In the aftermath of the hyperactive 2005 hurricane season, the value of reinsurance to the cedant has increased immeasurably.

Reinsurance buying strategies have changed a great deal over the last couple of decades with the birth of multinationals and the increasing sophistication of methods utilised. The cycle has arguably become less pronounced as underwriting has become more disciplined and as reinsurance purchasing has become more of a priority on insurers’ agendas. The traditional reinsurer/insurer relationship in isolation is also a thing of the past, with the capital markets being increasingly tapped for alternative forms of capacity.

The value of reinsurance for cedants is of particular importance after last year’s record breaking hurricane season. A number of new participants, in an effort to reduce their exposures, have begun buying reinsurance, such as Allstate which is now one of the biggest reinsurance purchasers. However, as we saw at last year’s renewals, Hurricane Katrina was not quite the market-changing event that had been anticipated. Unlike in the aftermath of September 11 where reinsurance rates soared across all lines of business, at last year’s 1 January renewals we witnessed a two-tiered effect, dubbed a “Tale of Two Markets”. While there were massive rate hikes on cat-exposed lines such as US property and offshore marine & energy, rates plateaued or continued to soften in other sectors. Statistics from the mid-year renewals suggest this dual hardening and softening has been further exacerbated. Changes to the rating agencies’ capital requirements, a riskier outlook projected by the catastrophe models and reduced capacity are just some of the factors behind this. What it all means of course is an extremely challenging environment, for both reinsurance buyers and sellers, in the run-up to the 1 January 2007 renewals.