Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Reinsurance costs not likely to increase at year-end renewals

Low investment yields, 2011 cats offset by plentiful market capacity

Reprints
Reinsurance costs not likely to increase at year-end renewals

MONTE CARLO, Monaco — Most insurers likely won't see significant increases in reinsurance costs at year-end renewals, barring any major catastrophes over the next four months, according to reinsurers, brokers and other experts meeting in Monte Carlo, Monaco, last week.

The sustained increases in property catastrophe reinsurance rates over the past 24 months, which have included rate increases of 40% or more in catastrophe-hit regions and low double-digit increases in the United States, will not be maintained, they say.

While reinsurance capacity is plentiful, the continued influence of 2011 catastrophe losses on the market and low interest rates dampening investment income likely will stifle attempts by cedents to significantly lower reinsurance rates, they say.

And an uptick in some areas of the primary casualty market may lead to increases in casualty reinsurance rates (see related story).

The overall consensus at the Rendez-vous de Septembre reinsurance meeting, which marks the traditional start of year-end renewal negotiations, was for a largely flat renewal with any movements up or down being confined to a narrow band. But it was unclear whether it would mark the beginning of a period of softening rates or continued pricing stability.

Reinsurance rates for contracts renewing throughout 2011 have seen increases, but rate hikes have been moderating as the year progresses, said Ulrich Wallin, CEO of Hannover Reinsurance Co.

“Provided that there's no significant loss between now and year-end, we expect further moderation,” he said. Rates likely will vary depending on classes of business, but U.S. catastrophe reinsurance “should see increases of around 5%,” Mr. Wallin said.

%%BREAK%%

Demand for catastrophe coverage is increasing over the long term, and prices likely will increase at year-end renewals, said Matthias Weber, group chief underwriting officer at Swiss Re Ltd. “We expect pricing levels in the industry to moderately increase, and we are prepared to employ more capital in property/casualty to support our clients,” he said.

But some U.S. catastrophe programs could see modest decreases in rates, said David Priebe, vice chairman of reinsurance broker Guy Carpenter & Co.

“U.S. property cat rates represent the most attractive pieces of business in the world ... the market feels that the margins in that area are attractive,” he said.

Noncatastrophe programs, such as aggregate excess of loss programs, still may see some increases, depending on the individual risks, Mr. Priebe said.

“But there is good dialogue between cedents and capital providers on developing program structures and pricing that makes sense,” he said.

“On the property side, there were price increases in January, but the increases at July renewals were much lower. It's our hope that we'll see risk-adjusted improvements in terms at Jan. 1, 2013,” said Simon Clutterbuck, a director at BMS Intermediaries Ltd., a unit of broker BMS Group Ltd. in London.

But rate decreases may be unlikely despite the rate hikes applied at recent renewals, said James Few, Hamilton, Bermuda-based CEO of Aspen Re and Aspen Bermuda Ltd.

%%BREAK%%

“We achieved rate increases on Jan. 1 and July 1 so, if nothing happens between now and the end of the year, rate increases may be tough to get. But this business is based on low frequency of losses, and people still remember the events of last year, so it's unlikely that we'll see decreases,” he said.

And rates in some areas of the world are still inadequate, said Jamie Veghte, executive vice president and CEO of reinsurance operations for XL Group P.L.C.

“We measure rate adequacy by line of business and geography worldwide. So we have levels of rate adequacy across geographies and lines,” he said. “Even with the increases we saw at April 1, I would still say we see the premiums Japanese primaries pay as rate-inadequate.”

There is still a need for rate increases on some international property cat programs, said David Cash, CEO of Endurance Specialty Holdings Ltd. in Pembroke, Bermuda.

“There's not enough cat loading on the products that we sell,” he said.

In the U.S., property cat reinsurance is “suitably priced,” but insurers are still finding it tough to push through increases that they feel are necessary, Mr. Cash said

For property catastrophe risks in general, the market appears to be a point on equilibrium, said Ed Noonan, chairman and CEO of Validus Holdings Ltd. “I can't say what will happen at Jan. 1, but the market seems to be stable, and we don't hear anyone saying that rates need to be up or down 30%,” he said.

%%BREAK%%

Overall rates likely will be up or down 5% at Jan. 1, 2013, renewals, said Steve Hearn, chairman and CEO of Willis Global, which includes the reinsurance brokering operations of Willis Group Holdings P.L.C. “They will be the maximum extremes,” he said.

While claims experience over the past two years and poor investment yields will put pressure on underwriters to increase rates, the abundant capacity in the market will hinder any attempts by reinsurers to significantly increase rates, Mr. Hearn said.

Investors continue to find the reinsurance market attractive and have increased the available capacity through investments in sidecars, insurance-linked securities and other investment vehicles, he said (see related story). And other than a significant catastrophe loss, other factors that would lead to significant rate movements are macroeconomic factors such as a rise in inflation, increased interest rates, or the effect of the eurozone crisis, Mr. Hearn said. “It's not about our industry.”

For European risks, reinsurance rates have increased moderately over the past several years, and there may still be some increases at year-end, said Peter Schmidt, Zurich-based CEO of European reinsurance for Catlin Group Ltd.

For example, catastrophe rates in Italy, which has a significant earthquake exposure, may increase further at year-end, but in general “we have a rather stable market,” he said.

The current low-interest-rate environment will be a key factor preventing significant rate decreases in all major coverage lines.

%%BREAK%%

With most reinsurers maintaining conservative investment strategies and bond yields at historic lows, reinsurers are forced to keep rates sufficiently high over the long term to ensure adequate underwriting profits, they say, though some hedge fund-backed reinsurers are taking a more aggressive investment strategy as they seek to increase returns (see related story).

The majority of reinsurers that invest mainly in bonds, however, could be facing a low-interest-rate environment for five to seven years, according to Dominic Crawley, global head of financial services rating at Standard & Poor's Corp. in London.

The interest rate outlook has significant ramifications for reinsurers, said Neil Maidment, chief of underwriting at Beazley Group P.L.C. in London.

“Property cat is particularly important in terms of loss contribution, but at the end of the day it's a $15 billion to $20 billion market out of a trillion-dollar global insurance industry. If rates go up or down a couple of points in Florida, I'm not sure it is as important as the fact that U.S. treasuries are not paying all that much.”

And past rate increases will not make up for the difficult investment conditions, said Michel Lies, CEO of Swiss Re.

“The current rate increases are insufficient to offset past deficiencies and low interest rates,” he said.

If interest rates are maintained, Hannover Re expects to see its investment results deteriorate by 10 basis points a year as its bond portfolio matures and it reinvests with lower-yielding bonds, said Mr. Wallin.

“We have to take that into account when we quote the business,” he said.

Property catastrophe reinsurers are particularly restricted when it comes to investment options, said Validus' Mr. Noonan.

“From the day we started, we said that if you are going to be in the cat business you can't take investment risk. We only invest in high-quality securities without much liquidity risk, so we have to generate profits from underwriting,” he said.