Prop-Cat Re Pricing Momentum To Continue, Execs Say

He reported that catastrophe reinsurance programs for Japan, renewing subsequent to the earthquake and tsunami in March, saw price hikes in the 40-60 percent range.

Prices were also up significantly in loss-effected zones in New Zealand and Australia, Miranthis said, referring to the late 2010 and early 2011 losses from earthquakes and floods in these regions.

"But from what we've seen, [rates] for June 1 renewals in the United States [were up] high-single digit to low double-digits," he said, referring to PartnerRe's portfolio and the market generally.

"There is clear momentum, but [the] question is will it carry on for rest of year."

"My own opinion is yes, [because] I don't think the indications of the model changes have been fully absorbed by the companies," he said, referring mainly to a potential price lift from a model change by Risk Management Solutions, which introduced a new version of its North American hurricane model at the end of February.

Chris O'Kane, founder and CEO of Aspen Insurance Holdings Limited agreed, adding that that once the changes are fully digested—producing higher rates during the 2012 midyear renewal season—those prevailing higher pricing levels will persist into the future.

He contrasted his assessment of cat-reinsurance pricing for 2012 and beyond to the scenario that played out after Hurricane Katrina in 2005.

Post-2005, pricing went up, "but as the sense of danger receded, they fell again" in the years between 2006 and 2010. "Here I think we have a new baseline," O'Kane said, speaking to marketwide acceptance of the validity of catastrophe models for reinsurance pricing purposes.

The two reinsurance executives joined Neill Currie, president and CEO of RenaissanceRe Holdings, in speaking to the need to fully vet and understand model results, with Currie comparing their indications to a sundial's accuracy in telling time—"they provide a spectrum of potential outcomes." All three agreed, however, that once models are evaluated (often by comparing outputs from multiple models), they form the backbone of cat-re pricing.

O'Kane, like Miranthis, said he didn't think the full impact of model changes had been digested by cedents or reinsurers in time for the midyear 2010 renewal season, suggesting that the timeframe for model users getting comfortable with RMS's new model "a year away."

O'Kane told S&P conference attendees that he based his conclusion on a recent conversation he had with a consultant in the modeling business. The consultant reported that only one of a dozen clients has adopted RMS Version 11. "Eleven of the 12 are still considering exactly what to do," O'Kane said, during the June conference.

On the question of what to do, "doing nothing is not an option," O'Kane added. "To the extent that that model is accepted by those who previously favored Version 10, they're going to [see that] their PMLs are higher, they're going to increase the demand for cat reinsurance, and that I think drives up pricing," he concluded.

BROKERS WEIGH IN

Separately, Willis Re and Guy Carpenter released reports over the last two days, with more specifics on pricing changes they observed for midyear reinsurance renewals.

In today's report from Guy Carpenter, the New York-based broker said that U.S. property-cat rates have experienced a "directional shift" since January 2011—like others attributing the hikes to global losses and model changes.

Guy Carpenter says increases in Australia and New Zealand ranged from 20 to more than 100 percent.

"Both insurers and reinsurers face a significant amount of work between now and the January 1, 2012 renewals as companies solidify their assessment of the impact on capital from the global losses and model version changes," says Lara Mowery, Global Head of Property Specialty for Guy Carpenter.

Yesterday, Willis Re reported prop-cat reinsurance increases in the range of 5 percent to 30 percent for Australia, 50-150 percent for New Zealand, and 5-20 percent for U.S. nationwide contracts. The lower ends of the ranges related to loss-free contracts, while the high ends indicate hikes for those with recent cat-loss hits.

London-based Willis Re saw casualty rates as flat across most lines and territories, according to a chart in the report, with U.S. professional liability emerging as one exception—with hikes of 5-10 percent for deals with loss emergence.

Willis Re's report talks about "a state of uncertainty" regarding the future direction of the market—with loss-effected reinsurers limiting share buybacks to offset losses that took out 10 percent of year-end 2010 capital, and $1.2 billion of new capital entering to take advantage of a possible market turn.

The broker says the market is "in a state of limbo," adding that a series of medium-sized cats or a contagion arising from European debt issues have the potential to reduce excess capital levels that have keep the overall market soft up until now.

At S&P, O'Kane said that even casualty reinsurance conversations are changing in 2011. "There isn't that pain" that's being experience in property, but "what is different is that there are not people talking about price reductions" any more. "That's not in the conversation."

"How much are we going to get off" is no longer the opening gambit, he said.

As for property, and the question of whether rates are adequate, he said, "We're getting more money in property cat per unit of risk. The question is whether that unit of risk is presenting more hazard, more danger" to reinsurers than in the past, noting, for example, that an earthquake in Tokyo in the next 30 years is now seen as more likely according to an emerging body of scientific research.