The 10 most important developments affecting the reinsurance industry this year and next
1. Rates are up – but modestly
Main renewals so far this year have shown a consistent picture, with property catastrophe rates up by between 10% and 15%. 1 Jan 2010 renewals will depend on the hurricane season.
2. Reinsurers recover capital
This year’s rates increase was mainly down to erosion of reinsurers’ assets during the financial crisis and the impact of last year’s hurricanes. In the first half of 2009, some reinsurers recovered half of what they lost last year, and this will continue if the financial market further stabilises.
3. Cedants examine counterparty risk
Reinsurers’ widely varying investment strategies has led cedants to become choosier about which reinsurers they include. Expect this trend to continue, as well as preferring diversification.
4. Merger mania
There have been two high-profile mergers recently: IPC, which looks set to merge with Validus, and PartnerRe/Paris Re. Expect stronger companies to opportunistically target weaker rivals.
5. Cat bonds recovering
The financial crisis indirectly affected new issues of cat bonds (whereby a bond issue replaces a traditional reinsurance contract) in the second half of last year. But this recovered in the first half of 2009, with nine bonds issued totalling $1.38bn. There are more bonds in the pipeline.
6. Catastrophe modelling
The large footprint of Hurricane Ike in 2008 caught many out, and reinsurers spent the next six months revising their estimates upward. Expect ever-increasing efforts trying to get it right.
7. Mother Nature
The 2009 hurricane season is forecast to be moderate, but even if there are only a few storms – one major hurricane among them – striking a highly insured area, it could hurt reinsurers badly.
8. Offshore woes
The G20 nations have threatened to clamp down hard on offshore financial centres. Several among them – especially Bermuda – are major centres for reinsurance. But political rhetoric has a tendency to get watered down when it’s time for practical action.
9. Bureaucrats in Brussels
London faces a proposal by the European Commission to end the Block Exemption Regulation for some forms of co-operation. There is a real danger that, by not fully understanding the unique nature of the subscription market, Brussels could adversely impact London’s ability to compete.
10. Wasa legal case
Reinsurers were encouraged by an historic House of Lords decision on 30 July that means the inclusion in the contract of a “follow the settlements” clause does not bind reinsurers to provide coverage for losses that fall outside the period clause. Expect changes to wordings.
- The reinsurance industry is recovering capital after the financial crisis
- Rate movements will depend much on the results of this year’s hurricane season
- More mergers are on the cards, as the industry appears to be in a consolidation phase
- The industry faces political threats from the G20 nations and Brusselst