By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
A $50 billion event just won't cut it anymore. Back five years ago with hurricanes Katrina, Wilma and Rita, those losses caused trouble and created significant market dislocation. Nowadays, they'd give the property reinsurance world pause for about one year, according to David Flandro, managing director at intermediary Guy Carpenter & Co.
A $100 billion event would likely cause "outlier" reinsurers to fail. We'd need to see a $150 billion hit to cause a sustained turn-around toward a hard property reinsurance market.
The reason, Flandro said, is that reinsurers have $19 billion in higher capital than historical levels given the risks written.
"With that kind of capital sloshing around, it's pretty tough to turn things decisively," he said, adding that the top 16 reinsurers have seen 35 percent capital growth between Dec. 31, 2008, and Sept. 30, 2010.
Perhaps an unexpected catastrophe event--an "unknown unknown"--could shake up the market without having to be such a massive loss. It could be a $30 billion terrorism attack that takes the markets by surprise and has an outsized effect on pricing, surmised Flandro.
In the meantime, property treaty reinsurance rates continue to slide, according to reports on the January 1 renewal season from Guy Carpenter and competitor Willis Re. Willis is seeing rates down 5 percent to 10 percent globally, and from zero percent to 10 percent in the United States, depending on the cedant's loss history and CAT exposure.
Rates on line decreased an average of 7.5 percent of U.S. property reinsurance programs in Guy Carpenter's index. Pricing decreases were shown to be less dramatic in the upper layers of programs, simply because rates were already bumping up against minimum capacity charges.
Such an environment leads Willis Re to recommend to reinsurers, as the title of its report suggests, to "Keep Calm and Carry on."
So what can reinsurers do then to carry on? One thing, which they're already doing, is work with and accommodate the primary carriers, who are also pinched (perhaps more so) by the soft market and economic conditions, said Flandro.
Such "cooperation" between reinsurers and primary carriers could only provide more momentum to trends occurring in the primary property insurance markets. According to a report from NAPCO LLC, a wholesale brokerage that specializes in property-catastrophe insurance, most risk management accounts will continue to see declines in their property rates at 2011 renewals. As with reinsurance, too much capacity and too few catastrophe losses in 2010 have made for too much competition.
Yet the NAPCO report warns that underwriters might reach a point in 2011 where they can't go any lower.
Even without that massive catastrophe loss, perhaps relief could be around the corner for underwriters at both primaries and reinsurers.
"It's no use waiting around for a big event," advised Flandro. "Reinsurers should instead be asking: What happens if nothing happens?"
And the answer could be a combination of diminishing reserve redundancies, cash flow turning more negative, and increased activity in mergers and acquisitions and stock buy-backs and dividend increases. The latter would constrict the supply of capital. And all of these factor combined, reasons Flandro at Guy Carpenter, could gradually, eventually, turn rates.
"What we have now are the early signs of all those things," he said.
January 4, 2011
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