Contrary to the expectations of many primary carriers,reinsurers have not drastically raised property-catastrophe ratesthis year— despite unprecedented disaster-related losses worldwide,and near-record losses domestically, in 2011.

And rates for property-per-riskand casualty treaties are “still pretty flat,” says David Flandro,head of global business intelligence at Guy Carpenter & Co., amajor reinsurance intermediary.

At its Jan. 1 renewal, Philadelphia Insurance Cos. faced alow-single-digit-percentage rate hike for its catastrophe-propertyreinsurance, according to Cole Henry, senior vice president ofcorporate underwriting.

Henry described the renewal rates as “attractive,” because hehad anticipated a multiple of the actual increase.

Similarly, reinsurers imposed a rate hike of just “a fewpercentage points” on Zurich Insurance Group Ltd. at its Jan. 1renewals, says Dan Loris, a senior vice president and head of groupreinsurance for the Americas.

Insurers are “seeing pretty stable capacity and pricing,” Lorisadds.

“It's not nearly the hardening that was expected,” agrees JohnWard, CEO of Cincinnatus Partners LLC, a Loveland, Ohio-basedprivate-equity firm specializing in the insurance industry thattracks reinsurance trends as part of its investment research.

Ward says he has seen catastrophe rates increase bylow-single-digit percentages: “nothing really dramatic by anymeans.”

Flandro estimates that property-catastrophe rates were 8 percenthigher at Jan. 1 renewals.

Observers point to two key factors that are keeping reinsuranceprices under control.

One is an abundance of capacity—and at most stable or, in manycases, diminishing appetite for reinsurance cover amongcarriers.

The other key reason: RMS Version 11 is having much less of animpact than many had anticipated.

CAPACIOUS CAPACITY

The combination of ample reinsurance capacity and lacklusterdemand from insurers has resulted in a renewal environment that canbe characterized as “very orderly” so far this year, says BryonEhrhart, the chief strategy officer for top reinsurance broker AonBenfield.

Catastrophes last year caused$380 billion in economic damage, according to Munich ReinsuranceAmerica. And a record $105 billion of that was insured. Domestically, catastrophes caused $75 billion of economic damage,about $35.9 billion of it insured—the fifth-highest U.S. annualtotal.

Reinsurers covered a significant portion of those losses,according to the Insurance Information Institute (see chart).

As a result, even insurers with no catastrophe losses wereexpecting sizable rate hikes this year.

But despite 2011's enormous cat figures, reinsurers' $455billion of capital at year-end 2011 was down just 3.2 percent, or$15 billion, from the industry's record $470 billion a yearearlier.

Capital fell only a fraction of the amountreinsurers paid out on catastrophe losses for several reasons,Flandro explains. For one, reinsurers released significantreserves; in addition, interest rates fell, which drove up thevalue of bonds in reinsurers' investment portfolios.

As a result, reinsurance capacity overall remains robust—but inan environment where carrier demand is tepid.

It's an “unusual phenomenon,” says Ehrhart, that so muchreinsurance capacity exists and that insurers are not demanding ita year after particularly large catastophe losses for both insurersand reinsurers.

What accounts for carriers ceding less risk to the reinsurancemarket?

Insurers, “pressed for margins,” are retaining more risk,especially on the casualty side, Ehrhart observes.

Zurich's Loris agrees. “As insurers' balance sheets strengthen,they're not as reliant on reinsurance,” he says. As a result,insurers are “squeezing every dollar of profit out of the balancesheet” by increasing their casualty retentions.

Zurich, however, did not increase its retentions this year, asit already had adjusted them a few years ago, Loris notes.

Philadelphia reduced its catastrophe-reinsurance purchase at itslast renewal in two ways: On its first reinsurance layer (whichprovides $5 million of coverage in excess of $5 million in carrierloss), Philadelphia increased its retention to 50 percent from 40percent.

In addition, Philadelphia reduced its book of windstorm-exposedproperties in Texas, a move that reduced its total catastropheexposure.

So even with the marginal rate hikes reinsurers are imposing,many insurers are paying no more in total premiums for theirproperty-catastrophe coverage because they are retaining more riskand buying less coverage, notes Ehrhart.

RMS 11: WHAT RATE REVOLUTION?

Many industry experts thought the upward-pricing impact of theRMS Version 11 U.S. Hurricane Model, introduced in February 2011,would be substantial—as the revisions to the model significantlyelevated the total-exposure estimates for most propertyportfolios.

But as it turns out, this has not been the case.

Robert Andrews, head of ceded reinsurance at XL Group of Exton,Pa., says he “noted a degree of property- cat capacity constrictionearly in the year,” which he attributes to reinsurers' earlyresponse to the updated windstorm model. “But that seems to haveevened out a great deal by May.”

The reason the rate and capacity impact has been less thanexpected: Reinsurers' are not relying solely on the new model toguide their decision-making, market executives note.

“Reinsurers are being reasonable,” and theyunderstand that many insurers dispute certain projections the newmodel makes, says Henning Haagen, head of reinsurance at AllianzGlobal Corporate & Specialty, a division of Allianz Group.

Insurers' objections to someelements of the model “globally caused insurers and reinsurers toquestion the rigorous use of models,” says Guy Carpenter'sFlandro.

Instead, reinsurers typically are using a blend of differentmodels, including their own, he adds. “We think that'shealthy.”

“[Most] everyone has implemented RMS 11 to a certain degree,”says Michael Finnegan, chief operating officer of Liberty MutualReinsurance, a Stamford, Conn.-based unit of Liberty Mutual GroupInc. But the new model is “only one of the tools” reinsurers areusing, he says.

“The impact of RMS Version 11 is fascinating,” observes Andrewsof XL. “Depending on your point of view, it has been either themost polarizing event in insurance history, or it has been theimpetus for frank debate on modeling and its rightful place in ourbusiness.”

And what's his perspective?

“Clearly, it has been the latter, as companies are ever-morecritically evaluating the various cat models' underlying loss anddamageability factors—particularly as they relate to their ownbooks of business,” he adds.

Munich Re is one reinsurer that did not implement the new RMSmodel since it relies on an internal model, says Pina Albo,president of the Reinsurance Division at Munich ReinsuranceAmerica.

Munich Re also has updated its model—but the reinsurercontinually refines it and the latest adjustments were not aresponse to the RMS update, Albo notes.