Global Reinsurance in conjunction with Ultimate Risk Solutions conducted the "Race to Renewals" survey at the Rendez-Vous de Septembre
Whenever a survey is conducted, the instigator of the study usually has a fair idea of the potential outcome and chances are will base the follow-up report on any anomalies within the findings. However, the Race to Renewals survey was conducted in the immediate aftermath of Hurricane Katrina and as such, all outcome predictions were scrubbed.
Respondents were asked their opinions on four issues: rate changes at 01/06 renewals; fluctuations in overall reinsurance spend; acceptable reinsurer security levels; and the outlook on the reinsurance sector.
In the run-up to Monte Carlo, there was much talk about the clear signs of softening already being experienced across a number of lines of business, with the pressure on underwriters to slacken rates expected to gather further momentum as the January renewals approached. But the magnitude of the devastation caused by Katrina appears to have put pay to this. A clear pattern emerges from the responses to the first question: "How do you see rates changing in the following lines of business at 01/01/06?"
Chart 1 shows that virtually across the board, more respondents expected rates to rise than fall. Only life and motor bucked the trend, with 20% believing rates will fall on the life side compared to 10% forecasting a rate increase, while motor revealed an 18%/16% split.
87% of respondents predicted that property cat rates would rise. However, what was somewhat surprising was that 10% still believed they would remain stable, with a further 3% actually expecting a drop in property cat rates even after Katrina. However, further analysis showed that many respondents who highlighted stable or down were operating in more localised markets, including Latin America and Africa which have a greater potential to be more resistant to rate hikes than those more directly impacted by Katrina losses such as Europe and North America.
On marine & energy rates, only 9% expected to see rates drop, reflecting the ongoing impact of Hurricane Ivan in 2004, which ploughed a deep loss furrow through the energy sector, coupled with the expected marine & energy losses resulting from Katrina. Although it should be noted that 35% of respondents believed that rates would remain stable. Speaking recently to a spokesperson from BP, the oil giant confirmed that it had escaped relatively unscathed from Katrina, with only seven near-shore platforms having been toppled and two leaning, with no deep-sea platforms effected. Furthermore, the oil giant added that despite its rigs being designed to withstand category 3/4 storms, many had taken the full brunt of category 5 Katrina and had emerged relatively intact. The greatest concern was the amount of oil and gas which has been "shut in", suggesting that most claims would impact business interruption policies.
The recent spate of airline crashes was reflected in the responses received on rate fluctuations in aviation. A remarkably benign period in the aftermath of 9/11 had seen rates begin to spiral down from the heady altitudes which they had reached, but 60% of those surveyed believed that aviation rates would rise in the forthcoming renewals, compared to 7% who expected to see them come down.
What price reinsurance?
When the dust had settled on the 01/05 renewals season, there was a market-wide acknowledgement that overall reinsurance spend was down, with cedants seeking alternative risk strategies rather than purchasing reinsurance at prices deemed beyond acceptable levels. With expectations that this tightening of reinsurance budgets would continue into 01/06 renewals, there appears little doubt that Katrina will turn this around.
Chart 2 shows that some 55% of respondents believed reinsurance spend would increase at 01/06, with a further 38% predicting spend would remain unchanged. The fact that unlike the natural catastrophe-related insured losses of 2004, with greater storm frequency rather than severity being a key factor in the extent to which the losses were absorbed on the primary side, the scale of Katrina has meant that insured losses are undoubtedly set to burst through into the higher reaches of excess of loss reinsurance programmes and flow inexorably into the retrocession market. For example, the assumed gross insured loss of $2.5bn announced recently by St Paul Travelers, becomes an $800m loss after tax and the impact of reinsurance, including the cost of reinsurance reinstatement premiums. On the retro side of the equation, Imagine Group, while having only a limited property cat portfolio, cited the impact of retrocession when announcing its $17m preliminary insured loss from Katrina. In contrast, Montpelier Re, which estimated a potential insured loss of $450m-$675m, highlighted the fact that it had in place limited retrocessional cover and would have to absorb the brunt of the hit. However, the reinsurer has since raised some $600m in equity capital in almost record breaking time, which has seen Standard & Poor's affirm Montpelier's credit and financial strength ratings, although it has now suggested that its insured losses might exceed the original estimate.
While there is potential for significant hardening, this is counterbalanced by the fact that if prices on the property cat, marine & energy and business interruption lines rocket upwards (with expectations that price increases will be across the board and not just limited to those lines directly impacted) from a starting point already deemed too high, then many cedants may turn to the capital markets in search of alternative risk transfer methods. There is still a danger that rate hikes could result in prohibitively expensive cover, and with increasing signs that insurers and reinsurers are seeking to attract more and more financial market expertise to their management teams, reinsurance may become a less appealing risk transfer mechanism. This is of course dependent on the appetite of the capital markets, which may not see such risk absorption as being as appetising as it was in light of the increasing storm activity.
The question - "In terms of reinsurer security, what is the lowest rated reinsurer that you would use?" - was also posed to Rendez-Vous attendees. Interestingly, while it comes as no surprise that some 34% of respondents indicated "A-", it is surprising that more people ticked the "BBB+" box than "A" (17% and 12% respectively) with a further 13% stating that "BBB" was still acceptable.
The final question put to delegates at the Rendez-Vous was: "What will the ratings outlook on the reinsurance industry be in 12 months time?" While 47% were of the opinion that the market would be able to hold on to its stable outlook, over one third of respondents felt that the financial impact of Katrina and the potential for further storms would see the industry flounder and be placed on negative outlook. And it is now clear that the pessimists among the respondents were correct, following the recent announcement by Standard & Poor's that the reinsurance industry has once again been placed on a negative outlook. The rating agency believes downgrades look set to outnumber upgrades for the remainder of 2005, although the number of downgrades is expected to be modest.
Global Reinsurance would like to take this opportunity to thank all of those who took of their time to complete this survey.