Reinsurance: a soft market

Despite the considerable rise of the loss experience of the natural catastrophe risks, the reinsurance market has exhibited an astonishing stability.

Photo credit: Atlas MagazineThe trend for the January 2011 renewals is unclear, though. Both insurers and reinsurers remain optimist as to the tariffs' evolution.

One has to admit that reinsurance has resisted well to the 2008 financial crisis. On the eve of the 2011 renewals, numerous signs are confirming the sector's well-being. Among these elements, we can mention:

  • the market recapitalization which allowed to rebuild the companies' shareholders' equities. According to some estimates, the market is overcapitalized of approximately 13 billion USD,
  • reinsurance stocks have significantly progressed on the stock market and investors remain confident,
  • reinsurers have managed to cushion the supplementary costs pertaining to the natural catastrophes of the first half of 2010 without major difficulties,
  • the 2010 first semester figures are displaying better results throughout the recent twelve months,
  • the market leaders have managed to consolidate their financial soundness. That is particularly the case of Swiss Re which is handling the next renewal in a better position than the previous year,
  • the contribution of Solvency 2 which is more favorable to reinsurers than to their ceding companies. In order to protect their shareholders' equities, insurers have to make recourse to reinsurance more often than they ever did before.
The reinsurance market is overcapitalized of approximately 13 billion USD

The July 2010 renewals

According to a survey published by the agency Fitch Ratings, the renewal of the treaties for the United States, Australia and Latin America zone have resulted in tariffs' regression of 5% to 10% in average. This downward trend has not prevented the emergence of important disparities between the different markets. Therefore, we managed to notice that the areas spared by the natural catastrophes have benefited from substantial reductions while hard-hit zones have been severely penalized. The tariffs increase ranged between 50% to 60% for the earthquake cover in Chile and between 15% and 30% for that of the offshore energy risks.

The January 2011 renewals

For many observers, the current trend is all about portfolios development and not about tariffs rises.

Following the Monte Carlo meeting, the position of the main markets' players is by and large as follows:

  • Munich Re will maintain a stable position. With the exception of some specific segments, natural catastrophes in Latin America and offshore energy, the July 2010 tariffs have not reported any increases; those of January 2011 will keep the same level.
  • Due to the market's overcapacity and to a lower demand from the ceding companies, Swiss Re does not rule out a possible fall in the rates. The Swiss reinsurer is hoping, nevertheless, to stabilize its portfolio.
  • Hannover Re, which maintains high profitability forecasts for 2011, remains confident although it is expecting a slowdown of 2% to 5% of tariffs during the next renewals.
  • Supported in its strategy by the rating agencies, Scor is optimist. It is hoping for a slight rise in the rates despite the overcapacity and competition which are likely to drive the market down.
  • Rating agencies, brokers, ceding companies and some professionals estimate that the 2011 renewals will, for the third consecutive year, result in a decrease of premiums for the following reasons:
    • the market overcapitalization while most insurers planned to purchase the same level of protection, and even less in comparison with the previous year,
    • the arrival of new players in continental Europe: Amlin and Catlin,
    • the recovery of securitization operations in 2010 which amounted to 2.6 billion USD by the end of July, that is, as much as in 2008 and 2009 combined.
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