Reinsurance Prices Stay Competitive at Mid-Year
By Brian McGuire
Senior Vice President, U.S. RE Corporation
Although indications earlier this year pointed to a potentially challenging and difficult mid-year renewal season, pricing for traditional catastrophe reinsurance programs including U.S. hurricane risk, tended to be reasonably competitive and at the lower end of most buyers’ estimates.
Prior to the January 1, 2009 renewal season, there was much speculation about how disruption in the financial markets would affect catastrophe reinsurance. Reinsurance buyers worried about whether reinsurers would have sufficient capital to maintain expiring levels of capacity at reasonable prices. Insurers with property exposures in Florida were apprehensive about bills under consideration by the Florida legislature, specifically those calling for a reduction in the amount of reinsurance sold by the Florida Hurricane Catastrophe Fund (FHCF). Some felt that any reduction would require replacing FHCF capacity with more expensive private market coverage, further increasing the cost of the rest of the program.
Fortunately, for most buyers, the anticipated market turmoil never materialized. In fact, although somewhat limited as compared to a year ago, there was still more than adequate capacity in the market for the June and July 1 renewals at reasonably competitive prices. Rates for Florida hurricane exposure were up modestly, between 10 and 15 percent over the prior year’s renewal -- a far cry from the 20 to 25 percent increases some predicted earlier in the Spring. This increase offset similar reductions experienced during the mid-year 2008 renewal season. The Florida legislature ultimately passed a bill calling for elimination of the Temporary Increase in Coverage Limit (TICL) portion of the FHCF by 2014 with a $2 billion reduction per year beginning in 2009. The pricing and availability of capacity to fill the gap resulting from the reduction in TICL clearly demonstrates that the reinsurance market continues to remain vibrant and competitive.
For non-U.S. hurricane risk, price increases were rare, based primarily on the loss experience of the reinsurance program. Those buyers whose programs experienced losses in 2008 generally saw nominal increases in both price and retention. However, buyers with programs that were profitable in 2008 generally saw a reduction in rates, which when applied to higher premium projections for 2009 provided the reinsurance market with amounts similar to the expiring premiums. Some buyers sought additional capacity at the top end of their protections, but in order to compensate for the additional cost, most voluntarily took an increase in the retention at the bottom end to achieve overall savings.
As to other lines of business, rates on Casualty Clash and Workers Compensation are very competitive, but General and Professional Liability lines such as E&O and D&O remain relatively firm. The rates on E&S business for large commercial risks requiring wind, flood and earthquake protection also seem to be holding up.
Without any major catastrophic event during the remainder of this year, the consensus is that reinsurance rates should continue to remain stable with possibly some minor adjustment downwards for 2010.
On the reinsurance buying side, the outlook remains extremely positive. Reinsurance pricing, with the exception of U.S. hurricane risk and programs with poor loss experience, remains highly competitive. Competition in the middle market area also remains intense as large nationwide insurance companies look to enhance premium volume and thus expand market share. We are likely to see further consolidation in this area.