Cheaper reinsurance a mixed blessing for primary market as excess capital holds down market

Falling reinsurance rates could be a mixed blessing for primary insurance companies, according to the 2011 outlooks published by the largest brokers.

Globally, reinsurance rates fell by an average of between 5% and 10% at the 1 January renewals, according to reports from the three biggest reinsurance brokers, Aon Benfield, Guy Carpenter and Willis Re (see pdf links, below right).

The reductions have largely been driven by reinsurers’ excess capital and the fact that reinsurance supply is outstripping demand.

However, while reinsurers are strongly capitalised, market conditions pose challenges that could have an impact on their primary clients, warn the brokers’ analyses. Poor investment returns and dwindling reserve releases from previous underwriting years cannot prop up falling underwriting results.

According to Willis Re’s outlook, ‘Keep calm and carry on’, the managers of some reinsurance companies are lowering their profitablity guidelines for 2011.

“In such an environment, any shock to reinsurers’ capital base – either through underwriting losses or other capital events – is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear,” said Willis Re chief executive Peter Hearn in the report.

Reinsurance rates in the UK have closely followed the global trend. According to Aon Benfield’s report, UK and Ireland property-catastrophe prices fell by between 5% and 10%.

Guy Carpenter’s report agreed, adding that UK property per-risk programme rates were down by between 5% and 15% for the lowest and highest risk layers, compared with a year ago.

One exception to the general trend was UK motor business, where poor performance in 2008 and 2009 has pushed up primary insurance rates, prompting reinsurers to raise their own prices.

Aon Benfield said that reinsurers’ concerns about a possible review of the claims discount rate, as well as the withdrawal of unlimited retrocession capacity by one large reinsurer, had added to the upward pressure on rates.

However, the reinsurance broker added that, because of the ample capacity available, reinsurers were only winning rate increases on programmes with higher deductibles where volatility was a concern or where claims experience had deteriorated.

“In some cases, insurers who purchase at a lower deductible or are able to prove a de-risking of the portfolio have achieved rate reductions,” Aon Benfield’s report said.