Jan. Reinsurance Renewals Saw ‘Orderly Rate Softening,’ Says Towers Watson

Record reinsurer capital levels, strong reinsurer capacity, an absence of major catastrophe losses in the U.S. and competitive pressures helped push down January 1 renewal rates for U.S. property/ casualty reinsurance premiums as much as 10 percent on an overall basis.

Typical reinsurance price changes for U.S. p/c companies on Jan. 1 saw property catastrophe rates down 5 to 10 percent; other property risks, general liability and professional liability flat to down 5 percent; and workers’ compensation flat to down 10 percent, according to observations by global professional services company Towers Watson, the world’s fourth-largest reinsurance broker.

Towers Watson characterizes the current renewal season as one of “orderly rate softening,” with the vast majority of placements executed before year-end 2010.

“A major factor influencing this orderly softening was the reinsurers’ stable capacity allocated to most lines and regions, supported by their strong capital position,” said Bill Eyre, managing director of Towers Watson’s Reinsurance Brokerage business.

“These positions have rebounded following the 2008 financial crisis, which negatively impacted reinsurers’ asset valuations through the spring of 2009. During the 2009 − 2010 period, the increase in reinsurer capital could be mainly attributed to realized and unrealized investment gains, along with strong underwriting results.

Towers Watson estimates that the top 40 global reinsurers’ surplus will be approximately $315 billion at year-end 2010, representing a new high-water mark for reinsurers’ capital levels.

Property Catastrophe

The vast majority of property catastrophe reinsurers were seeking to keep pricing as close to expiring rates as possible, based on the premise that the correct technical pricing levels had been reached. Additionally, as expected, more pricing credit was given for significant reductions in catastrophe-exposed total insured value than for modeled loss reductions, Towers Watson said.

Many reinsurers were pushing for rate increases because of higher expected regional loss estimates stemming from Risk Management Solutions’ (RMS) revised model changes within its recently announced version 11.0 (scheduled for release in February), despite competitive pressures that were reducing year-over-year rate-on-line percentages (reinsurance premium in relation to reinsured limits). Towers Watson anticipates that, during the first quarter, insurers will perform analyses on their property portfolios using the new model and may see the impacts of RMS version 11.0 on their reinsurance program beginning with July 1 renewals.

“More than a few buyers have purchased additional limits in anticipation of increased RMS loss estimates,” said John DeMartini, leader of Towers Watson’s Catastrophe Risk Management practice and the company’s U.S. Property Reinsurance specialty practice.

Casualty

The reinsurance price softening in the U.S. casualty sector was less pronounced than original insurance price softening, but the gap is narrowing, according to Towers Watson. Further, demand for reinsurance was stable, as there were few instances of new or increased reinsurance purchases.

“Reinsurance supply was generally flat, as some established reinsurers were reducing their risk appetite, while a handful of newer entrants saw an opportunity to grow in select areas,” said Keith Harrison, managing director of Towers Watson’s North American Reinsurance operation in London. “Top concerns among cedants and reinsurers were quite similar, including rate adequacy, top- and bottom-line growth, weak investment income, the potential for inflation, slowing claim frequency reductions, increased claim severity, regulatory uncertainty and tort reform rollback.”

From a third-party liability perspective, Harrison said that reinsurance pricing was flat to down 5% on top of still reducing primary pricing. Further, umbrella reinsurance net premiums were also flat to down 5% — with strong reinsurer appetite especially from onshore U.S. reinsurers — and little change in structures or conditions.

In professional lines, the core long-term group of key professional liability and medical malpractice reinsurers remains relatively stable, with just a few new entrants. Reinsurance prices were flat.

Workers compensation catastrophe reinsurance pricing continued to soften at a similar pace to last year, with reductions reaching 10 percent or more. Per-person exposed treaties were flat. Workers compensation insurance premiums were down due to reduced payrolls, but there are some encouraging early signs that payroll growth is starting to increase in 2011 in some class codes. However, some major sectors, such as construction, remain depressed, and therefore no sea-changes are expected.

Looking Ahead

Towers Watson projects that stable global reinsurance capacity will continue to outpace flat to downward reinsurance demand from U.S. insurers for the balance of 2011. From a supply perspective, barring major catastrophe losses in 2011, Towers Watson expects that reinsurers’ capital bases will grow moderately ⎯ despite continued share buybacks ⎯ which would suggest a further increase in excess capacity. Towers Watson also notes there are signs that excess capacity will not necessarily be fully deployed in 2011 and will likely stay on the sideline awaiting a market turn.

In terms of reinsurance demand, Towers Watson predicts that cedants’ appetite for reinsurance spending will be flat to down for the balance of 2011, particularly driven by insurers’ strong capital positions and weak top-line growth. This will cause cedants to rationalize their reinsurance spending, and selectively increase their risk retentions where warranted, the company asserted.

Additionally, while the global reinsurance sector remains generally stable from a financial strength and rating agency outlook, individual reinsurers will continue to be challenged to maintain pricing discipline, manage their catastrophe risk exposures effectively and properly assess their reserve adequacy, among other challenges.

“Reserve redundancies will continue to decline, and we would expect that this will become a more dominant factor in 2012 that could potentially reverse current supply-and-demand dynamics,” Eyre said. “Additionally, we see enterprise risk management (ERM) as a major factor impacting individual reinsurers and insurers differently, particularly as more and more insurers begin to establish defined risk appetite boundaries and conduct more rigorous economic capital analyses of risk accumulations across their organizations. This may influence more or less reinsurance buying, depending on what the analyses show.”

Source: Towers Watson