The Reinsurance market has come through what many are describing as the most problematic renewals season on record, which has resulted in delays on most lines
That the industry should have experienced such a tumultuous renewals period is to be expected given the utter chaos that the market found itself in in the aftermath of the most devastating hurricane season ever. However, despite widespread confidence that massive rate hikes would spread outside of those loss-affected regions and lines, the predicted across the board price increases have not occurred.
There are myriad reasons as to why this has proved to be the case, which will be tackled in detail in this issue, but it is interesting to note Alastair Speare-Cole's comments at a recent renewals briefing. "The market is much more sophisticated," said Speare-Cole, head of direct reinsurance at Aon UK. "The old rule of thumb would be with a big cat loss, rates across the board go up. But while this has held good in the past, it no longer holds good now."
Few would argue that the market is a much more sophisticated entity than it was five or ten years ago, but has this greater sophistication been founded upon an over-reliance on technology? As has already been well documented, the storms of 2005 have raised serious questions about how the market assesses risk. The market has been accused of an over-dependency on the output of catastrophe models, which were severely tested by the frequency and severity of the Atlantic storms and in a number of instances found wanting.
Guy Carpenter in its renewals review pinpointed what it described as the "uncertainty factor" in this year's renewals, "as the market was less confident in the results of the models and extra cautious on the calculations of exposures". A knock-on effect has been a demand for more comprehensive information from cedants to allow better quantification of the catastrophe exposures in a particular programme. While this is clearly a factor which has further hindered the market in achieving the 01/01 renewal deadline, going forward this can only be good for the overall performance of the industry. Reinsurers are actively seeking to gain a greater understanding of the risks which are being placed.
Take for example the impact of this process on the retrocession programmes being placed. Piers Cantlay, chief executive officer of reinsurance at Aon UK, describes the process which has occurred as being one of purification.
"Prior to 2006, we could place cover on somebody's excess of loss book, but also on their facultative portfolio, their binders, their line slips etc," he said. "And some of those portfolios have been very 'untransparent' in their catastrophe content. This year it is impossible to place a worldwide programme with those classes included. So our retro programmes protect their cat XL, their risk XL and their pro rata cat, and that's about it."
Add to this the fact that rating agencies, regulators, brokers and risk modellers are all undergoing a similar period of reassessment and it is fair to say that 2006 will prove to be one of the most important transitional years the international insurance and reinsurance industry has ever undergone.
But we should not see this as conclusive proof that the industry is fundamentally flawed. Despite taking a severe financial battering in 2005, it has withstood the worst that nature can throw at it, and is still standing strong.