are really able to fulfill most of our client orders," said Tim Gardner, managing director and leader of the global property specialty practice for reinsurance intermediary Guy Carpenter & Co. Inc. in New York.

Since there were few catastrophe-related reinsurance losses last year, reinsurers hit hard by the catastrophes in 2005 had the opportunity to replenish their capital.

Additionally, between $50 million and $100 million of new capacity is available in the Bermuda and London markets, said THB's Mr. DiClemente.

Overall, "It is much easier to place catastrophe business than it was a year ago," Mr. DiClemente said. "Property catastrophe will certainly be the last area that softens, but in terms of the rest of the market, there has already been considerable erosion of rates and increased competition."

Falling rates

Rates for U.S. standard commercial business have fallen by as much as 15%, with smaller cuts of up to 10% for complex commercial business, said Bryon Ehrhart, president and chief executive officer of Aon Re Services in Chicago.

"Property cat reinsurance rates remained relatively stable at 6/1 renewals falling only 8% to 10% from record 7/1/06 renewals," said Bear, Stearns & Co. Inc. analyst David Small in a research note. "Increased demand from reinsurance buyers offset increased supply following a no-cat event '06 and legislative moves in Florida," he said.

The Florida Hurricane Catastrophe Fund, under a law signed by Florida Gov. Charlie Crist earlier this year, expanded state-backed capacity available to buyers of property catastrophe reinsurance by more than $10 billion (BI, Jan. 29).

Initially, the legislation was widely seen as a drag on worldwide reinsurance market premiums. But those concerns were somewhat overblown, market observers say, as buyers generally wound up tapping both the cat fund and the private market for coverage.

"Florida companies bought more open market reinsurance than some might have expected...to protect their solvency and, in some cases, their ratings," noted Paul Karon, CEO of reinsurance broker Benfield Inc., in Minneapolis.

"Almost all the Florida insurers took (the cat fund) up because it was very cheap," Mr. Karon said. Even so, property catastrophe reinsurers generally still saw "robust" purchases, he said.

"The premium that was thought to be lost to the cat fund...did not decrease as much as people thought," said Towers Perrin's Mr. Woods. "People bought more cover. I think some of them questioned whether they wanted to stake their recoverables on the state pool."

What to expect

The biggest question for both buyers and sellers is whether this year's Atlantic hurricane season--which began June 1 and runs to Nov. 30--will be severe like 2004 and 2005 or calm like 2006.

Predictions from atmospheric scientists have pegged hurricane activity in the Atlantic basin to be more active than normal.

"Keeping last year's relatively benign season in mind, we think an active season--along the lines of the 1995 and 2004 seasons, where we experienced between five and six Category 3 storms or above--is a distinct possibility," said Steve Smith, senior vp of ReAdvisory, the analytical arm of reinsurance intermediary Carvill Group in London, in a recent statement.

Going forward, "if there are no losses this year, I think rates are going to come down significantly. If there are losses, all bets are off," Benfield's Mr. Karon said.

If reinsurers experience a hurricane season this year that mirrors last year, "clients are going to start pushing awful hard for some more meaningful reductions in January," said Mr. Gardner.

Those reductions may arrive even sooner, said THB's Mr. DiClemente.

"If this is another benign storm season, there is going to be a very significant softening that takes place in the last quarter...rate reductions in the area of 15%-20%" and "in non-cat areas it may be 50%," Mr. DiClemente said.