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Reinsurers trying to better control 'surprise losses': Willis Re


Reinsurers are taking steps to control or reduce their exposure to “surprise losses,” according to a report issued Friday by Willis Group Holdings P.L.C.'s Willis Re unit.

The report—“Change Is in the Wind”—noted that insured losses of more than $100 billion and reinsured losses in excess of $50 billion have made 2011 the second-worst on record for catastrophe and manmade losses.

“Of perhaps greater concern is the reality that the majority of this year's catastrophe claims arose from either unmodeled or inadequately modeled perils or territories,” Willis Re Chairman Peter C. Hearn wrote in the report.

“With ever growing emphasis on risk management, the results of 2011 are a sobering reminder for the global insurance industry of the limitations of the current state of our understanding of natural catastrophes. This realization has led some reinsurers to question the benefits of diversification, which is leading to capacity constraints in second- and third-tier catastrophe-exposed territories,” he said.

The report notes that reinsurers are responding by attempting to deal better with “surprise” losses, such as the flooding in Thailand. These responses include demanding “far greater transparency of data” or imposing sublimits to keep their exposures to manageable levels.

Changes in catastrophe modeling also are affecting the reinsurance market, according to London-based Willis Re.

In the United States, Willis Re said the Jan. 1, 2012, renewals “are moving up in line with increases seen in mid-2011 renewals but with increased differentiation by client and portfolio.” Increased prices for natural catastrophe risks have attracted new capital to the industry, but mostly through “specialized, dedicated investment funds” instead of increased capital for existing market participants, said Mr. Hearn.

Despite the losses, the report noted that global reinsurance capital levels were only “marginally down” at the end of the third quarter from the start of 2011. But the report also pointed out that “the investment income outlook for all reinsurers is increasingly bleak.”

The market is “increasingly segmented with rate movements being driven by individual loss history and perceived exposure movements and not by an overall blanket increase,” according to the report. “While this is a superficially logical approach, it has led to significant differences,” in rates.

“If 2012 underwriting results return to profitability, it is unclear if we will witness a prolonged market hardening,” according to the report. “The key to a sustained market hardening is much more likely to lie in the impact of the current economic turmoil in the eurozone and elsewhere and how this works through to diminish the capital bases of reinsurers.”