Reinsurance Prices Expected To Remain Firm Through July '09

Global reinsurance prices firmed for Jan. 1, 2009 renewals and are expected to remain firm for the April through July renewals, according to a report issued by Aon Benfield insurance brokerage.

In its January 2009 Reinsurance Market Outlook, Aon Benfield, a unit of Chicago-based Aon Corp., said that assuming there is only limited additional turbulence in the financial markets and no significant reinsured catastrophe losses occur, it expects that the April through July reinsurance renewal market will be similar to the Jan. 1 market.

U.S. hurricane and earthquake reinsurance pricing rose modestly at January renewals, and pricing of other global natural perils held firm.

However, U.S. hurricane-dominated programs, especially those exposed in the state of Florida, would likely experience more significant price increases than others due to the potential inability of the Florida Hurricane Catastrophe Fund (FHCF) to fully finance its projected 2009 capacity in the uncertain municipal bond market, the report said.

The loss of significant optional FHCF capacity or less confidence in its claims paying ability may greatly impact reinsurance renewals for Florida residential property insurers, said Aon Benfield.

Impacting supply and demand, the financial and credit crisis, as well as the severity of 2008 hurricanes, impacted reinsurers and it is estimated that reinsurers will be entering 2009 with 15-to-20 percent less economic capital than in 2008, according to the report.

Reinsurers sustained over $10 billion in ceded catastrophe losses in 2008. However, reinsurers have maintained the core capital required to underwrite risk, the analysis noted.

"Reinsurers have demonstrated prudent capital management during the recent financial crisis, particularly when measured against other financial institutions. Despite significant investment-related losses, equity capital remains at appropriate levels to support underwriting risk for reinsurers," said Bryon Ehrhart, chief executive officer of Aon Benfield Analytics.

"Moreover, reinsurers have very low debt leverage and comparatively very low total asset leverage, relative to banks who have struggled greatly during this financial crisis," added Mr. Ehrhart.

The report noted that the capital markets, which have played an increasing role in the mitigation of insurance risk, have also suffered from the recent financial turbulence. However, the multiple-year structure of catastrophe bonds has helped cedents hedge capacity and price in the current firm market.

The impact of the credit and liquidity crisis has been considerably worse for insurers than for reinsurers. For calendar-year 2008, Aon Benfield estimates that insurer capital will decrease by 25-to-30 percent, Aon Benfield estimated.

Mr. Ehrhart noted that while insurers have maintained the core capital they need to continue their businesses, additional capital may be needed for future growth. Reinsurance purchases have been limited to those with "more stressed balance sheets." Where reinsurance pricing has increased, cedents have tried to offset increased reinsurance spending through higher retentions in some cases, he said.

The report can be found at www.aon.com and www.aonbenfield.com.