Newsletter Sign-up

By GRAHAM BUCK, who covers European risk management issues

Reinsurance rates continue to soften, as evidenced by the newly released figures for 2009 offshore reinsurance in the U.S. market from the Reinsurance Association of America (RAA). The data showed total ceded premiums to offshore reinsurers little changed for a second successive year, down just 0.2 percent from 2008 at $58.1 billion. Net recoveries in 2009 were back at $112.34 billion or just below their 2007 level, reversing a 7.3 percent increase the previous year.

"There are grounds for believing that global economies will stage a slow but steady recovery from the economic downturn, but there is still a great deal of uncertainty--principally from the risk of further sovereign debt crises following Greece and also the potential for a double-dip recession in the United States," Waterman said.

Barring an occurrence of a KRW-like hit in the weeks ahead, Waterman suggested, reinsurers' best hopes for increased demand lies in the new insurer solvency rules that take effect in 2013.

"When I gaze into my crystal ball, the market metrics are not looking good," said John Daum, executive director at Lockton Re USA.

As Daum pointed out, the RAA stats show an increase in combined loss ratios from 97 percent in 2009 to 102.1 percent for the same period in 2010, while also a drop in premium from $16.2 billion to $15.6 billion. Surplus capacity is up 5 percent from $37.5 billion to $38.7 billion.

"In addition, these figures don't reflect the July 1 renewals, and that there will be an impact of some sort linked to dramatic increase in the selling of CAT bonds," he said.

TAKING THE HIGH ROAD

Annual figures for reinsurance recoverables have also been affected by the three basic drivers cited by Waterman, with less business reflected in fewer recoveries. The temporary uptick in 2008 was just that, a blip, Waterman suggested, mostly reflecting the impact of Hurricane Ike that year, which was the third most severe storm on record.

The overall four-year decline is evidenced by comparison with RAA's data for 2005, when total ceded premiums were $62.1 billion and recoverables $123.9 billion.

Scott Williamson, assistant vice president of financial analysis at RAA, said that the relatively high amounts that year were impacted by some significant loss portfolio transfers (LPTs) from a couple of U.S. reinsurance subsidiaries.

"2005 was a high water-mark year following Katrina losses," he added. "Since then, Sept. 11 and KRW recoverables have been paid down substantially, and there have been relatively lower amounts from CAT losses."

Yet if the overall U.S. premium pie is shrinking, that means more offshore reinsurers competing for a slice. RAA's data also shows the total number of reinsurers steadily increasing year to year, from 4,007 in 2005 to 5,304 in 2009. Those assuming premium from U.S. cedents also rose, albeit less sharply, from 2,321 to 2,668.

Yet as Waterman noted: "The United States is a mature market, and the pie they share is pretty defined with no new lines of business being added."

So what options remain?

"Reinsurers have a problem. They don't want to reduce prices further, so many are likely to take the 'high road' and return capital to shareholders at an increased rate," said Daum. "To put this into perspective, $91 million of shares were bought back in (the second quarter of) 2009, while $746 million were bought back during the same period in 2010.

"I don't want to be too optimistic, but so far the hurricane season from a loss perspective is relatively benign. In the market's current state, even a $20-30 billion loss event would probably put the brakes on any price decreases, but not significantly harden the market."

September 7, 2010

Copyright 2010© LRP Publications