US hurricane season could tip pressured market—brokers

But brokers have warned that an active US hurricane season could change the dynamics of the primary market and that the reinsurance market is potentially in a phase of transition and could harden come the 2012 renewal season. On the other hand most risk managers and insurance buyers speaking at a recent Commercial Risk Europe roundtable said that they foresee a flat and benign primary market for the coming year and have not seen any of the telltale signs that usually precede a big shift in market conditions. According to a report by Marsh, despite the major nat cat losses in 2011, which include the New Zealand earthquake, floods in Australia, earthquake, tsunami and nuclear disaster in Japan and storms and tornadoes across the US, the overall global insurance market remains generally well-capitalised.hideInsurers are being more selective in the capital they deploy and have in some cases withdrawn from catastrophe-affected regions and loss-making sectors of business, said the broker in its Global Insurance Market Update—2nd Quarter 2011. As a result, accounts with losses, or with a significant proportion of catastrophe exposures, are experiencing tougher market conditions. The expectation of an active US hurricane season, combined with greater insurer discipline, increases the potential for a changing market dynamic through the balance of 2011, Marsh added. High hurricane activity could be the much-vaunted ‘market tipping point’, it warned. “Although there has not been an overall change in market pricing in the wake of further natural catastrophes in the second quarter—including storms and tornadoes across the US—the global insurance market remains under pressure,” said Nick Bacon, Chief Executive Officer of Bowring Marsh, the company’s specialist international placement broker. “Many insurers and reinsurers have already seen their 2011 budgets for catastrophe losses substantially eroded, if not exceeded. And this was before the start of the Atlantic hurricane season.” According to Marsh’s report, property renewals varied widely in the second quarter depending on loss records, catastrophe exposure levels, catastrophe cover purchased and the quality of data submitted. Generally, insurance programmes with catastrophe exposures representing at least 25% of the total insured value saw rate increases of up to 15%. But property programmes with no significant catastrophe exposure continue to enjoy competitive market conditions with most policies renewing flat or with small increases or decreases in the quarter. The global primary casualty insurance market began to see small increases in rates for many lines of business in the second quarter of 2011, continued the broker, while excess casualty rates remain competitive. The primary market will ultimately be affected by what is taking place in the reinsurance world. The June and July reinsurance renewals, which predominantly take place in the US, did not reveal a general hardening. But reinsurance brokers argue the market is in a state of transition and some reinsurers are positioning themselves for future rate hikes. Pricing for property in catastrophe-affected areas is on the up and more generally in the US. According to the Willis Re Mixed Messages report, an exceptional run of nat cats over the past 16 months has cost insurers $86bn and reinsurers $48bn. The string of natural catastrophes in the first quarter of 2011 cost reinsurers in the region of 10% of their total shareholders’ funds at the end of December 2010, it added. This has clearly taken a major chunk out of the industry’s catastrophe budgets. But offsetting the reinsurance losses, Willis Re reports that during the first half of 2011, share buybacks have been scaled down and $1.2bn of new capital has entered the industry through sidecars and fresh equity. Guy Carpenter said that in the first quarter of 2011, the reinsurance sector's dedicated capital position fell by 4.4% to about $165bn, whilst in the second quarter, reinsurance capital remained essentially flat and moderately down year-to-date. Reinsures in the US are also contending with changes to some of the widely-used nat cat models, which have impacted their view of risk as they attempt to understand the impact on their capital management and performance strategies. Risk Management Solutions has released its RMS v11 cat model in the US and, according to Willis Re, forthcoming new releases of European catastrophe models are generating similar issues this side of the Atlantic. The effects of the models along with the global cat losses in 2011 will come into sharper focus when recent event losses are fully realised and the industry reaches consensus on the integration of the model changes, said Guy Carp. “Given all the variations in loss experience, model change, exposure change, structure change, capacity demand and geographical scope it is not easy to generalise about rate changes. The reinsurance market as a whole has reacted reasonably logically with a differentiated approach driven on a case-by-case basis,’ said Willis Re Chairman Peter Hearn. “The reinsurance market remains in a state of uncertainty regarding its short-term future direction, but what is clear is that any turn in the market pricing cycle is unlikely to follow historic patterns,” he added. On the recent renewals Guy Carp said US property catastrophe reinsurance rates have experienced a directional shift since January 2011. In Australia and New Zealand pricing was adjusted upwards to account for exposure growth and a further general increase in pricing, with additional increases imposed on catastrophe programmes impacted by loss activity. Overall, increases ranged from 20% to more than 100%, it said. Property catastrophe rates in Latin America and the Caribbean were stable, with general increases between 5% and 10% in wind-exposed regions, it added. US commercial primary casualty pricing continued to decline during the first half of 2011, but at a slower pace than 2010, with general liability rates flat, the broker added. In its June & July 2011 Reinsurance Renewals Update Aon Benfield said that there were ‘meaningful’ rate changes for regions affected by the significant catastrophe events of the first quarter. And it added that the market reported price increases of up to 15% in less- or non-affected areas. However, the intermediary said it achieved rates of flat to -5% for its clients. "There was real debate in the approach to the June and July renewals periods about whether western European and US insurers should pay more for their catastrophe capacity…By focusing on the facts, the capital position of the reinsurance industry, and not the emotion stirred in the market, we were able to navigate through a turbulent period and achieve differentiating client results," said Bryon Ehrhart, Chairman of Aon Benfield Analytics. On the whole insurance buyers themselves remain calm on the state of the insurance market currently and going forward. Julia Graham, Chief Risk Officer of law firm DLA Piper UK and vice-president of Ferma expects rates to be flat over the next six months. “If anything is brewing I get no feeling for that, but the rest of this year will be benign. And in this context, I like an environment that is unexciting,” she said. “We are not getting the chatter that usually precedes a turn in the insurance market.” Colin Campbell, Head of Risk Management & Compliance at retail group Arcadia, said he sees no general rate increases on the horizon. Outside of Europe and in areas with earthquake risk, there is a possibility that rates may change, but this is not certain, he added. Whilst agreeing that rates are currently settled and quiet in the conventional areas of insurance within Europe, Gary Marshall, Group Risk Manager, Polestar UK Print Ltd, did sound a note of caution. “Outside Europe and looking twelve months on, rates are unpredictable and I am not sure they will remain so settled. There is the potential for significant change because I think that a storm is brewing,” he said.

US hurricane season could tip pressured market—brokers

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