Property CAT Rates Rise by 8 Percent

High catastrophe losses and the continuing international credit crisis pushed property catastrophe rates up by 8 percent at the Jan. 1, 2009, reinsurance renewals period, according to a briefing on global reinsurance market conditions published by Guy Carpenter & Company LLC.

Cats and Credit Push Prices Up: Global Reinsurance Review January 2009, available at www.GCCapitalIdeas.com, Guy Carpenter’s new intellectual capital Web site, states that property catastrophe reinsurance rate increases were moderate on average, as the Guy Carpenter World Rate on Line (ROL) Index rose 8 percent.

Among the major findings:

• Property Catastrophe Rates Rise: Despite the magnitude of catastrophes and financial losses, the 8 percent increase in property pricing was substantially lower than the increases that followed disasters such as Hurricane Andrew in 1992, the terror attacks of Sept. 11, 2001, and Hurricanes Katrina, Rita, and Wilma in 2005. For the United States, rates rose on average by 11 percent, but there were wide variations dependent upon loss experience and zone. Continental Europe remained relatively stable, with rates increasing between 0 percent and 10 percent on a risk-adjusted basis. Rate changes in the UK ranged from -2.5 to 5 percent.
• Casualty Capacity Down: Casualty reinsurance pricing grew 5 percent on average at the January 2009 renewal, with a notable lack of capacity. A number of programs could not be placed at any reasonable rate. As a result of the financial catastrophe, new insurers had the opportunity to enter the market, but reinsurers generally were unwilling to support new capacity in order to keep reinsurance rates from dropping. The lines of business most directly impacted by the credit crisis – such as errors and omissions (E&O) and directors and officers (D&O) insurance – experienced the greatest difficulties at renewal.
• Effects of Financial Catastrophe: According to the Guy Carpenter Global Composite, carriers lost 15 percent of their implied aggregate book value in 2008, compared to 32 percent for the S&P Banks Index. The Guy Carpenter Reinsurance Composite, consisting of 16 leading firms, lost aggregate shareholders’ equity of $17 billion (16 percent) by the end of the third quarter of 2008.
• Retrocession: 2008’s later-than-usual treaty retrocession renewal saw reduced capacity and higher prices. The market was constrained by an inability to replenish balance sheets as a result of the financial catastrophe, as well as the withdrawal of major players from the market. As a result, the upward pricing reaction was more pronounced than in other sectors, and capacity for losses related to Hurricane Ike was scarce.
• Buyers Turn to ILWs: A number of reinsurance buyers sought 2009 capacity in the form of Industry Loss Warranties (ILW), as early as October 2008. Several major purchases led to higher prices, as carriers increasingly looked to replace catastrophe bond capacity with ILW cover. Higher demand and a limited ILW capacity are likely to continue into 2009.
• Marine, Energy, and Aviation: Marine rates rose 10-15 percent on average (risk-adjusted), while offshore energy pricing, particularly in the Gulf of Mexico, was substantially higher. The aviation renewal showed little change, with pricing stabilizing.

Guy Carpenter will release more detailed reports on specific lines of business, regions, and market conditions in the reinsurance sector over the next two weeks. The forthcoming articles will be published on GCCapitalIdeas.com and will provide a more comprehensive review.