Hurricanes and the financial crisis took their toll on the insurance industry before the last renewals season, but how has it changed reinsurance pricing? In our annual Renewals Review, leading experts give their insight into pricing trends ahead of end-of-year reinsurance negotiations, describing where the opportunities will be in 2010.
Pricing - on a knife edge
Anyone looking at the relatively modest reinsurance rate rises of 2009 could be forgiven for thinking the market is stable. Words like “orderly” and “moderate”, uttered widely after the summer renewals, add to the sense of calm. The reality? Seismic forces are pulling rates in opposite directions. Somehow, reinsurance pricing remains balanced on a knife edge across most lines. Reinsurers’ discipline and mostly sound accounting have left their balance sheets in a relatively healthy state. The lack of reinsurance company failures has kept prices low. Reinsurance actuaries, pushing the advance of technical pricing, also take credit for the market’s relative restraint, while regulatory requirements (Solvency II and the like) also play their part.
- Hurricane Ike losses
- Reduced availability of capital
- Low investment returns
- Currency movements2009 losses: windstorm, flood, aviation, wildfire, piracy
- Hurricane season 2009? Fear of the unknown
- Regulatory compliance: cost of Solvency II, modelling and ERM
- Anticipated interest rate rises in 2010?
- Strong balance sheets of most reinsurers
- Sufficient capacity in many lines
- Lack of reinsurance insolvencies
- Reinsurers competing for reduced business
- Customers seeking to reduce premium and unable to pay
- Financial hardship of insurers
- Political pressure in peak zones to keep primary rates low
Property reinsurance: Hurricanes and all the rest
The financial crisis last year meant that primary insurance companies’ balance sheets were weakened. $60bn of industry surplus in US Property and Casualty was wiped out in 2008, with a further $19bn lost in Q1 2009. Property reinsurance saw increases in the last renewals season, but it remains a tale of two markets: cat-exposed risk and the rest.
Weakened balance sheets among primary insurers in Q2 will stifle further large reinsurance increases in 2010. A major hurricane costing insurers $35bn could cause reinsurers $15bn of losses, driving up prices. Capital providers have avoided property cat as distressed debt is more profitable.
Besides Gulf coast wind, other property lines to have seen rate increases include California quake and specific industries such as steel and mining. Property reinsurance rates outside these areas and in Europe have remained fairly stable, in part due to downward pressure from cash-strapped primary insurers.
• Capacity: Sufficient, additional capacity forming for US hurricane-exposed areas.
• Rates: Gulf of Mexico and other cat risk areas saw rises of up to 30%. Non-cat areas saw rises of 5-10%, led by a 103% combined ratio for the US market in 2008.
• Next steps: Watch out for the weather and new capacity forming at the end of 2009.
GR Prediction: Moderate rate increases in 2010, higher in cat-exposed zones, but not as high as 2009. However, a $35bn-plus storm could send rates soaring.
Casualty reinsurance: A competitive streak
Capacity flooded into casualty reinsurance on the expectation of rate rises which failed to materialise. Weakness in the original insurance business and decreases in underlying exposures due to the global economic decline were foremost among the causes. Observers still believe demand for casualty reinsurance inevitably rises in difficult times and now expect to play a longer-term game. Capacity remains high in most areas of casualty reinsurance, but there will not be so much supply for risks of below $25m. Nonetheless, the new capacity has increased competition and prevented what some might term as “necessary” price increases. Meanwhile, the structure of casualty reinsurance is not changing to a major degree. The reinsurance market remains in a better state than the primary market, which could lead to reinsurers increasing rates in 2010.
• Capacity: Abundant and set to increase depending on rate conditions.
• Rates in 2009: Solid due to influx of capacity.
• Next steps: Minor adjustments to ceding and profit commission terms have been made to reflect experience.
GR Prediction: High capacity levels could keep prices relatively stable.
Marine reinsurance: A long and arduous journey ahead
The global downturn has slashed the value of ships and cargoes, reducing profits for marine reinsurance. Yet there is still more than enough capacity. The exception is marine energy which has taken drastic action after Ike. Without any cat losses in the rest of 2009, reinsurers expect the sideways movement to continue. However, the Gulf of Aden is a notable exception due to piracy driving pricing upward.
• Capacity: Plentiful as no marine insurers have withdrawn.
• Rates in 2009: Flatlining (with the exception of Gulf of Mexico, see Energy).
• Next steps: With no prospect of an imminent revival in shipping volumes, can marine rates go down any further?
GR Prediction: Flat rates set to continue. Underwriters, braced for the long haul, will attempt to improve the quality of their risks.
Energy reinsurance: Losses spur energetic rate rises
Talk is dominated by rate increases in US Gulf of Mexico exposures. Windstorm pricing has been redesigned in response to unexpectedly large Ike losses in 2008. At the last renewals, many reinsurers asked for price hikes of 30% on cat-exposed risks, offering pro rata not XOL. However, cat-exposed energy prices have become uneconomical for many customers: less than 50% of the aggregate purchased in 2008 was bought in 2009.
• Capacity: Adequate.
• Rates in 2009: Increases of 30 to 40% in cat-exposed regions. 10 to 15% elsewhere.
• Next steps: Reinsurers continue to drive prices, as well as terms and conditions.
GR Prediction: Continued price increases, but potentially more modest rises. Continued steep rises if any level of hurricanes losses is seen in 2009.
Cargo reinsurance: Scraping along the bottom
Low loss levels, high reinsurance capacity and pressure from buyers have all brought downward pressure on cargo reinsurance pricing, which is now extremely competitive. Reinsurers cannot be optimistic. The global involvement in cargo means capacity remains high, but London is the place for more technical areas, eg, “delay in start up” and “rejection” business.
• Capacity: Capacity remains high.
• Rates in 2009: Low and flat. Prices have “bottomed out” due to low loss levels, drop in cargo movements and reduced demand.
• Next steps: Demand not expected to pick up significantly in the next 12 months.
GR Prediction: A flat market continuing into 2010.
D&O and E&O reinsurance: Financial crisis remains a liability
Professional lines reinsurance has seen a split between financial lines, which have gone through the roof, and the rest, which remain soft. In the absence of new entrants, capacity is expected to remain stable at best, with existing providers unlikely to increase aggregate exposure.
Financial lines: claims set to rise.
The rest: The downward drift in public/product liability rates is now due less to price drops than to falls in customers’ turnover. E&O prices are falling.
• Capacity: Could fall in the absence of new entrants.
• Rates in 2009: Large rises (40%+) in financial institutions D&O. Stability in other lines.
• Next steps: A predicted increase in D&O claims as companies continue to experience delayed problems as a result of the financial crisis.
GR Prediction: Claims experience, capacity stretch and high demand pushing up financial institution risk. Other lines remain stable.
Life reinsurance: Reminded of their own mortality
Demand for life reinsurance has risen due to life insurers’ poor capitalisation. New capacity entered the primary life and life re market in 2009 spurred by life insurance being uncorrelated to economic cycles.
• Capacity: Adequate, new entrants due to life’s uncorrelated nature.
• Rates in 2009: Largely stable, modest increases due to increased demand.
• Next steps: Downturn causing changes in lapse and claim patterns.
GR Prediction: Rates gradually rising.
Trade credit reinsurance: The dust settles in the ‘nightmare’ scenario
The number of manufacturers and distributors going bust means trade credit is a nightmare. Several reinsurers pulled out completely and others demanded significant rating increases at 1/1 2009. As a result, stable terms are expected at 1/1 2010, with the following upward pressures: business written in 2008 and Q1 2009 is developing worse than expected; and certain large players have cut the capacity they offer.
• Capacity: Reduced due to departure of certain large players.
• Rates in 2009: Significant rating increases at the last renewals.
• Next steps: Losses are increasing but rates restrained by falling demand or underwriters’ aversion to the worst risks.
GR Prediction: Mainly more stable, but with some upward pressure.
Aviation reinsurance: On a wing and a prayer
Two high-profile losses in 2009 – Air France Flight 447 and a Yemenia Airbus – will increase pricing from low levels. Yet even the predicted increases might not be adequate to offset loss results, and 2009–2010 will be a very difficult year for aviation insurers and reinsurers. Rates will also be hit by a number of large satellite losses.
• Capacity: A small market with sufficient capital.
• Rates in 2009: Hardening with increases of up to 20–30% after heavy losses.
• Next steps: Rate increases, but cash-strapped airlines could exert downward pressure.
GR Prediction: A flat market continuing into 2010.
Motor reinsurance: Economy drives the market
The continued poor performance of the motor insurance business combined with the effects of the financial crisis dominate the outlook for motor reinsurers in most major markets.
Unprofitable direct rate levels have impacted proportional reinsurance, but the prospect of price rises has been held back by cashflow underwriting by direct insurers trying to support liquidity.
The reduced number of new cars entering the market has reduced opportunities to reprice ongoing business.
Recent reserve releases and the insurers’ desire to maintain market share have held back rate increases that would have been expected given challenging current year results.
• Capacity: Adequate.
• Rates in 2009: Stable – reinsurance rate increases held back by insurer activity.
• Next steps: Difficult economic conditions set to have delayed effects.
GR Prediction: Mostly flat, emerging markets slightly up.
Political risk reinsurance: An uncertain world
Economic and political instability have clearly impacted business. Many reinsurers have hit aggregate thresholds and could cut capacity, driving up prices.
Demand for capacity is strong as firms seek to insure trade credit and political risk exposures against a world with increasing risk.
• Capacity: Strong demand, but reinsurers reluctant to offer additional capacity.
• Rates in 2009: Increasing moderately.
• Next steps: Capacity shortage could provide upward pressure.
GR Prediction: Prices will creep up, even without significant political upheavals in growing markets.
Terrorism reinsurance: Caution beats complacency
Reinsurers wanting to reduce volatility on their books are more cautious about offering capacity without price increases. Terrorism is one line that has been overlooked in terms of loss potential given limited terrorist loss since 2001.
• Capacity: Available, “Ts&Cs” restrictive.
• Rates in 2009: Increasing moderately.
• Next steps: Reinsurers seek to raise rates to mitigate potential volatility on their books.
GR Prediction: Continued moderate price increases.