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Searching For A Hard Market
| January 24, 2010 by Helen Yates
With the exception of US catastrophe lines, reinsurance rate hardening remains a mirage, particularly in the Middle East. Helen Yates asks what this means for the market going forward.
There is much debate in the reinsurance industry over whether the loss of capital in 2008 was a market-changing loss. It certainly seemed like a seismic shift at the time. More than US$100bn left the industry – most of it as a result of the banking crisis and subsequent investment losses and writedowns. And then there was Hurricane Ike, the third most costly US hurricane in history, coming in at US$10.7bn, according to ISO Property Claim Services.
While most reinsurers emerged relatively unscathed, a handful of players – including AIG, Swiss Re and XL Capital – suffered bigger losses. As the international reinsurance industry came to terms with the financial crisis and resulting credit crunch in the latter part of 2008, predictions were that rates would harden across the board. This was partly an expected response to a major industry loss – particularly for classes with exposure to Hurricane Ike – but also a reaction to an expected increase in demand.
With equally dented balance sheets, cedants were expected to seek greater levels of reinsurance as a form of contingent capital. But the onset of recession disappointed reinsurers, as buyers instead looked to retain risk. “Primary insurers have identified reinsurance as one area where they can keep costs in check by increasing their retentions,” says AM Best in a new report on the global reinsurance sector. “The magnified exposure to large claims or catastrophic losses seems to be a risk many are willing to take for now.”
While international reinsurers witnessed some pricing increases at the various renewal deadlines in 2009, these were largely confined to US catastrophe-exposed lines. Rates rose an average of eight per cent at the January 1, 2009 renewals, according to Guy Carpenter, and further increases were witnessed at the mid-year renewals. “The only area they could get significant 10 per cent to 15 per cent rate on line increases was in US hurricane [CAT underwriting],” reveals Bryon Ehrhart, CEO of Aon Benfield Analytics. “Everything else was flat to slightly up – so reinsurance rate improvement that reinsurers had anticipated was there, but it wasn’t as strong as they had anticipated.”
The dynamics brought on by the downturn are having conflicting pressures on price, depending on the position of each individual player. While those reinsurers with strong balance sheets maintained discipline and looked to drive rates upwards, those more weakened by the financial crisis were persuaded to offer more competitive rates in return for their customers’ loyalty, notes AM Best. These opposing influences are continuing to conspire against a truly hard market.
