Large rate hikes expected in catastrophe-affected lines only: Aon Benfield

MONTE CARLO, Monaco─Despite large catastrophe losses and low investment yields, the surplus capital in the reinsurance industry means there will be no large rate rises at Jan. 1 renewals except for catastrophe-affected lines of business, according to Aon Benfield Inc., the reinsurance brokerage arm of Aon Corp.

At the start of 2011, the reinsurance industry had total capital of $470 billion, said Bryon Ehrhart, chief strategy officer of Aon Benfield.

While reinsurers have been able to boost profits but have been releasing reserves in recent years, this ability is likely only to last into the first quarter of 2013.

He said the use of reserve releases meant many reinsurers had not needed to drive up rates.

There has been an increase in merger and acquisition activity in the reinsurance market, and this likely will continue, according to Paul Schultz, president of Aon Benfield Securities.

He said M&As had been driven by the low stock market valuations of many reinsurance companies and a need for companies to diversify.

Should there be a large loss that wipes out capital and requires reinsurers to recapitalize, that recapitalization most likely would be in the form of sidecars or similar vehicles that enable investors to have a clear exit strategy, he said.