Reinsurance Market Outlook - Aon Benfield - Reinsurance

REINSURANCE MARKET OUTLOOK
Executive Summary – Remarkable Recovery
The remarkable recovery of both insurer and reinsurer capital translated into a catastrophe
reinsurance renewal market for January 2010 that was focused on rate decreases in all peak zones
of the market. Rate on line (ROL) decreases were in line with Aon Benfield’s light catastrophe
season scenarios published in September 2009. Rate decreases, adjusted for changes in
exposure, for the peak zones of U.S. hurricane and U.S. earthquake ranged from minus 5 to minus
15 percent. At the mean, the ROL decreases taken on January 2010 renewals were very similar in
magnitude to the rate increases taken on January 2009 business.
Global reinsurer capacity is driven by capital. Capital increased by 16.6 percent through September
2009, likely fully recovering from the 16.9 percent capital decrease in 2008 by the end of 2009. As
a result, capacity for the global catastrophe reinsurance market has been restored to near its all
time December 2007 peak and it is meaningfully higher than witnessed throughout the January
2009 renewal season. Reinsurers showed markedly less anxiety than last year and were more
focused on gaining the largest possible signings on their program authorizations rather than on rate.
The market is again price competitive as capacity growth outpaced demand growth.
Other major reinsurer catastrophe zone exposures such as European windstorm, flood and earthquake are
reinsured for substantially lower ROLs at similar expected loss than United States peak zone exposures.
They tend to reflect experience, exposure and model changes rather than being tied more clearly to changes
in reinsurer capital. Layers impacted by European windstorm Klaus generally saw experience based ROL
increases while unaffected layers generally held ROLs stable or were reduced by as much as 6 percent.
The global catastrophe reinsurance market softened; however, the market is not soft. Renewal rates reflect a
disciplined view by reinsurers on the balance of risk and return on capital deployed. Aon Benfield believes
that reinsurers will not be able to deploy all their capital and, as a result, we project $10 to 15 billion in
significant reinsurer share repurchases during the year. The growth of government-sponsored insurers and
reinsurance-like entities continues to erode the opportunities for private reinsurers to deploy capacity.
Reinsurers have the capacity or could maintain higher levels of capital if reasonable demand were present.
Casualty and specialty insurers continue to benefit from an abundance of reinsurance capacity. Experiencebased
rates drive most of the renewal pricing and continual decreases in loss frequency paired with
reasonable increases in loss severity mean that insurance and reinsurance rates per unit of exposure
continue to decrease. In some lines, such as directors and officers liability, there have been historical
differences of opinion between insurers and reinsurers over original rate sufficiency. Reinsurers have
substantially erred on the side of safety and priced or structured themselves out of a material segment of
casualty business. Insurers have benefited greatly from the higher retentions taken in response to what have
proven to be unreasonable reinsurer price and structure proposals over the years. The business that
insurers retained has been very profitable for the underwriting years from 2003 to 2007. Reinsurers will need
to rethink their value proposition to casualty and specialty insurers as those insurers face an even more
competitive marketplace.
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