Guy Carpenter says cat losses and credit crisis pushed rates up; market remains highly volatile

High catastrophe losses and the continuing international credit crisis pushed property catastrophe rates up by 8 percent at the January 1, 2009, reinsurance renewals period, according to a briefing on global reinsurance market conditions published by Guy Carpenter & Company, LLC, the global risk and reinsurance specialist. Property catastrophe reinsurance rate increases were moderate on average, and the Guy Carpenter World Rate on Line (ROL) Index rose 8 percent.

“Price increases at the January 1, 2009, renewals have been tempered somewhat by large capital positions, which have enabled carriers to absorb the year’s losses, but the marketplace remains highly volatile,” said Chris Klein, Global Head of Business Intelligence, Guy Carpenter. “We have seen wide differences in pricing, dependent on a number of factors, such as loss history, geography, and line of business. At the same time, the expectation of another above-average storm year and the ongoing credit crisis underscore the need for disciplined capital management in the coming year.”

Among the major findings:

• Property Catastrophe Rates Rise: Despite the magnitude of catastrophes and financial losses, the 8 percent increase in property pricing was substantially lower than the increases that followed disasters such as Hurricane Andrew in 1992, the terror attacks of September 11, 2001, and Hurricanes Katrina, Rita, and Wilma in 2005. For the United States, rates rose on average by 11 percent, but there were wide variations dependent upon loss experience and zone. Continental Europe remained relatively stable, with rates increasing between 0 percent and 10 percent on a risk-adjusted basis. Rate changes in the UK ranged from -2.5 to 5 percent.

• Casualty Capacity Down: Casualty reinsurance pricing grew 5 percent on average at the January 2009 renewal, with a notable lack of capacity. A number of programs could not be placed at any reasonable rate. As a result of the financial catastrophe, new insurers had the opportunity to enter the market, but reinsurers generally were unwilling to support new capacity in order to keep reinsurance rates from dropping. The lines of business most directly impacted by the credit crisis – such as errors and omissions (E&O) and directors and officers (D&O) insurance – experienced the greatest difficulties at renewal.

• Effects of Financial Catastrophe: According to the Guy Carpenter Global Composite, carriers lost 15 percent of their implied aggregate book value in 2008, compared to 32 percent for the S&P Banks Index. The Guy Carpenter Reinsurance Composite, consisting of 16 leading firms, lost aggregate shareholders’ equity of $17 billion (16 percent) by the end of the third quarter of 2008.

• Retrocession: 2008’s later-than-usual treaty retrocession renewal saw reduced capacity and higher prices. The market was constrained by an inability to replenish balance sheets as a result of the financial catastrophe, as well as the withdrawal of major players from the market. As a result, the upward pricing reaction was more pronounced than in other sectors, and capacity for losses related to Hurricane Ike was scarce.

• Buyers Turn to ILWs: A number of reinsurance buyers sought 2009 capacity in the form of Industry Loss Warranties (ILW), as early as October 2008. Several major purchases led to higher prices, as carriers increasingly looked to replace catastrophe bond capacity with ILW cover. Higher demand and a limited ILW capacity are likely to continue into 2009.

• Marine, Energy, and Aviation: Marine rates rose 10-15 percent on average (risk-adjusted), while offshore energy pricing, particularly in the Gulf of Mexico, was substantially higher. The aviation renewal showed little change, with pricing stabilizing.

“Though the financial catastrophe has affected pricing, it has been less extreme than might have been expected,” said Klein. “In the end, effective risk and capital management practices have enabled the industry to absorb the shocks of 2008 effectively.”

“Looking forward,” added Klein, “there are a number of unknowns that could negatively impact rates, such as another above-average catastrophe year or a financial surprise. On the other hand, a resolution of the credit crisis could restore asset values and improve the financial conditions of insurers and reinsurers. The first half of 2009 will therefore be a waiting game, with dramatic events having the potential to either negatively or positively impact the market and pricing.”