AM Best interviews David Sandham, Editor of Global Reinsurance, about higher reinsurance rates

David Sandham, Editor of Global Reinsurance, was interviewed recently by John Weber of AM Best on the subject of the hardening reinsurance market.

The main reasons for the hardening market are: firstly, last year US hurricanes and other catastrophe losses were higher than expected – Hurricane Ike turned out to be the third most costly hurricane in US history. A related reason is a reduction confidence in the abilities of the current generation of cat models: some of the initial loss estimates fell far short.

Secondly, in the financial crisis many insurers have suffered investment losses. With weakened balance sheets, insurers are keener to transfer risk. To maintain capital ratios, and finding it hard to raise new capital, they turn more to reinsurance.

Also, little new reinsurance capacity has come in to meet the extra demand. Add to that, retro capacity (where reinsurers themselves shed risk) has lessened.

So a confluence of factors has forced rates up.

Reinsurance renewals on the First of January confirmed expectations that the reinsurance market has turned. Guy Carpenter’s World Rate on Line Index for property catastrophe rose 8 per cent at the January One renewals period.

However, we should not oversimplify the picture. The hardening was not at all uniform. A lot of the peak zone catastrophe pricing in the US increased by 20 per cent or more. European wind accounts were up much less – about 5 to 10 per cent. And some other renewals - that had not been affected by catastrophe losses during 2008 - saw no increase at all.