Reinsurance broker Guy Carpenter has published its update report on the state of the reinsurance market at the 1st June renewals this morning. Generally reinsurance price rises have begun to slow according to the report as the light catastrophe losses of the start of 2012 combined with positive reinsurer results and a reinsurance sector with plentiful capital made ample reinsurance capacity available at the renewals.
Guy Carpenter estimate the reinsurance sectors capital position to be about $15 billion above historical trends, given risks assumed, at the moment which after the record catastrophe losses of 2011 is a very healthy place for the sector to be. They put insured losses for the first five months of 2012 at just $6 billion, way below the $75 billion seen by this point of the year in 2011.
The retrocessional reinsurance market is the one area where price increases continue to be high. According to Guy Carpenters report the upwards price movements seen in June are of equivalent magnitude to those seen in January this year. This despite general reinsurance price increases slowing at the 1st June renewals. Guy Carpenter say that the hardening property retro rates reflect both the unprecedented losses experienced in 2011 but also the uncertainty that remains around the ultimate loss numbers for some events, particularly the flooding in Thailand. Retro reinsurance claims can take a long time to settle as first insurance claims are assessed then settled, then reinsurance contracts are settled and finally retro claims can be made and agreed.
Actual retro rate rises were somewhat mitigated by the fact that most post January programmes had already experienced some rate rise previously. Capacity remained adequate in the June renewals and Guy Carpenter say that this is in part due to the number of retrocession sidecars which were activated at the end of 2011.
It’s no surprise that capital market investors are looking favourably at the reinsurance and retro space right now as the continuing rise in rates will offer them very attractive returns at a time when other markets are suffering from the economic climate. The flow of capital into the space looks set to continue and the catastrophe bond sector should benefit from this increased interest and sponsors will likely be encouraged to issue deals later this year to capitalise on the interest and potentially the more expensive cost of retro.
On the industry loss warranty market Guy Carpenter says that there was inactivity in the traditional reinsurance UNL market during December 2011, which led many protection buyers to look early to the industry loss warranty (ILW) market for a source of coverage. The objective for these buyers was to secure reinsurance/retro coverage in advance of the January renewal. Some large deals were bound supported by typical carriers but the anticipated influx of capacity from new entrants failed to materialize. ILW pricing was up significantly year on year in all territories and for all perils, other than in Europe, but down slightly from the high levels seen in mid-2011. As the traditional reinsurance market levelled off during 2012, the usual take up of ILWs in the early weeks of the new year was less apparent with no shortfalls to fill or program gaps to plug. Activity increased during the last weeks of the first quarter as those seeking cover secured significant limits, predominantly for Japanese risks as this is their main renewal season for these large Japanese programmes. The ILW market was then relatively inactive for a few weeks before picking up again more recently. Selected buyers have secured significant U.S. wind protection in the ILW market. During all these peaks and troughs there has been ample capacity to meet buyer demand.
This behaviour seems typical of the ILW market which does seem to run hot and cold depending on the capacity needs and how well the traditional reinsurance market and also the catastrophe bond market are responding to coverage requests. It will be interesting to see where capital goes throughout the remainder of 2012 as there is plenty available and it is likely to be the more competitively priced forms of cover which will benefit the most.
On Florida, Guy Carpenter says that the general consensus is that the reinsurance market was up by between 5% to 10% on average at the June 2011 renewals. However, this year while January and April renewals continued the upward trend the June 2012 renewals were much flatter for pricing in Florida. Interestingly Guy Carpenter says that non-traditional capacity was more prevalent than in previous years with sources such as CWIL®, Guy Carpenter’s county weighted industry loss product, seeing more action. This helped to mitigate price rises as less traditional reinsurance capacity was required where non-traditional solutions were used.
David Flandro, Global Head of Business Intelligence at Guy Carpenter, stated; “The reinsurance sector continues to function normally and, in the absence of a significant catastrophe loss burden, the improving capital position is likely to contain any attempt at price increases throughout the year.”
Lara Mowery, Head of Global Property Specialty, added; “Quoting behavior for non-Florida accounts was more varied than for Florida accounts, likely reflecting the difference in reinsurer appetites across renewals exposed to a broader geographic base and significantly diverse business focus. Even as quoting volatility declined, there again was evidence of reinsurers taking a more tailored approach to each individual renewal. As seen at the January and April renewals, reinsurers are implementing more sophisticated approaches using custom risk measures, based their own research and experience. Pricing and capacity outcomes more specifically reflect each company’s circumstances.”
You can access the full report from Guy Carpenter here.
Subscribe for free and receive weekly Artemis email updates
Sign up for our regular free email newsletter and ensure you never miss any of the news from Artemis.