Aon Re Global released its expectations for the worldwide reinsurance renewals with effective dates of 1 January 2008 in September.
The most significant finding indicated that the size of an industry event or events necessary to change the downward direction of the current reinsurance pricing cycle – $15bn to $25bn – had grown to a very significant level.
Given that reinsured losses tend to be around half of insured losses in significant events, insured losses would need to be in the $30bn to $50bn range.
To some, this finding might be a bit strange given that Hurricane Katrina, a $40bn insured loss event, brought such significant challenges to the reinsurance market just over two years ago.
The figures are based upon five important assumptions:
• The 31 December 2007 capital in the property casualty business will exceed $300bn, up from $274bn at 30 June 2007. A $50bn insured event would likely cost reinsurers less than $20bn after reinstatement premiums and taxes, or well less than 10% of a reinsurer’s capital and, more importantly, less than expected earnings for 2007;
“Perhaps the industry really has matured and grown quickly post-Katrina to serve such significant events without missing a beat
Bryon Ehrhart President & CEO, Aon Re Global Services
• Reinsurance industry earnings for 2007 will be in the $40bn to $50bn range even if expected levels of catastrophe losses occur;
• High interest in the property and casualty reinsurance business from private equity, hedge funds and catastrophe bond investors continues. The only real barriers to entry for this capital are the availability of underwriting talent, and sidecars likely sidestep that barrier;
• Insurers’ underlying profits have rebuilt their balance sheets, and cedents are in a position to increase their catastrophe retentions post loss if necessary to curtail potential attempts by the market to increase rates materially; and
• The rate on line levels in force now are just off their July 2006 peak and are less likely to have material increases due to significant changes in catastrophe models and the models ratings agencies use to evaluate reinsurer capital after a $30bn to $50bn event.
Perhaps the industry really has matured and grown quickly post-Katrina to serve such significant events without missing a beat.