Industry loss warranty prices continue to rise at renewals

It’s the 1st of July so expect a flurry of posts about the reinsurance renewals season from us over the next few days. Guy Carpenter have released their renewals report this morning and it contains a little insight into how the industry loss warranty market and reinsurance prices are moving at the renewals.

Overall the reinsurance sector’s dedicated capital remains moderately down year-to-date according to Guy Carpenter, it fell by 4.4% in Q1 and during Q2 remained essentially flat. They suggest that the reinsurance market are still coming to terms with the catastrophe losses experienced so far in 2011 and the RMS hurricane model change and say the long-term implications will come into sharper focus once event losses are fully realised and the industry reaches consensus on the model change.

Their overall perception of the reinsurance market is of one still in transition as rates begin to rise and the market attempts to settle down after a heavy period of losses. In general Guy Carpenter have witnesses price increases in property catastrophe lines in most territories while other lines such as casualty either flat or decreasing in general.

Property retrocession reinsurance continued to trend towards rate increases, particularly on loss affected programs. Most of the price increases have been driven by rises in industry loss warranties and county weighted industry loss products. Guy Carpenter have seen strong demand for all types of ILW and CWIL covers. They say that the CWIL product has seen particularly strong demand and Guy Carpenter have now placed over $1.3 billion in limits to date during 2011. Trading activity in the ILW market has been healthy during recent weeks with the focus on U.S. wind, both first and second event protection.

Industry loss warranties have seen steady price increases across the board this year and Guy Carpenter say that capacity is freely available for most types of cover. Hedge funds and traditional carriers have set aside limits to take advantage of the price increases seen in ILW’s earlier this year.

Interestingly, unlike last year, Guy Carpenter say that rated carriers have been the most active buying group of industry loss warranties compared to hedge funds who were most active last year. It appears that industry loss warranties are rising in popularity this year, helped by a desire to lock in profits by spending the remainder of catastrophe budgets and the RMS hurricane model update, say Guy Carpenter. The popularity may also have something to do with those who would have issued catastrophe bonds prior to the start of hurricane season looking elsewhere for a shorter term replacement while the market recovers from the shock of the Japan earthquake.

From reading the report it seems that Guy Carpenter hold a similar position to many observers and participants in the market right now, that unless further major loss events are experienced the reinsurance price rises may not be sustainable as capital isn’t an issue right now and could keep prices down.

David Flandro, Global Head of Business Intelligence, said; “How the reinsurance sector’s capital position develops over the remainder of the year is heavily dependent on large loss experience, which will be influenced by the hurricane season. A light hurricane season with no significant landfalls could enable reinsurance capital to resume growth, while a heavy season with at least one significant landfall could mitigate growth or potentially result in an impairment of capital for 2011.”

Bill Kennedy, CEO of Global Analytics and Advisory, said; “Reinsurers are carefully evaluating where to deploy their capacity in a transitional market. Looking ahead, insurers’ ability to provide detailed reasoning for their own assessment of their portfolios, as well as reinsurers solidifying their position on metrics for deploying capacity, will be key factors leading to the January 1, 2012 renewal season.”

You can download the full report from Guy Carpenters blog.