U.S. Reinsurance Renewal Rates Down 10%: Guy Carpenter

Reinsurance prices on average worldwide are down approximately 9 percent, driven by excess supply and fueled by strong profits and low losses, a brokerage firm said today.

The findings by Guy Carpenter & Company were contained in its report "2008 Reinsurance Market Review: Near Misses Call for Caution" and were based on Jan. 1 renewals of reinsurance contracts.

Insurers, the brokerage said, took advantage of a buyer's market and many 2008 renewals closed late as cedents held out for lower rates in the continuing soft market. Reinsurers were rewarded not only with lower rates but often smaller lines.

In the United States property-catastrophe reinsurance rates on average are down 10 percent nationally and 12 percent regionally. Rates for continental Europe are off 7 percent, and in the United Kingdom they are lower by 7.5 percent.

Barring large catastrophe losses in 2008, the report predicted that "the downward drift in rates is expected to continue through 2008 and into 2009.

According to the brokerage, although the frequency of catastrophes in 2007 was high, the "near misses" in large coverage areas led to a lack of big catastrophe losses and a subsequent softening of the market.

Chris Klein, Guy Carpenter's global head of business intelligence, in a statement said, "Though the market remains relatively placid, it's important to emphasize that this is no time for complacency."

According to Mr. Klein, "A number of close calls in 2007, including two Category 5 hurricanes and several earthquakes--not to mention the subprime crisis--demonstrate how quickly things can change in the reinsurance market and should underscore the need for continued vigilance."

The report discusses the impact of rating agencies and regulators' actions on the newly emerged reinsurance "hubs" in Zurich and Dublin.

Among the other major findings of the report:

While analysts expect the total damage resulting from the subprime mortgage market meltdown to reach $400 billion, Guy Carpenter estimates that the impact on directors and officers liability lines will be a more modest $3 billion.

Capitalization of the Bermuda Reinsurance Composite increased by 20.4 percent in 2007, reaching $129 billion at the end of the third quarter of 2007, due to strong retained earnings. Reinsurers returned $9.4 billion to shareholders in 2007, a 200 percent increase over 2006. In addition, more than $2 billion in share repurchases were executed.

Sean Mooney, Guy Carpenter's chief economist, said that "low and decreasing interest rates have reduced the incentive to engage in cash flow underwriting, while the focus on managing capital is reducing reinsurers' interest in assuming more inadequately priced business."

He added, "External capital may also help flatten the peaks and valleys of the insurance cycle."

Guy Carpenter's analysis of the reinsurance market said there is less chance of a boom and bust cycle today because reinsurance senior managers are more attuned to their owners' demands and appear to be focusing more on generating above-average returns to shareholders instead of more traditional goals such as increasing top-line and market share.

The report based on the Guy Carpenter World ROL [rate on line] Index reviews global market conditions at the Jan. 1 renewal period and covers renewal trends across various lines, including property, casualty, life, accident and health, retrocession and marine, as well as by geographical areas including the United States, Europe, Asia and the Pacific Rim, and Latin America/the Caribbean.

A copy of the full report is available for download at www.guycarp.com. Printed copies are available by contacting Guy Carpenter at marketing@guycarp.com.