Following a flurry of last-minute activity to secure lower prices in the 1 January 2010 renewals, the news is in: reinsurance rates have softened. But why is this, and what can we expect in the year ahead?
The 1 January 2010 renewals were a late renewing season. Buying continued beyond Christmas Eve and through into the week after, as some buyers held out right up to the last moment. And in some cases, they were indeed able to persuade reinsurers to take a little extra off the price. “But it was not an undisciplined renewal,” Guy Carpenter’s global head of business intelligence, Chris Klein, says.
According to Aon Benfield Analytics’ chief executive, Bryon Ehrhart, reinsurers showed “markedly less anxiety than last year” at the 2010 renewals and were “more focused on gaining the largest possible signings” on their programme authorisations.
Many contracts were oversubscribed, leading to detailed negotiations as to which reinsurers would get what amounts. In the negotiations, cedants and their brokers took into account such factors as reinsurers’ payment performance and security, as well as their own need to diversify. Less tangible factors, such as reinsurers’ loyalty during tough times, were also important.
And the headline news is that reinsurance rates softened. Guy Carpenter’s World Catastrophe Rate on Line Index declined by 6%. This index measures property cat, whereas casualty reinsurance rates were on average “flat to down 10%”, Klein says. Last year, the same property cat index was up 8%, so reinsurers have lost most of the ground they gained last year.
This raises the question of whether we are seeing a return to the soft market that began in 2006, or alternatively whether this marks the beginning of a more volatile period of ups and downs, in which persistent trends are very hard to predict.
The importance of wider economic factors to pricing in the reinsurance market supports the latter view. Pricing was firmer at 1 January 2009 not only because of Hurricanes Gustav and Ike, but also because of the erosion of capital suffered by reinsurers due to the financial crisis.
Similarly, the recovery of reinsurers’ assets over the past year is an important reason for the softening at 1 January 2010, though the absence of severe hurricane losses in the 2009 season is also important, of course; there were only three hurricanes in the North Atlantic 2009 season, causing few significant losses.
The recovery by reinsurers has not been matched in the primary insurance sector. Willis Re chief executive Peter Hearn says: “The position is worse for reinsurers’ clients, where stagnant premium growth is pressuring expense ratios, particularly in mature markets. Reinsurers have listened to these concerns and responded sensibly with measured premium reductions.”
The softening was not universal: pricing for tornado and hail exposure in the middle of the USA hardened, and in Europe, where catastrophe pricing was on average flat to 5% lower, Austria – one of several European countries that suffered hailstorm losses – saw price rises of 20%-30%.
Whereas the North Atlantic hurricane season was benign, Windstorm Klaus caused insured losses of $3.5bn in Europe, making it the most costly event of 2009. In the casualty sector, despite the general downturn, rates for financial institutions’ professional indemnity were up.
An interesting wrinkle was the influence of adjustments to the vendor catastrophe software models. These adjustments have decreased predicted losses for both earthquake and wind.
Another notable feature from the risk transfer market in general was the rush of cat bond new issues toward the end of the year, bringing total new issues to $3.4bn for 2009, which is 25% more than 2008. Pricing of cat bond new issues was cheaper in the latter part of the year. Aon Benfield calculated that, in the final quarter of 2009, spreads in the US wind and multi-peril sectors decreased by 36% and 26% respectively on a non-seasonal adjusted basis.
The reduction in pricing followed a calming among investors from the high levels of anxiety seen following the Lehman bankruptcy and in the wake of the financial crisis. Prospects for further growth in 2010 in the cat bond market are now looking good. With admirable precision, Munich Re has forecast that it is “conceivable that for 2010 the volume of new issues may be around $5bn”.
1 January was the first of four main annual renewal seasons. Most experts are currently predicting a continuation of the soft market at the April, June and July renewals; assuming, of course, that there are no large reinsured catastrophes before these dates.
Looking forward at the reinsurance industry as a whole in 2010, one of the effects of the softer reinsurance market could be increased mergers and consolidation activity. The twin spurs of low growth and strengthening capital positions could cause many chief executives to seek expansion through merger. Pointing in the same direction are the low values the stockmarket places on many reinsurers.
Share repurchases are an alternative reaction to the same set of stimuli, however. Aon Benfield forecasts that significant reinsurer share repurchases in 2010 will fall in the range of $10bn-$15bn.
One of the most exciting events of last year, from a spectator’s point of view, was the takeover battle for IPC Holdings. If we have truly entered – or re-entered – a soft phase of the market, more excitement of that kind could be on the cards for 2010. GR