NU Online News Service, March 31, 2:24 p.m. EDT
The reinsurance industry is well-positioned to absorb first quarter catastrophe losses that could rise as high as $42 billion, according to reports released today, and while pricing is expected to improve, another event may be needed to spur global hardening.
A Willis Re report, "Shaken and Stirring," says 2011 first quarter losses—including Australia flooding and Cyclone Yasi, the February New Zealand earthquake and the March 11 Japan earthquake and tsunami—could cause about $60 billion in losses to the global insurance industry, of which between $35 billion and $42 billion would be passed from primary insurers to reinsurers.
"Fortunately, this run of losses is occurring at a time when the global reinsurance industry's financial position is strong," says Willis Re Chairman Peter C. Hearn in statements opening the report. He says "excellent" underwriting results in 2009 along with strong investment returns in 2009 and 2010 "have left the industry with robust capital positions."
A report on global reinsurance by Morgan Stanley agrees, stating, "The global reinsurers have sufficient capital to withstand the financial impact [of first quarter losses in Japan, New Zealand and Australia] while preserving key ratings with [Standard & Poor's] and others."
Still, Morgan Stanley said it is cutting its earnings per share estimates for global reinsurers for the fifth time in 10 weeks.
The Willis Re report also notes, "While reinsurers' financial strength may be largely unimpaired, their financial flexibility—for some—has been impacted. This is likely to manifest itself in a reduction of share buy backs and other excess capital management techniques." Willis Re adds that mergers and acquisition activity may decrease as well "as the effect of the losses on individual companies' balance sheets and business franchises are digested."
The Morgan Stanley report also predicted a halt to buy backs.
Global hardening of rates, however, are not expected by Willis Re or analyst firm Keefe, Bruyette & Woods (KBW).
In its most recent Property and Casualty report, KBW says, "While we expect the recent spate of global cats to result in improved pricing, particularly for cat-exposed business, and project modestly improved pricing at mid-year U.S. renewals, we view that a global hardening of prices across all sectors is unlikely."
Hearn, in a statement released with the Willis Re report, says the market is close to a turn, but not there yet. "While the financial strength of the reinsurance industry remains remarkably intact in the wake of Tohoku, it can only withstand so many blows," he says. "The reinsurance industry is on the cusp of change and a hard market may be only one more major event away. It could be something as dramatic as a catastrophic hurricane during the upcoming North Atlantic and European winter windstorm seasons or something more systemic like creeping inflation, but whatever the cause, reinsurers have proven their resilience and are gearing up for a bumpy ride over the remaining months of 2011."
The Morgan Stanley report says it expects global property reinsurance pricing to turn positive in 2011. "In addition to the magnitude of [2011 first quarter] cats, the biggest surprise of 2011 is the escalation in the P&C 'debate' about whether pricing power is returning across the industry," the report says.
It also challenges assumptions that events in Japan may not impact pricing in other areas. "Some like to think Japan events would not have an impact on pricing for Florida renewals, but we think this ignores the practical realities of a concentrated reinsurance marketplace," the report states.
Morgan Stanley notes that 70 percent of global reinsurance premiums are written by the top 10 carriers. While the top 10 have diversified exposures, protecting them from losses in peak zones, that diversity also means pricing in multiple areas can be affected by one event, Morgan Stanley notes.
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