No panic needed over year-end renewals

Despite the dramatic impact of Superstorm Sandy in the US towards the end of the year, 2012 was a lot easier on the international insurance and reinsurance industry than 2011 in catastrophe terms. The industry remains healthy from a capital perspective and even enjoyed an influx of fresh capital in search of return in the second half of the year. There are more difficult patches of the market as ever. Darker corners include the loss-hit marine market and some parts of the liability markets notably financial institutions as concerns continue about the ongoing effects of the financial crisis, not least in Europe.hideBut standard commercial lines in mature markets such as Europe and the US still attract plenty of capacity as the insurers compete to maintain volumes. Specialist markets such as aviation where losses have been very low are highly competitive and rates are even softening. Competition for business in so-called emerging markets continues to rise as the insurers seek new avenues of growth so those European risk managers with risks to manage and transfer in such markets should not be overly concerned. Overall the outlook for insurance and reinsurance buyers therefore remains good, particularly if they have decent loss records and are prepared to retain more risk if needed. As ever the tone is set by the weather and the experts agree that 2012 was not such a bad year in this respect. Broker Willis Re said in its January 2013 renewals report published this week that global natural catastrophe losses for 2012 are estimated to be about half the level of the $120bn losses suffered the year before. This means that most reinsurers will not suffer any 'material capital impact' and will remain within their annual catastrophe budgets, said the broker. Willis Re concluded that this had resulted in a 'stabilisation' of rates in property classes and there were no blanket rate increases on January 1. Willis' report, entitled Reinsurers Clear the Sandy Hurdle, found that, in general, international rates for property catastrophe business are risk adjusted flat to -5% and US rates for property catastrophe are risk adjusted flat to -5% on loss free accounts and +10% on loss impaired accounts. Peter Hearn, Chairman of Willis Re and John Cavanagh, CEO of Willis Re, jointly commented: "In the absence of Superstorm Sandy, reinsurers would have found it difficult to resist buyer pressure for further concessions. As such, Sandy's impact has helped to stabilise market pricing on an overall basis and reinsurers have largely delivered to their clients in terms of capacity and continuity." The Willis report concluded that on an international basis, Sandy had caused little impact. The broker added, however, that despite the addition to the market of new capital and promising 2012 underwriting results, the repercussions of the global financial crisis would still influence conditions and pricing in the sector. "Investment returns are dwindling, primary companies in most mature markets are finding growth difficult and larger primary insurance groups are restructuring the way they buy reinsurance," noted the broker. Willis noted that 2012 had been a particularly difficult year for the marine market, which suffered one of its worst underwriting years in recent history. "Already suffering from the Costa Concordia and the deterioration of the Rena loss from 2011, Superstorm Sandy is widely expected to be the largest ever marine loss with a disproportionate impact on the marine market," stated the broker. The report pointed out that the marine market has suffered large losses from yachts and pleasure craft, general cargo, imported cars, specie and inland marine as a result of Sandy. It also added that the 1 January, 2013 marine renewals are 'especially late' because of uncertainty surrounding the Sandy losses. The broker added that many buyers have increased retentions on loss-hit programmes to help mitigate rate increases which are a minimum of +15%, even on loss-free offshore energy excess of loss contracts. Also, shipowners that use the protection and indemnity (P&I) market have experienced 'minimum' 10% increases with the International Group Reinsurance Program up 40%. P&I Clubs are passing on increased reinsurance costs via original general increases in the range of +7.5% to +10%, stated Willis Re. More generally the broker concluded that the capital base of the global reinsurance industry remains 'adequate' and has benefited from an 'accelerating inflow' of new capital. This has come particularly from long-term investors that are 'drawn' to event risk as an alternative non-correlated investment class, said Willis. The broker said that the environment remains competitive for catastrophe bond issuance. Third party capital activity has 'picked up' and 'broadened' as investor demand outstrips issuer supply, stated the Willis report. The broker also noted that, in longer tail classes, frequency and severity of losses continue to fall and buyers continue to retain more. "Whilst unlikely to impact [the] retrocession market significantly, Superstorm Sandy slowed any potential downward rate movement. With clients who are buying additional vertical cover also willing to take higher retentions to maintain the same spend, limits, retentions and risk-adjusted pricing were flat in general," stated the broker. Just before year-end, Marsh reported that global insurance rates had continued to firm in the fourth quarter of 2012. The broker noted, however, that the firming had occurred at a slower rate than in the previous quarter, despite the mounting cost of Sandy to insurers. It reported that its 'Risk Management Global Insurance Index', a composite or weighted average of rate change activity over the preceding four quarters in major lines of insurance business, rose slightly to 101.2 from 100.9 in the third quarter. The index was based at 100.0 in the second quarter of 2012. Figures also published in Marsh's 'Global Insurance Market Quarterly Briefing' showed that the average rate change at renewal was a 1.2% increase in the fourth quarter, compared to the 1.4% seen in the third quarter. "While property rates continued to rise, the rate of increase continued to flatten for the second quarter in a row. Rates for financial and professional lines continued to rise, with the average renewal showing a 2.2% increase year-on-year," reported Marsh. Financial institutions in the US, Europe and Australia continued to see rate increases in their liability insurance programmes during the fourth quarter. This reflected insurers' concern about the global economic situation and increased regulatory scrutiny, added the broker. Dean Klisura, Marsh's US Risk Practices and Specialties leader, said: "While Superstorm Sandy caused some insurers to suffer significant losses, we do not expect it to be a market-changing event. Insurers remain well-capitalised with most of them unlikely to reduce their capacity in 2013." Mr Klisura added: "However, some insurers are increasing their push for rate increases. The proportion of US insureds seeing rate reductions on renewal fell in most lines of business this quarter. US insureds will find it increasingly difficult to secure rate decreases for property insurance in early 2013. This is especially true for those with losses from Sandy. Flat or declining premium rates at renewal typically are likely to be reserved for insureds with favourable loss histories and low catastrophe exposures." Aon Risk Solutions published a report on the aviation insurance market just before the end of the year that confirmed the overall benign market conditions and outlook for insurance and reinsurance buyers as the year drew to a close. Aon reported that lead airline hull and liability premium had fallen by around 10% on average in 2012. "There is little sign of change in the softening market conditions as insurers manoeuvre for market share and premium income," it stated. Aon said that lead premium reductions in this part of the market remain 'healthy' from a client point of view, adding that following market terms are increasingly soft. This comes on the back of losses that look set to be the lowest for a quarter of a century. The potential for underwriting profit appears to be the highest since 2005 as a result, said Aon. "The fourth quarter continues the soft market that has been in place since the start of 2012. Competition between insurers has been particularly strong, with following markets offering additional savings. The headline statistics tell a more steady story with premiums down by 10% on average. Insurers' experience across their airline portfolio would suggest greater reductions in terms of rates versus premium," stated Aon. The broker said that the catalyst for the reductions in this market comes as a result of efforts by insurers to meet broader plans for forecast targets in what remains a profitable market on the back of the low level of claims over the last two years. "The industry is to be congratulated for the improved safety conditions," it added. When Aon published its report around 75% of the total expected lead hull and liability premium had been recorded for 2012/13 airline insurance programmes, with around 40 more insurance programmes expected to be placed in the last few weeks of the year. Aon said that of the 22 renewals recorded during December, only three had experienced higher lead hull and liability premium and this came mainly as a result of increased fleet values. "That said, despite falling premium volumes, risk exposures have continued to rise overall on average by around 5%, recovering from the declines that occurred during the global recession," added the broker. Aon said that the current loss figure for 2012, excluding minor losses, was $231.6m compared with $530.9m recorded at the same point in 2011. If an estimate for minor losses were added, the overall loss total would be $831.6m compared with $1.13bn in 2011, it said.

No panic needed over year-end renewals

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