Most of us say "thanks" without thinking.
With the exception of catastrophe-prone accounts, Jan. 1 reinsurance renewals appear to have been muted, and economic conditions may drive the global reinsurance market in 2012 more than underwriting concerns, according to industry participants.
Brian Boornazian, chief executive of Aspen Re, voiced the frustration of reinsurers about current conditions in a Jan. 3 conference call. Boornazian said significant changes to key catastrophe models, along with record low investment yields and pricing, should lead to a hardening trend.
"What actually happened on Jan. 1 is that we saw a market hardening in certain lines, but not a 'classic' hard market," he said. "The signs all point to an industry awareness that the risk being assumed needs more rate to produce adequate returns. The insurance and reinsurance markets are starting to accept the need for change. But, so far, only cat-exposed and loss-affected contracts are experiencing any significant improvement to rates."
Boornazian said the market is "beginning to adjust" to the several ongoing factors that would all, individually, necessitate a market hardening. "But we are still only at the beginning," he said. "More change is needed to reach rate levels that are adequate for exposures, and the other external factors that affect our industry's profitability."
He added that in many areas, pricing remains at, or below, 1999 levels.
In its reinsurance market outlook for 2012, broker Aon Benfield said reinsurers were critical to supporting primary insurers throughout 2011 and its series of big natural catastrophes. Despite the losses, reinsurance capital "remains strong and competition still exists in the reinsurance market for program participants."
Broker Willis Re said in its "1st View" report that "outside of a few specific problem areas, rates at Jan. 1, 2012 for long tail-classes have remained unchanged. Some reserve releases are still coming through from earlier underwriting years to help cushion quarterly results, but there is an increasing divergence among reinsurers, as some are increasing reserves for catastrophe losses earlier in the year and a few are posting increases for asbestos-related claims."
The story of 2011 was one of catastrophes, capital, reserve releases and the economy, said Key Coleman, managing director at consultancy Grant Thornton LLP. "If you were to say at the beginning of last year that the industry would have $100 billion of cat losses and see only a tentative market hardening, some reinsurers might have questioned your credibility," he said.
Coleman said capital was a big part of the way the year played out for reinsurers. The market started the year with about half a trillion dollars in capital, and "once the dust settles from the fourth quarter, we'll probably end up in about the same place," he said. "That probably puts some downward pressure on rates," he said.
Catastrophe-exposed accounts will see significant price increases, said Coleman. But other lines will be less affected, except by non-underwriting factors.
Aon Benfield said preliminary experience from Jan. 1 renewals show that "the capacity required by clients ... was achieved at accretive prices, terms and conditions."
The broker noted that certain factors led to a muted January renewal season. Among them, some of the largest catastrophe-hit accounts won't renew until April, June or July.
Aon Benfield also noted that some catastrophe-exposed insurers in Western Europe and the United States shifted catastrophe cover demand to the capital markets in the form of catastrophe bonds, where pricing is more predictable. Other insurers appear to be waiting until some of the market uncertainty clears, the broker said.
Both Aon Benfield and Willis Re said significant changes in catastrophe models do not seem to have driven pricing significantly.
Continuing low investment income and a dwindling of reserve redundancy releases that marked 2011 and previous years will have negative effects on reinsurer income, said Coleman. "There's not going to be that sort of 'get out of jail free' card in 2012," he said.
A dampened economic climate will work against underwriting profit as well. Coleman noted that with workers' compensation, for example, claims could rise as people lose their jobs. Workers who might have been reluctant to file a claim will more likely do so if they lose their job.
Coleman said January renewals showed a predictable hardening of rates in catastrophe-hit areas and those exposed to catastrophes that hadn't been it in 2011. But for the rest of the nonlife lines of business, rates are not moving much.
Asked about the 2012 renewals rounds yet to come, he said there should be some stability, but "the jury's still out" on possible hardening of rates.
Willis Re said in its report that the market "is increasingly segmented with rate movements being driven by individual loss history and perceived exposure movements and not by an overall blanket increase.
"While this is a superficially logical approach, it has led to significant differences in rate levels which some buyers have found difficult to assimilate as they struggle to manage the margin between their original pricing and the cost of reinsurance," said Willis Re. "At the same time rate increases are largely being driven by an immediate earnings challenge and not the classic capital shortage of an historic hard market rating turn."
Willis Re added it is "unclear" whether the reinsurance market will see a sustained hardening trend. Economic factors outside the underwriting cycle look to be important factors.
"The key to a sustained market hardening is much more likely to lie in the impact of the current economic turmoil in the euro zone and elsewhere and how this works through to diminish the capital bases of reinsurers," Willis Re said.
(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)