By CYRIL TUOHY, managing editor of Risk & Insurance®
The increase follows two years of declines, according to industry pricing reports. The dismal fortunes of the 2008 stock market are to blame.
"We understood the factors that were going on, but in the history of the industry, it's unusual to see a reverse without getting a major natural catastrophe causing major losses to the industry," said Sean Mooney, chief economist at reinsurance broker Guy Carpenter & Co., who also authored a report on the topic for the reinsurance intermediary.
Hurricanes Ike and Gustav--which, according to Swiss Re estimates, cost the industry about $50 billion--would alone not have been able to harden 2009 reinsurance rates, according to Mooney. It was the brutal investment environment that eventually tipped the rate scales.
A separate report issued by Willis Re found that some large carriers with nationwide U.S. property-catastrophe programs had been hit with price increases of as much as 25 percent.
Regional reinsurance programs are seeing much less of a price increase and can expect favorable terms because there's still plenty of capacity, according to the Willis report, with the exception of regional property coverage programs in catastrophe-prone areas of the country.
Reinsurers are for the most part in good financial shape but are also keenly aware of how difficult it will be to raise new capital should they need it on short notice to pay claims.
Bart Hedges, chief underwriting officer of Greenlight Re, likened the current "supply-driven hard market" to the hard market of the 1980s, with capacity shrunk mainly due to investment results and only partly due to underwriting results.
"There's no question that there's less capacity," he said in a December interview. "If you look on the other side of the balance sheet, everybody understands that the capital is not going to be freely flowing in the future."
Not only are reinsurers expected to raise prices, but they will also seek to reduce event limits, according to the Willis Re report.
Reinsurance companies have fared much better than banks because they were much less exposed to the weaknesses in the U.S. residential mortgage business. But the severity of the stock market decline has meant that even reinsurers with modest exposures have taken a beating.
"The basic factor was the credit crisis and its impact on the values of stocks and that impact on the capital of reinsurers," said Mooney. "It wasn't so much that the reinsurers had an enormous amount of equity in their portfolios, but it was the size of the decline."
(Read the rest of the Jan. 13 R&I One.)
January 9, 2009
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