Recent catastrophic events are likely to impact the upcoming renewals season, warns Charles Cantlay.
Prior to the market-changing catastrophic hurricanes this season, there was every expectation and, in fact, desire from both buyers and sellers to make the 2006 renewal season an early one.
Several years of consistent profit and a move away from the deep peaks and troughs of previous cycles engendered by a more technical approach to capital management and risk assumption, promised a relatively dull renewal season with most of the debate centred on price and what scale of reduction (modest) might be negotiated.
However, Hurricanes Katrina, Rita and most recently Wilma have removed any possibility that this might be the case. Given the global exposure of all the major reinsurers in the business, even those lines unaffected by US wind losses are bound to feel the impact.
Despite this, it is possible that buyers accessing local markets for local exposures will still be able to renew early. In fact, non-correlating clients may become a more sought-after commodity for reinsurers looking to diversify their portfolio.
For the rest of the buying community the picture will be very different. This promises to make the forthcoming renewals season one of the latest on record. There will be a period of intense analysis to determine any one reinsurer's share of the market loss and any capital depletion; an assessment of the ‘waiting agency effect', ie what actions (downgrades) may follow generically; a total re-think (particularly by the retro market) of inherent portfolio volatility and then of aggregates assumed, prices charged and new return on equity targets. Finally, there will be the creation of a new business plan focusing particularly on aggregates written in volatile areas, and – probably most time consuming of all – there is the small matter of clients coming to terms with what will be a very different product on offer.
It will inevitably be a renewal season whose major substance will be in the second half of December and which may well continue into January as significant capacity shortfalls in certain key areas of risk are likely.