The calm before the storm?

The January renewals have seen no sign of any arrest to the steady slide in rating  levels and  while talk is of challenging times and the need for clam there will be those in the sector which are looking eagerly for a storm to shock the market out of its downwards drift.

With underwriters still loathe to talk about their performance in the January 1 renewals until they announce their 2010 figures brokers have been quick to have their say and the view is that over capacity has been the defining factor of the renewals and will continue to vex the underwriters in the year ahead.

The headline losses of 2010 such as the Chilean earthquake the European windstorms and the Australian floods at the tail end of the year and into January do not seem to have halted the steady replenishment of reinsurer’s capital to almost record levels. Therefore without a major event the question underwriters will have to answer is what do they do with their capital?

There was plenty returned to shareholders last year but as Chris Klein, Director Reinsurance Markets, at Guy Carpenter says it is an option that does not appeal.

“Chief Executives don't join firms to return money to their shareholders, they would much prefer to use it,” he adds. “The question for the reinsurers is how they use the capital in what is a very challenging market.”

As rates continued to fall Mr Klein believes that while discipline remains there is now a growing issue over the need for economies of scale.

“We have seen some underwriters walking away from renewing business but that can be as much a strategic underwriting decision as one of price,” he explains. “What is more interesting is whether we are reaching a point where the economies of scale come into play and top line figures become as important as the bottom line performance as reinsurers look to deploy capacity.”

All believe that the January 1 renewals saw a steady reduction across the majority f classes with offshore energy and Chilean risks for obvious reasons seeing notable price hikes.

Indeed brokers reported that unlike most other classes, pricing for marine has been flat, while although the ultimate loss to the global reinsurance market from the Deepwater Horizon spill still remains unclear, marine accounts which include energy exposures and pure energy accounts are seeing significant rises with some prices increasing by more than 30%.

Will Re says the overcapitalisationin the reinsurance market continues to gradually push rates downwards with price reductions at the January 1, 2011 reinsurance renewalsaveraging between 5% and 10%.

It’s report issued this month was entitled "Keep Calm and Carry on," and says that despite the continued softening and the worst ever first quarter for natural peril losses on record, the global reinsurance markethas emerged from 2010 relatively unscathed, aided by recovering investment positions and continuing strong reserve releases.

According to the report, reinsurers’ 2010 underwriting results are lower than the exceptional ones achieved in comparatively loss-free 2009, but they are much better than initially feared after the disastrous first quarter. With the industry overcapitalized,Willis Reanticipatesthat reinsurers may seek to implement more aggressive capital management strategies through share repurchases, dividend payments and other similar measures.

Peter Hearn, CEO, Willis Re, says, “The global reinsurance industry faces tough prospects for 2011. Thin investment returns and declining back year releases provide little cover for declining underwriting returns. In such an environment, any shock to reinsurers’ capital base, either through underwriting losses or other capital events, is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear.”

He adds the reports finding point to a challenging 2011 for the global reinsurance market with strong premium growth in emerging markets proving insufficient to offset continuing sluggish premium growth in the mature markets.

According to the reinsurance broker, the pricing gap in most classes between reinsurance and primary business shows no signs of narrowing. As a result, Willis Re says that primary carriers are purchasing less, particularly in casualty lines, and reinsurers are seeing reduced premium volumes.

Aon Benfield for its part believes that there has been a meeting of minds between the reinsurers and the cedents.

Its reportreveals that the partnership between insurers and reinsurers has been renewed, as reinsurers are now lowering rates at the same pace,or greater,than insurers. 

“Both reinsurers and insurersare enjoying fully recovered balance sheets but quite limited growth in demand for their products” 

The report cites that the major developed markets in the U.S., Germany, France and the U.K. are facing their second or third year-on-year of non life market-wide premium declines, even as gross domestic product figures return to sequential growth.  Therefore, both insurers and reinsurers now need to partner to create new demand generating products and innovations on existing products.  Until insurers and reinsurers start to show a reasonable level of traction of new demand, the report reveals the reinsurance market outlook will continue to reflect a global softening.

Aon Benfield adds its views the January 2011 renewals are at “the upper end of the range of softening that Aon Benfield projected in September of 2010”.

“Following a U.S. hurricane season with no land-falling events and high investment valuations, reinsurers lowered rates at a slower pacethan last January.  U.S. catastrophe programs that include hurricane exposure, which is the peak reinsured global peril, fell by 5 to 10percent,” it 3xplains.  “Reinsurance rates for property and casualty per risk and per occurrence programs also fell.”

The report highlights that these programs already substantially reflect the price decreases taken by insurers, saw terms and conditions including ceding commissions and other features changed to reflect a net price decrease of a further 5 to 10 percent.

Dominic Christian, co-CEO of Aon Benfield, said: “Whilst negotiations around the USD60bn of externally transacted reinsurance premium renewing at 1/1 may be fairly described as being reasoned and assured, there has been on occasion real variability around program outcomes – treaty terms have remained robust, but pricing less homogeneous than for some time.”

Guy Carpenter says its research found for the second consecutive year, global reinsurance property catastrophe rates on line for most lines of business declined at the January 1, 2011 renewals.

Its Guy Carpenter Global Property Catastrophe Rate on Line Index dropped 7.5 percent in 2010, as moderate loss activity, high levels of industry surplus and other factors contributed to the decrease. Structures did not change significantly, with cedents buying amounts of cover comparable to last year.

Bill Kennedy, CFA, CEO of Global Analytics and Advisory, at Guy Carpenter said:  “We expect 2011 to be a challenging year in terms of global macroeconomic issues and insuranceunderwriting. It is also likely to be a year of opportunity. Insurers armed with the best information,insights and innovative solutions will be best positioned to take advantage of the changingenvironment.”

He adds regulation continues to be a potential threat if it is not fully tackled by the market.

“The Solvency II regulatory capital regime has profound impact on the industry far beyond the European jurisdiction,” says the broker. “Re/insurers worldwide should be prepared to identify, understand and manage these risks associated with Solvency II changes.”

In terms of regulation Willis Re adds that despite predictions to the contrary, “there is only limited evidence at the January 1 renewals” of forthcoming changes in insurance regulation in non-U.S. markets bringing new opportunities for reinsurers.

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Overshadowing talk of rates however remains the issue of over capacity and the record levels of reinsurer capitalisation moving into 2011.

Aon Benfield says its research has found that for the first nine months of 2010 total global reinsurance capacity increased by 17%, reaching a record high of USD470bn by Q3 2010.

Bryon Ehrhart, Chairman of Aon Benfield Analytics, adds: “Reinsurance performed well in 2010 for insurers.  It absorbed underwriting volatility from significant insured earthquakes in Chile and New Zealand and maintained sufficient capacity for orderly renewals in those markets. With capacity at record levels, pricing has been reduced to allow reinsurance to be the most accretive form of underwriting capital for insurers in 2011. 

“With insurer valuations at levels that don’t allow for much underwriting volatility, we believe cedents will benefit from executing reinsurance transactions that provide working capital in addition to tail capital relief.”

Guy Carpenter estimates dedicated reinsurance sector capital to be $19 billion (11 percent) in excess of historical levels given risks currently assumed, with a defensible range of between $14 billion (8 percent) and $26 billion (15 percent).

David Flandro, Guy Carpenter’s Head of Global Business Intelligence, adds:  “While current market conditions show no immediate signs of reversing, we see an increasingnumber of latent factors which – alone or in combination – could at some point precipitate ameaningful change in the market’s direction. Depending on loss experience, these factors couldbegin to coalesce around renewals later in 2011.”

While rates continue to be under pressure in the traditional reinsurance markets the size and scale of the bond issuance continues to grow significantly.

Figures from Willis Re for the last half of 2010 highlight what is describes as “a dramatic increase in new deals in the catastrophe bond market”.

“2010 has seen $4.8 billion of new natural catastrophe bond capacity issued compared to $3.4 billion in 2009 and $2.7 billion in 2008. At year end, outstanding natural catastrophe bond amounts total $12.2 billion,roughly in line with the 2009 figure of $.3 billion,” it says.

Aon reported thatInsurance-Linked Securities (ILS) volume increased by 44% in 2010, with annual catastrophe bond issuance reaching $ 4.9billionn compared to $3.4 billion in the same period a year ago.