Aon Re Global Analysis finds supply is growing faster than cedent demand and spells out other factors driving the low-price trend
Pricing is projected to be favourable for traditional property catastrophe reinsurance programmes when insurers seek mid-year renewals, according to an analysis by Aon Re Global.
While terms and conditions are expected to continue to improve, price reductions will be a higher priority for cedents. The underlying fundamentals that drove the softening of price and terms and conditions at January 1, 2008 are expected to continue through the June and July renewal season. “Supply continues to grow at a faster rate than that of cedent demand, which implies continued softening,” said Bryon Ehrhart, president and CEO of Aon Re Services.
Expectations for property and casualty reinsurers leading up to the June 1 and July 1 renewals are driven by the following factors: Low severity of property catastrophe losses in 2006, 2007 and the first quarter of 2008; 15 to 20% returns on equity in 2007; Significant reserve releases in 2007 and further reserve releases anticipated in 2008; Growing capital bases, due in part to lighter share repurchases than anticipated; Stability or anticipated decreases in key US perils of property catastrophe loss models; Limited impact on most reinsurers from mortgage security losses and the repricing of credit risk; Increased interest in assuming property catastrophe and other insurance risks from capital markets investors through insurance-linked securities, industry loss warranty swaps or collateralised reinsurance transactions at prices comparable to projected decreases in traditional reinsurance costs.
At current pricing levels, and with the capitalisation of the property and casualty reinsurance market, Aon Re Global estimates that it would require a ground-up property catastrophe occurrence loss in the range of $30bn to $50bn to change the direction of property catastrophe reinsurance rates, terms and conditions.
A substantial majority of the world's largest property insurers now utilise risk transfer capacity through sponsorship of catastrophe bond transactions. This alternative facility now represents between 10 and 30% of programme capacity for insurers buying more than $500m of coverage for peak reinsurance aggregate zones. Aon Re Global expects this trend to continue through 2008 as even more catastrophe bond funds are raised.