April Renewals See Some Reinsurance Rates Up 14%

Pushed up by limited capacity, U.S. property-catastrophe reinsurance rates for April 1 renewals had increases up to 14 percent for national programs on a risk adjusted basis, a reinsurance brokerage reported.

Guy Carpenter said reinsurers' capital has been crimped by investment losses.

Its report said the latest increases extend a trend that began at the beginning of the year. The firm said national programs on a risk-adjusted basis went up in the Northeast from 6 percent to 8 percent. The firm said this compares to a reinsurance rate increase of 11 percent on average for January 1 renewals.

The company found that for residual markets, risk-adjusted pricing rose 12 percent to 14 percent on average, but specific results varied widely based on risk pool characteristics.

Capacity needs, regions and specific perils ultimately influenced the final rates that insurers were able to secure.

Relative to 2008 firm order terms (FOTs), prices were up 14 percent to 16 percent year-over-year for higher layers and 10 percent to 14 percent for lower layers, said Guy Carpenter.

The report by Lara Mowery, managing director and head of global property specialty, said for programs focused on the Northeast, lower layer FOTs were up only 4 percent to 6 percent from April 1, 2008, and higher layers saw increases of 8 percent to 10 percent.

The report explained that market competitiveness can be measured by the ratio of FOTs to average quotes with the ratio low in a competitive market, as FOTs are accepted considerably below quotes.

For the national U.S. market as a whole, FOTs ended up at 94.8 percent of average quotes, about equal to the same ratio calculated at the January 1 renewal, indicating no change in the competitiveness of the market this year, the brokerage found.

It said discounts were more pronounced for the Northeast, where higher-layer FOTs were discounted 8 percent to 10 percent relative to quotes, with lower layers at 10 percent to 12 percent discounts

Pricing trends at this renewal, the report said, were influenced substantially by the reduced availability of capacity, especially for perils in historically capacity-constrained zones and program-specific loss histories.

"Capital has undoubtedly been constrained," the report said, and this has had an impact on pricing. It added that some reinsurers have already used up their allocated capacity for transactions other than renewals and in certain cases are having to reduce renewal lines as well.

Using the 20 firms tracked in the Guy Carpenter Global Reinsurance Composite as a proxy for capital availability, the brokerage found that shareholders' funds dropped 18 percent last year--reflecting lost capital of $19.7 billion.

It said unrealized losses on investment assets were largely responsible for the decline in capital, accounting for 53 percent of the decline in shareholders' funds in 2008.

Share repurchases and dividend payments were found to have depleted capital as well, though most programs were suspended by the end of last year.

The firm projected that capital will likely continue to be constrained this year. The report said that while efforts of several insurers to raise capital have been successful--and dividends and buybacks have come to a virtual halt--"uncertainty in financial markets could continue to impair investment assets this year."

However, Guy Carpenter said concerns about the ability of carriers to replenish their balance sheets "may not be as daunting as some have expected. Nonetheless, the ability to secure additional capital does depend on specific companies and lines of business."

Looking at the Florida reinsurance market, the company said renewals are already underway there due to worries about price increases and capacity.

The report noted that the outcome of the current Florida legislative session and decisions by Florida Hurricane Catastrophe Fund trustees could have a profound impact on the market. It noted that the ultimate structure of the fund and whether it will purchase its own reinsurance is still to be determined.

The fund is underfunded, and the report said to address its "significant gap in coverage." Discussions are underway with the U.S. Department of Treasury and an effort is being made to statutorily allow insurers to recoup the cost of purchasing additional reinsurance within the Temporary Increase In Coverage Limit (TICL) layer should funding for TICL remain in question.

Insurers considering entering the market late with the hopes of securing lower, last-minute rates are unlikely to accomplish their objectives, the report advised. "As capital is still constrained, early action will be crucial to managing the cost of coverage."