NU Online News Service, April 22, 2:59 p.m. EDT

After record 2011 first-quarter catastrophe losses that outpaced man-made and natural catastrophe losses for all of 2010, facultative reinsurance rates in many regions have begun to firm, and are set to increase through 2011, according to an Aon Benfield report.

According to the report, “Bringing Fac Into Focus: Q1 2011 Review,” the 2011 first quarter “will go down in history as being the worst quarter ever for the brutal severity of losses to the global insurance and reinsurance markets.” Aon Benfield says the insurance and reinsurance markets are expected to see about $52.6 billion in losses, which is a $12 billion increase over the total man-made and natural catastrophe bill of $40.6 billion in all of 2010.

Aon Benfield also says the industry faces the impact of changes in Risk Management Solutions’ (RMS) 11.0 model along with climbing combined ratios and a continued low investment return environment. “Together,” Aon Benfield says, “these [factors] have resulted in a rapid slow down in the ubiquitous rate reductions of 2010 and will lead to increased rates in the most impacted geographies during the course of 2011.”

According to reinsurance intermediary Gill and Roeser, facultative reinsurance is reinsurance under which the cedant has the option of submitting and the reinsurer has the option of accepting or declining individual risks, as opposed to treaty reinsurance where a reinsurance agreement covers a book or class of business that is automatically accepted on a bulk basis by the reinsurer.

In the 2011 first quarter, Aon Benfield says U.S. property catastrophe-exposed accounts saw an average 3 percent drop in facultative pricing domestically and a 5 percent reduction in London. Non-cat-exposed risks saw 3 percent drops both domestically and in London. Aon Benfield says this pricing represents a change from this time last year, when facultative cat and non-cat rates plunged 15 percent.

In the Asia-Pacific region, which saw the bulk of major first-quarter catastrophes, domestic catastrophe rates in many parts of the region trended upward “in a direct response to the magnitude of insured losses from [Cyclone Yasi] and both New Zealand earthquakes [September 2010 and February 2011],” Aon Benfield says.

Catastrophe rates in the domestic Australian and New Zealand markets were up 10 percent in the 2011 first quarter compared to a 3 percent drop a year ago. Non-catastrophe rates dropped 8 percent, as exposures did not see any major losses, Aon Benfield notes. In the 2010 first quarter, non-catastrophe rates in the region dropped 10 percent.

In Japan, Aon Benfield notes that both the domestic and London markets had already quoted many renewals before the March 11 earthquake and tsunami and those quotes were honored on April 1. Since March 11, “early indications are that cat rates in both the domestic and London markets will rise by as much as 30 percent, whilst non-cat rates will remain flat in both markets,” Aon Benfield says.

Elsewhere in the Asia-Pacific region, Aon Benfield says domestic markets saw continued rate declines, while the London market took a different approach and offered flat renewals for both catastrophe and non-catastrophe business.

Aon Benfield says the Europe, Middle East and Africa (EMEA) region presents “mixed messages,” but overall shows rate decreases slowing. For Continental Europe, excluding France, catastrophe rates were flat compared to down 4 percent in the 2010 first quarter. The French domestic market, which offered flat rates a year ago, saw catastrophe rates drop 5 percent in the 2011 first quarter.

“London market cat rates were flat for Continental Europe in [the 2011 first quarter] compared to 10 percent reductions same time last year, so evidence of some tightening is being presented by underwriters,” the Aon Benfield report says.

Rates in the Middle East continued to fall for catastrophe and non-catastrophe rates.

“In summary,” Aon Benfield says, “markets are reluctant to give reductions for cat business in virtually all regions in light of the major cats experienced so far this year. In [the 2011 second quarter], we anticipate that this reluctance will result in targeted cat rate increases in some of the European domestic markets, the U.S. domestic market, Australia, New Zealand, Japan and in the London market for cat business emanating from [Asia-Pacific], Latin America and the Middle East.”

Special Reports /

Aon Benfield: Facultative Reinsurance Rates Firming In Cat-Prone Areas

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