There is no holding back the soaring rates on US wind-exposed lines, while in the rest of the world prices are likely to remain level or even soften at the 1 January renewals. And so continues the tale of two markets, despite a non-existent hurricane season, discovers Mairi Mallon.
While few will put a figure on how much prices will go up or down in what continues to be a completely split market, there is an acknowledgement that there is still a shortage of supply in hurricane-prone areas and an over-capacity in the rest of the US and across the world. Given that most of those interviewed for this piece were speaking before the official end of the hurricane season, fingers were crossed for a profitable 2006 to fill the coffers depleted by the storms of the past two years.
Buyers of reinsurance are holding back this year as they have spent the last nine to ten months looking at a whole range of issues from the cost of their programmes and their economic viability to what the retention levels should be and how much cover they need to buy as dictated by new catastrophe model predictions and rating agency requirements.
These new evaluations, combined with a hesitance to be the first to jump with new pricing or terms and conditions, are expected to stall the 1 January renewals. Despite predictions for flat or downward movements in non-US wind areas, many reinsurers have been talking up the market, keen not to be witnessed saying that prices are slipping in case it becomes as self-fulfilling prophecy.
"I think it is fair to say there has been a dampening of ardour in certain areas," said Richard Brindle, founder and chief executive of Lancashire Insurance, set up in 2006. "We have deliberately not played in the property cat treaty market this year," he said. "However exciting the headline increase may look like, if it is still based on RMS Version 5, then you are clearly not getting the real deal. So we stuck to our knitting and we expect the three sectors we selected to be incredibly strong next year."
Brindle said he expected non-marine property and retrocession increases to be in double digits when terms and conditions were factored in. For Gulf of Mexico energy the incredible rise this year could be anything from 500% to 1,000%, depending on terms and conditions, wind limits, rates and deductibles. He added: "It may taper off this year, but if you go from one to ten, then back to nine and a half, you are still doing pretty darn well. So we are pretty confident about the renewals."
David Ezekiel is president and chief executive of IAS, a Bermuda captive management company which has helped many of the 2001 and 2006 start-ups establish their back office functions. He is also chairman of the Association of Bermuda International Companies and has a unique birds-eye view of the market there. "I think strangely enough in the high-level property cat area, people think pricing is going to hold up," he said. "I am not too sure how much of that is wishful thinking, but that is the expectation. Given that there is already a fair amount of capital around and that hopefully by the time the hurricane season is officially over there will be even more surplus around, the chances are that people will start chasing rates a bit."
But brokers say the market is remaining disciplined, despite grumblings among reinsurers that the Class of 2006 is pushing prices down. "Prices have risen sharply in 2006, particularly at 1/7 and we are still expecting continued rises into 2007," said Bruce Bartell, active underwriter of Chaucer's Syndicate 1084. "Nonetheless given a lot of people's appetite for diversification, international business is coming under pricing pressure. We believe the peril of windstorm is something that globally needs proper pricing and that undoubtedly European windstorm is an area in particular where we would like to see prices continue to rise. But our fear is that with many reinsurers' appetite for diversification, our efforts to keep prices rising in Europe may be somewhat stifled."
Robin Spencer-Arscott, president of Cyrus Re, XL Capital's new sidecar, said he believed that rates will continue to be strong. "This has been a wonderful year - especially when compared to last year," he said. "But it will take a few more years to even things out after such terrible losses which affected a lot of people. Facultative rates are not so great, but property catastrophe is doing well and everyone is quite bullish about January renewals."
Cat prices holding firm
Robert Hartwig, president of the Insurance Information Institute (III), said the market outside of the cat prone areas, such as the southeast coast of the US, is holding firm. "They are down universally in casualty areas. Outside of that, in hurricane-exposed areas in the United States, they are holding firm in 2007 - barring the lack of any hurricane activity in 2006. That is a reasonably defensive posture for reinsurers to take given the expectation that there will be more severe hurricane seasons yet to come." The III said that reinsurers absorbed about 45% of the total losses from the 2005 hurricane season and needed a period of stability and profitability to recoup losses.
Unlike other market observers, Hartwig does not believe there is a lot of room for additional upward price movement in the property catastrophe segment because of the considerable amount of new capital that has entered the marketplace. He said that by his estimate, $27bn of net new capital had entered the North American market since Hurricane Katrina, including capital raised by existing insurers and reinsurers, capital raised by at least 14 new start-ups, capital put in by sidecar vehicles as well as the increased capacity of Lloyd's syndicates. "And so with this initial capital it has helped alleviate some shortages, but at the same time it has probably prevented prices from going up further than they otherwise would," added Hartwig.
Matthew Grant, chief markets officer at Risk Management Solutions said that reinsurers appear to be keeping prices level, understanding that one quiet hurricane season does not signal a change in their overall forecast of increased hurricane activity worldwide. "The rates for the hurricane-exposed business are holding up pretty much to what they were earlier this year and the end of last year despite the relatively quiet hurricane season," he said. "I think people felt that rates would have gone down, but there is a general recognition that although hurricane activity this year was quiet, it did not actually signal a trend of reduced activity, just a more quiet year. The activity rate is still higher than the long-term average so that means they will land more."
Ezekiel agreed that terms and conditions appeared to be holding up. "I think most of the work there was done after Katrina, Rita and Wilma. If things continue the way things are, one would expect to see a whole new bunch of sidecars coming on board either for 1 January or 1 July in 2007."
Charles Cantlay, deputy chairman of Aon Re UK, agreed there would be more sidecars - but said they would only make a small dent in the requirement for more capital. "There are at least two or three sidecars that I have spoken with and I am sure as you know a sidecar is nothing more than a glorified quota share," said Cantlay. "I think it is a very smart way of accessing additional capacity, which adds to your own business, your own profile, and you own remuneration schemes." But he said that it was difficult to gauge what the capital market appetite was going to be. "I think there are two quite diverging views there: one, that when the markets see, with the absence of any losses between now and the new year, just how much capital the business can make in 2006, then one view is that will attract further capital in." The other view was that the markets were getting a little bit sated in their appetite because they were being presented with the same business plan over and over again. "And there is only so much talent out there that can support these business plans," he added.
Even if capital does continue to flood into the market Cantlay does not forsee any major impact on rates. "There is a mismatch between supply and demand for US exposures. I think it is about $10bn odd dollars, I have seen other people quote that mismatch between supply and demand as high as $40bn." Cantlay said it was important that the industry now experiences a few more seasons without large losses to allow companies to regroup and stabilise. "Stuff happens," he said. "But if we get through the rest of 2006, it will produce a lot of stability in the market. It will allow a lot of people to rebuild their balance sheets and a lot of people to make a significant profit."
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