With the asset side of reinsurers’ balance sheets reeling from the impact of the global economic downturn, reinsurers badly needed a break from major catastrophe claims. By and large, they got it—thereby avoiding the still-more interesting question of where the industry would have found the capital to replenish its coffers following another 2005.
Spared that test, it seems the industry has learned some lessons from previous cycles. Ultra-conservative investment strategies, steered well away from volatile equities, left reinsurer assets in far better shape than other financial institutions—to the extent that the relatively benign past year has seen most regain the ground they lost during 2008.
At the same time, the market’s disciplined approach to rate reduction, in a market where supply significantly exceeds demand, suggests a keen awareness that a clement claims environment like last year’s is not to be relied upon.
With the vast majority of claims concentrated at the attritional end of the scale, comfortably within insurers’ retentions, reinsurers generally had an excellent year in 2009—even if they tended to downplay it in their fourth quarter reporting.
As 2009 proceeded without major catastrophe activity, rates began to flatten out or fall back. By the year end, rates generally were more or less where they had been at January 2008. Away from sensitive areas like credit insurance, medical malpractice, and certain areas of professional lines, the reinsurance market looked fl at to gently softening through the first quarter of 2010.
Meanwhile, reinsurers’ asset bases had regained the ground they lost (roughly 15 percent between the zenith in December 2007 and the nadir in March 2009). Bermudian reinsurers, for example, recovered from an unrealised investment loss deficit of $1.7 billion in the first nine months of 2008 to gains of $1.8 billion in the corresponding period of 2009.
Reinsurers have maintained pricing discipline through the January and April renewals. Where we go from here depends essentially on how long this will last in the absence of market-changing claims activity.
Resisting insurer pressure for lower rates, reinsurers argue that the relative calm of last year (133 natural disasters and 155 manmade) was exceptional and that rating must anticipate far worse. Natural catastrophes cost around $22 billion in insured losses during 2009—man-made a further $3 to $4 billion—against a total economic cost of between $50 and $60 billion.
Like the Chinese earthquake and the windstorms in the Far East, many of the year’s events were costly enough in human terms, with 15,000 lives lost, but they left insurers, especially reinsurers, substantially unscathed. The Haiti earthquake in January this year continued this pattern. The single biggest loss was winter storm Klaus, which cost the industry around $3.5 billion—much of it retained by direct writers in the French and Spanish markets.
But 2010 already looks to be shaping up for something rather different. Estimated losses from the Chilean earthquake and the European windstorm Xynthia continue to mount, edging ever closer to anticipated worst-case estimates of $10 billion and $4 billion apiece. Meanwhile, on the back of the worst first quarter for many years, forecasters are already predicting an above-average hurricane season.
It seems increasingly possible that the market may be on the brink of a new shift in cycles—or, at the very least, that significant further softening in the general rating environment is now unlikely. As the market has repeatedly shown in recent years, things can change very quickly. Reinsurers wasted no time in responding to altered claims experience in classes such as financial institutions insurance and medical malpractice, which saw significant increases in the second half of last year.
If not claims, it could be broader economic patterns that may precipitate another major market shift. There are increasing concerns over the adequacy of reinsurers’ past-year reserving and the threat of significantly declining releases from past-year reserves.
A double-dip recession could yet hurt reinsurers’ investment income, putting further pressure on rates. The same could happen if governments cut interest rates to fuel increased economic activity. Reinsurers’ prudent predilection for government bonds could yet backfire if sovereign debt issuers such as the U.K. government slide further into fiscal difficulties.
Certainly, the current market is soft. But do not count on it getting softer. The roller coaster may just be gearing up for its next ascent.
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market update.
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