Re Prices Face Sharp Rise

The dislocation in the reinsurance market has moved beyond the U.S. wind exposure realm, a leading analyst said on Friday.

Morgan Stanley property-casualty analyst William Wilt wrote that the release of the “widely telegraphed” U.S. wind model by Risk Management Solutions will increase loss estimates of personal insurers by about 40 percent and commercial insurers by about 75 percent.

“Despite the advance warnings, many reinsurers and brokers expect the jaws of some primary company executives to drop at that revelation,” Mr. Wilt wrote.

Further shock will follow the revelation that the cost of reinsurance has accelerated by between 30 percent and 50 percent since Jan. 1.

“Talk about a one-two punch,” he wrote.

Mr. Wilt noted that the dislocation in the reinsurance market has now moved to the cost of earthquake covers in California “that have also begun to rise meaningfully–up some 50 percent or more on year-on-year renewals.”

National accounts soak up much reinsurance capacity. “We suppose Allstate's $2 billion purchase earlier this year and recent efforts by State Farm to secure additional catastrophe reinsurance are having a big impact on available capacity,” he wrote.

Personal insurers have had some success in passing reinsurance costs on to policyholders. “This is not to suggest that rates in cat-exposed areas are adequate, but regulators seem receptive to the need for personal reinsurers to pass along reinsurance costs,” Mr. Wilt said.

But companies must return money to policyholders if reinsurance rates rise by less than the assumptions embedded in the primary rate hike, he added.

The analyst said that the progression of Hurricanes Rita and Wilma loss estimates should face some scrutiny.

“Apparently, second and third event covers sold in the aftermath of Katrina are triggered at thresholds such as between $10 billion and $15 billion,” he wrote.

Rita and Wilma recently passed the $10 billion and $5 billion threshold.

“In this zero sum game, some companies may have to own up to loss development, while others may suddenly look a little bit smarter,” he wrote.

Overall, however, uncertainty remains around this issue, he noted.