Guy Carpenter briefing shows capacity continues to tighten at 1st April 2009 renewals

A briefing issued by Guy Carpenter finds reinsurance rates continuing to increase for the US property-catastrophe reinsurance market at the 1st April, 2009 renewals.

The briefing, titled Rates Up on Tightening Capacity at US 4/1 Prop-Cat Renewal, adds that national programmes rose between 10% and 14% on a risk-adjusted basis, with the Northeast seeing 6% to 8% increases. Risk-adjusted pricing was up 12% to 14% on average for residual markets, though results varied widely, depending on risk pool characteristics.

By comparison, reinsurance rates increased 11% on average at the January 1, 2009 renewal.

Quoting behaviour varied widely, ranging from -15% to 15% for certain programs. Capacity needs, regions, and specific perils were among the factors influencing the final rates that insurers were able to secure.

For the US market, firm order terms (FOTs) ended up at 94.8% of average quotes – 80.5% of the top quote and 110% of minimum quotes. Increases were less pronounced in the Northeast, where higher layer FOTs discounted 8% to 10% relative to quotes, with lower layers at 10% to 12% discounts.

Relative to 2008 FOTs, prices rose 14% to 16% year-over-year for higher layers and 10% to 14% for lower layers. For programs focused on the Northeast, lower layer FOTs were up only 4% to 6% from April 1, 2008, and higher layers saw increases of 8% to 10%.

Pricing trends were substantially impacted by the availability of capacity – especially for perils in historically capacity constrained zones – as well as program-specific loss histories.

Lara Mowery, Head of Guy Carpenter’s Global Property Specialty Practice, said: “The rise in reinsurance rates at the April 1 renewal extends the upward trend that we saw at the beginning of the year. Capital has undoubtedly been constrained, and this is translating into decreasing capacity in a number of areas, which then has an impact on reinsurance pricing.

“Taking early action continues to be critical in helping insurers manage their cost of coverage. As we move into the Florida renewal season, the many unknowns make this strategy more difficult for these companies.”

Capital

According to the Guy Carpenter Global Reinsurance Composite, shareholder funds dropped 18% last year – reflecting a decline in capital of $19.7 billion. Unrealized losses on investment assets accounted for 53% of the decline. Share repurchases and dividend payments resulted in the depletion of capital as well, though most programs were suspended by the end of last year.

Capital is likely to continue to be constrained in 2009, with uncertainty in the financial markets likely to impair investment assets. The ability to secure additional capital will depend on specific companies and lines of business.

Florida renewals

As a result of concern about continued price increases, a number of Florida renewals are already underway. The outcome of the current Florida legislative session and the decisions by the Florida Hurricane Catastrophe Fund Trustees could have a profound impact on the market.