Reinsurers' Biggest Catastrophe May Be Lack of Catastrophes

Reports issued by the largest reinsurance brokers last week are pointing to continued price declines in the U.S. that could mean trouble for the industry’s bottom line for years to come even without a major catastrophe loss.

According to Wills Re, reinsurance buyers were able to get significant rate reductions as much as 25 percent on some accounts. Overall property reinsurance rates were down a 15 percent according to Guy Carpenter and Aon said that it expects rates will be reduced between five percent and 20 percent for 2010.

But the declines come at a cost as reinsurers may begin writing new business at an underwriting loss in order to protect market share.

“The trio of down cycle drivers, namely, excess capital, stable investment returns and limited growth prospects, continues to weave its magic, obscuring hidden dangers lurking in the quarters ahead,” according to Willis Re.

The reinsurance market is in more of a precarious spot than previous cycles, says Chris Klein, director of reinsurance markets for Guy Carpenter in London.
On one hand, they are going into a forecasted active North American hurricane season with a majority of their catastrophe budgets spent on European windstorms and the Chilean earthquake that occurred in the first quarter of the year.
But if the hurricane season is unusually quiet they will remain flush with capital and face renewals where buyers will demand even greater price cuts that could eat into hard-earned underwriting profits of the last five years.
“Pricing can be a reflection of what happened in the past instead of what exposure there is in the future, especially from the perspective of buyers,” Klein says. “But there comes a point where (re)insurers need to make a decision about how far will they go to defend their market share.”
If reinsurers enter the annual
Monte Carlo Rendezvous in September unscathed by further large catastrophe losses they will face some hard decisions.
“I think there will be some concerns that if [reinsurance investors] don’t get the return they expect on capital they will withdraw,” Klein says. He adds that several reinsurers have been attempting to return capital in the form of buybacks, but that typically ends in the last half of the year.

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