Almost every discussion of 2012 reinsurance rates for U.S. property risks touches on major changes in catastrophe models—both the recently released Risk Management Solutions (RMS) version 11.0 U.S. Hurricane Model; and, to a lesser extent, AIR Worldwide’s revisions released last year but only now making their way through the system.

James Vickers, chairman of Willis Re International & Specialty, is one of a number of experts who believes the RMS changes already have had some upward impact on pricing on certain mid-year U.S. property-catastrophe renewals—and he expects this trend to continue in the Jan. 1, 2012 renewals. 

However, he anticipates RMS changes for European windstorm will have less impact because most buyers there are still assessing how the model change will affect their holdings “and because models other than RMS are widely used” across the Atlantic, Vickers adds.

Pina Albo, president of the reinsurance division for Munich Reinsurance America, in Princeton, N.J., reports June and July rate increases in the 10-plus percent range for large U.S. property-catastrophe renewals. She ascribes that double-digit bump both to the worldwide catastrophes in 2011 and initial client implementations of the new RMS version 11.0.

Extrapolating from these mid-year jumps, Albo predicts that for large accounts, even without additional significant catastrophe losses for the remainder of the year, the combination of cat losses to date and the new RMS version working itself through the systems will lead to Jan. 1 renewals with the same 10-percent increase seen at mid-year—or the percentage jump may even be slightly higher.

Jim Bradshaw, CEO of Willis Re Inc., also expects that the upward-bound pricing trends seen in mid-year renewals will continue in 2012. But he cautions that variations “driven by reinsurers’ loss experience, the impact of the new RMS version 11.0 model results on their PMLs [probable maximum losses] and changes in their exposure base” all make sweeping market predictions about pricing directions difficult.

Unlike Munich Re and Willis Re, Aon Benfield is not seeing widespread U.S. adoption of the new RMS version, and Bryon Ehrhart, chairman of Aon Benfield Analytics and Securities, anticipates it will have little effect on renewals this season.

What accounts, in his view, for this resistance to the new model? Ehrhart says that the initial guidance provided by RMS prior to release of the new version indicated that the resulting changes would be “reasonable.” But “what insurers are seeing from the actual model is far greater change, and that change seems to many insurers to be unwarranted. For example, average annual losses for the industry in the new model are twice the historical record since 1992, adjusted for [inflation] and exposure growth,” he says.

“Reinsurers are very intelligent users of cat models and they understand that any new model that produces losses that are twice the historical record” requires further examination about how that model applies to the actual risk portfolios of individual insurers, Ehrhart says. This has given rise to an ongoing and as-yet unresolved dialogue between insurers and reinsurers over how applicable RMS 11.0 is to a particular insurer’s situation, Ehrhart say 



When it comes to buying trends, Munich Re’s Albo reports some carriers have increased retentions under excess-of-loss coverages, but she’s not sure this trend will continue given the frequency of losses this year—particularly in the Midwest—that have hurt these insurers financially.

Also, Albo is seeing some increased demand for additional property-catastrophe limits driven by the new cat models, which show exposures are higher than previously thought.

One interesting buying trend Albo expects to see in 2012, driven by the high frequency of natural catastrophes in the Midwest: a shift away from excess-of-loss policies that attach when losses reach a specified level to quota-share policies where risk is shared proportionately.

“Despite the generally higher spend involved in buying quota-share over excess-of-loss policies, some companies may be starting to buy more quota share for balance-sheet protection, following the high frequency of natural cats in the Midwest,” she says.

And purchasing quota-share policies remains popular for carriers where surplus relief is required or where they are starting in a new line of business and want a reinsurer’s input and knowledge as they grow into that line.

For his part, Aon Benfield’s Ehrhart doesn’t expect material shifts in demand one way or the other for reinsurance at the Jan 1 renewals. “The reinsurance market has lost roughly half its casualty-treaty business since 2004, and we don’t see much more decrease,” he says.

But neither does he anticipate an increased demand for property reinsurance based on the new models or the actual losses, since few carriers saw losses go through the top of their reinsurance limits.

Andy Barille, a consultant to insurers and reinsurers, also foresees a more-of-the-same approach from reinsurance buyers next year. “Companies are managing their retentions very well; there’s no change here,” he says. “A lot of reinsurance covers will be written” at the same terms as the previous year, Barille says.


Reinsurance capacity is not expected to be a big problem for renewals—but some do see the potential for at least some tightening.

Ehrhart, for his part, sees no pulling back and expects total capacity to rebound to the $470 billion the industry had at the start of this year.

Willis Re’s Bradshaw also believes “the coming renewal season will see an abundance of reinsurance capacity being deployed in a market that has experienced localized catastrophes and changing [modeling] science. Not surprisingly, the impact on cedants renewing programs on January 1 will depend on a number of variables, including but not limited to risk location, loss experience and line of business,” he says

But Cliff Gallant, a KBW managing director whose equity research focuses on the P&C industry, notes that a lot of Bermuda-domiciled reinsurers have had bad losses this year, despite a fortunate hurricane season, and these losses will rein in excess capacity. He sees this as a healthy limitation on reinsurers’ ability to aggressively pursue growth, which helps keep discipline in the industry.

Noting that “all eyes are on property catastrophe,” Albo, too, anticipates some capacity tightening as a result of the 2011 catastrophe events and the new RMS model.

“Capacity/supply has generally been available, but as the RMS version 11.0 model works itself through the system for insurers, it also works its way through the system for reinsurers, so we may see a general tightening of the reinsurance capacity that is available to satisfy that increased demand”—especially when it comes to hurricane-related risks, she says.

“We may also see restrictions in deployment of this capacity,” Albo adds, “if prices that reinsurers can get are deemed to be insufficient.”

While rates and capacity may be the primary concerns for buyers, especially with the promise of not-insubstantial increases on January 1, Ehrhart observes that insurers should keep in mind just what they are paying for in the first place.

“We’ve got an incredible focus on pricing—without a lot of focus on just how reinsurers benefited those loss-affected regions this year. Reinsurance worked. It really helped regional insurers protect earnings from volatility and protect their balance sheets so they could continue to protect insureds.”