Despite softening in the reinsurance catastrophe market discipline is still being maintained, according to Sean Mooney.
To provide insight into the global reinsurance catastrophe marketplace, Guy Carpenter has published “The World Catastrophe Reinsurance Market”, its annual study of property catastrophe reinsurance markets, encompassing markets in 22 countries and four regions, representing over 90% of the catastrophe reinsurance marketplace.
Looking back on 2005, with an eye on 2006 renewals, we see a continuation of trends begun in 2004. Rates on line continued their decline, although to a lesser degree than 2004. Reflecting abundant reinsurer capacity, the marketplace was highly competitive, leading to further softening in rates. Part of the decline in rate on line is somewhat artificial, since many countries experienced upward movement in programs, effectively lowering rates since rates on line decline as cover moves up. However, our analysis of layers with the same amount of risk still shows a marked decline in pricing.
Despite this softening, the current market appears more disciplined than previous soft markets. This is attributable to a number of factors, including new market entrants' commitment to investors that they will not chase market share. Additionally, the unprecedented storm activity in 2004 and recent terror bombings reminded reinsurers of the unexpected risks they face as they accumulate exposures. An increasingly technical marketplace also allowed cedents and markets to use hazard modelling as the basis for determining price, leading to a narrower range of price variability. Other factors included relatively low investment returns and the disciplined market for retrocession support.
Across the globe, one trend stands out – the record level of natural peril catastrophe losses, which are primarily driven by increased populations in highly exposed regions and construction costs that are continually outpacing inflation. With record-breaking windstorm activity to date in 2005, compounded by unpredictability on the terror front, it is difficult to confidently predict market conditions. Despite this uncertainty, however, renewals for 2006 are likely to experience a similar environment to this year, with the continuation of a soft but disciplined market.