1 November 2011Re/insurance

Whichever way the wind blows

It’s been something of a mixed year for the reinsurance industry. The Christchurch earthquake in New Zealand, followed by the Tohoku earthquake and tsunami in Japan, caused a great deal of worry about natural catastropherelated losses, especially when the US then experienced a string of tornado losses in the south and Midwest. But then things died down and there were no major natural catastrophes until Hurricane Irene carved its way through New England at the end of August, leaving behind a trail of destruction.

A stirring market?

According to rating agency AM Best, the market is now starting to stir from what has been something of a tepid period. In its latest special report on the global reinsurance market, the company said that: “Hopeful signs are emerging for the global reinsurance industry after years of a soft market, weak investment returns, lukewarm investor interest and sluggish consolidation activity. The bottom line has been squeezed, and capacity has been dampened. Favourable lossreserve development that bolstered 2010’s underwriting performance is unlikely to be duplicated in 2011. Catastrophe losses–estimated to be as high as $60 billion for the first half of 2011–have diminished last January’s robust capital position. Companies are hoping for, but not betting on, a more dramatic improvement in property cat pricing at the January 2012 renewal.”

The AM Best report states that by the second quarter of 2011 net property catastrophe premiums written by the Bermuda reinsurance market totalled $30.4 billion, which is already more than half the total of $52.6 billion written for the whole of 2010. There is a caveat, however. AM Best also states that the combined ratio for the first half of 2011 so far amounts to 116.2 percent. The total for 2010 was 92.7 percent–although it is never wise to read too much into combined ratios that cover only a portion of the year. The final combined ratio for 2011 will undoubtedly be watched with interest.

Market opinion

Charles Dupplin, chief executive officer at Hiscox Bermuda, told Bermuda Re that as things currently stand the reinsurance industry is in a reasonably good position. “The market is in a mode where there’s an upwards glide path on rates, although it depends a lot on whereyou’re talking about. The US has seen loss-hit business trend upwards. The very large amount of loss activity in the rest of the world has also had an effect even on areas which have not experienced losses. There is, after all, only one pot of money to pay claims.”

The ongoing financial environment is also impacting the market as worries over the debt burden carried by many countries, especially those weaker members of the eurozone, has been causing financial markets to fluctuate, with evident implications for investment returns.

Dupplin pointed out that low investment returns have had an impact on the reinsurance market. “We’re in a long-term low interest rate environment,” he said. “There’s not much coming in from the investment side of the business, so on the insurance trading side there’s pressure on front-line underwriters to get prices up.”


For many Bermuda companies the renewal season is both significant and extremely sensitive, as negotiations between the various interested parties are ongoing and consequently confidential. Bermuda Re spoke with market players in confidence about their predictions for January 1, with the comments outlined below drawn from Bermuda players anonymously. Their thoughts provide a valuable indication of likely heading.

US portfolio

Asked what percentage change it expected on US property catastrophe rates at January 1, one company said that there would likely be zero to 5 percent increases, but added that this was heavily client-dependent. Looking at the major drivers of these changes, the company identified loss events in the US, the implications of RMS’s hurricane model and the rating agencies’ views on model change and how exposures will be reported–will they force reinsurers to report using RMS or a combination of third party and internal model?

Another company forecast a rise of 10 percent to 15 percent in US property catastrophe rates, adding that the major drivers will be the US tornado/hail loss activity in 2011 and the ongoing implications of RMS model changes. The company added that accounts written at January 1, 2011 were unaffected by recent RMS model changes, but that price change on specific accounts could be significant going forward.