1 September 2010Re/insurance

Will a soft 2010 lead to 'blood in the streets'?

After a buoyant 2009, it seems that the predictions of the major players have come true for 2010, with reinsurers continuing to face a softening of pricing and premiums in June and July this year. Willis Re’s earlier forecasts predicted for the first quarter of 2010 that ”a single poor quarter would not be sufficient to drive any general market turn” away from a further decline in reinsurance rates.

Others were inclined to agree, predicting that June and July rates would follow downward patterns set earlier in the year, with a further deterioration over the course of 2010. And it seems that despite the pressures of catastrophes in the first half of 2010, reinsurers have found that their forecasts have proven painfully accurate.

Many reinsurers may well have hoped that the host of major catastrophes at the beginning of the year—specifically the Chilean earthquake, storm Xynthia in Western Europe, hailstorms in Australia and the Deepwater Horizon disaster in the Gulf—would help prompt a turn in pricing, or at the very least encourage a little greater buoyancy. Unfortunately, and despite what John Charman, president and chief executive officer of AXIS Capital, called “the unprecedented number of worldwide catastrophes” during the first half of 2010, it seems that such disasters have exerted little upward pressure on pricing.

Soft pricing persists

Reinsurance rates “continued to fall” for both property and catastrophe reinsurance in July, according to Guy Carpenter, and brokers and reinsurers across the board were in agreement. Validus Holdings indicated that “reinsurance prices were down” in June and July; while Willis Re said that “the trend of price declines amid fierce competition continued”. And such a fall in pricing appears to be the case across virtually all lines and geographies, with only those directly affected by recent catastrophes registering any kind of upward movement. “Only a handful of loss-driven classes and territories showed any pricing stability or upwards pressures”, analysts at Willis Re said, with the wider global trend in reinsurance being towards a further softening of rates.

Declines have ranged across territories and lines, with MarketScout’s Market Barometer indicating price decreases of around four percent for the wider reinsurance market. Zeroing in upon specific lines, it is clear that more marked decreases are evident. Validus Holdings, for example, reported a 10 to 20 percent decline in the price of US property reinsurance, with figures from Aon Benfield painting a similar picture.

The latter’s outlook for catastrophe reinsurance meanwhile painted further falls in pricing of 10 to 20 percent—declines the broker termed “moderately more aggressive” than those at the January and June renewals. Other specialist lines, such as casualty and aviation, have likewise experienced a softening of pricing, with casualty reinsurance “flat to down 10 percent”, whilst aviation remained “essentially flat”, according to Guy Carpenter.

About the only two lines to have experienced a hardening of attitudes and pricing were the energy sector and catastrophe reinsurance in Chile. They bucked global trends thanks to the Deepwater Horizon disaster in the Gulf, which served to dent confidence in the energy sector and prompted something of a rethink regarding the pricing of energy business; and the Chilean earthquake of February 2010, which resulted in sharp rises in pricing of between 45 and 65 percent in Chilean catastrophe reinsurance, according to Aon Benfield. Localised price increases in Chile are unsurprising and look to be sustained as the threat of seismic activity is factored into reinsurance pricing.

Reinsurers extending cover on energy lines are meanwhile watching the insurance loss warranty market with interest, says Jeff Consolino of Validus Holdings, where premiums have risen by as much as 40 to 60 percent, particularly for deepwater rigs. There are expectations that such price rises may be passed on to the catastrophe reinsurance sector. That these rises occurred was not unexpected—that the number of global catastrophes at the start of the year had such a limited impact upon pricing trends, perhaps a little less so.

Premiums and renewals

Premiums varied across the reinsurers, with some reporting a rise in premium returns, but most recording a fall. Patrick Thiele, president and chief executive officer of PartnerRe, indicated that “premium growth will be difficult in this environment of restrained exposure growth”. Standard and Poor’s likewise predicted that there would be a “continued softening in premium rates for most reinsurance lines”, limiting opportunities for profitable growth. On property and catastrophe lines specifically, PricewaterhouseCoopers reported that June and July premiums had declined by between 10 and 15 percent, with such falls almost certain to hit Bermudian reinsurers with books dominated by the two lines.

Meanwhile, and despite what Aon Benfield described as longterm decreasing demand for reinsurance, renewals proved “firmer than expected” in June and July according to Guy Carpenter, in part thanks to predictions of an active hurricane season to come in the third and fourth quarters of this year. Such positive renewal behaviour suggests that the market is taking advantage of depressed pricing and premiums to renew reinsurance contracts as the prospect of a stormy hurricane season and year end looms. Looking forward in the short term, however, Aon Benfield Bermuda predicts that “few significant programmes” will renew “during the balance of the year”, and it seems that interest in June and July may well not be mirrored at the next round of renewals.

Supply still driving down pricing

Competition remains one of the key factors driving down reinsurancerates, with a host of players citing excess market capacity as a key downward pressure on pricing and premiums.

In Bermuda, there continues to be “so much capital and capacity”, according to Joe Rego, president of Aon Bermuda, that the competitive environment has meant further price declines in 2010. Additional market players are unlikely to change what Guy Carpenter calls “supply-driven, short-term price reductions”. And despite the addition of new players, it seems that Bermuda may have deliberately lost some of its 36 percent global market share in the last year as, in the words of Rego, “global competition for premium dollars has heated up”. Only further major global catastrophes or some significant mergers and acquisitions within the industry look likely to lead to any substantial hardening of pricing in Bermuda and beyond.

Further pressure on pricing and premiums is being exerted by a “reduction of exposure because of the economic downturn and cedants continuing to increase retentions”, according to credit rating agency A.M. Best. Other brokers are in agreement, with Aon Benfield’s Bryon Ehrhart saying that “demand is not growing at a pace equal to supply”. It seems that until wider economic conditions improve and the confidence of cedants is restored, such issues will continue to drive down the price of reinsurance. In the meantime, many of the reinsurers are repurchasing shares to reduce their exposures until prices turn a corner—Europe’s Munich Re is buying back around five percent of its share capital this year.

Blood in the streets?

Looking forward to the second half of 2010, brokers have no clear picture regarding the shape of future conditions. The depletion of catastrophe budgets in the first part of the year may help to relieve the downward pressure on pricing, but “low investment returns, diminishing reserve releases, inflation concerns and Solvency II” continue to mount as countervailing pressures upon any improvement in pricing, according to Willis Re. The question is how will pricing turn that stubbornly elusive corner?

A number of brokers are predicting that only mergers and acquisitions will encourage any hardening of attitude. Tom Bolt of Lloyd’s said that “CEOs won’t move prices until they see blood in the street and have the concern that some of it might be theirs”. Casualties would certainly help to ease competition, but it is perhaps the loss of individual brokers’ own blood that will act as the greatest catalyst for a turn in pricing.

Meanwhile, soft pricing “keeps the prospect of mergers and acquisitions on the front burner for Bermuda market insurers”, Aon Bermuda’s Rego said, with Aon Benfield Analytics predicting that “losses in the first quarter will likely drive reinsurer consolidations more than reinsurer pricing strength”. A rise in catastrophe activity in the second half of the year—predicted by some—would help, nudging pricing upwards, with the impact likely to be greater if the catastrophes affect leading lines and geographies. It seems that some analysts are already predicting, without “wishing to tempt fate”, that an active hurricane season could well mean that the “market upturn may arrive sooner than expected”, in the words of Wills Re’s Peter Hearn.

It seems that a stormy end to 2010 might be just what the industry needs. For some reinsurers, it can’t come soon enough.