The reasons behind softening reinsurance rates
The Jan 1 2010 renewals were a late renewing season. Buying continued up to Christmas Eve and in the week after, right up to the end of the year, as some buyers held out to the last moment. In some cases they were able to persuade reinsurers to take a little extra off the price. But it was not an undisciplined renewal.
Many contracts were oversubscribed, leading to detailed negotiations as to which reinsurers would get which amounts. In the negotiations, cedants and their brokers took into account such factors as reinsurers’ payment performance, security, as well as their own need to diversify. Less tangible factors such as reinsurers’ loyalty during tough times were also important.
The headline is that reinsurance rates softened. Guy Carpenter’s World Catastrophe Rate on Line Index declined by 6 percent. Last year the same Index was up 8 percent, so reinsurers have lost most of the ground they gained last year. This raises the question whether the soft market which began in 2006, has now resumed, or whether, alternatively, we have entered a more volatile period in which persistent trends are very hard to predict. Arguing for the latter view is the importance of wider economic factors to pricing in the reinsurance market. Pricing was firmer at Jan 1 2009, not only because of hurricanes Gustav and Ike, but also because of the erosion of capital reinsurers suffered due to the financial crisis. Similarly, the recovery of reinsurers' assets over the past year is an important reason for the softening at Jan 1 2010, though the absence of severe hurricane losses in the 2009 season is also of course important.
The softening was not universal. Guy Carpenter points out that pricing for tornado and hail expsosure in the middle of the United States hardened. And in Europe, where catastrophe pricing was on average flat to 5 percent lower, Austria, which has suffered hailstorm losses, saw price rises of 20 to 30 percent.