And, while underwriters are clearly concerned about exposures that are very difficult to model such as contingent business interruption as shown by the Thai floods, there was no knee-jerk reaction shown to date by the reinsurers, so far at least.

The insurance equity analyst team at the UK arm of US investment bank KBW hosted a conference call on the January renewal season earlier this week with experts from across the industry.

The analysts said that their impression was that a globally diversified portfolio should have renewed with risk adjusted rates up 1–4% this January.

The KBW team said that it was generally agreed that most catastrophe business was easily placed at the 'right' price and that this was not a renewal season characterised by a dearth of capacity.

Casualty business remained surprisingly weak to the speakers with no rate increases outside of UK motor, added KBW.

"The good news was that the eurozone crisis was not a meaningful feature of business fundamentals. The bad news was that the Thai floods rounded off a year of no underwriting profits (broadly put) and no meaningful rate changes to show for it," stated the KBW summary.

The analysts said that European windstorm business saw rate increases of about 3%, but the changes ranged from -10% to +35% depending on loss experience. US catastrophe rate increases were 7–13% while Asian catastrophe rate movements were 'highly loss-dependent,' stated KBW.

"Casualty rates were broadly unchanged, apart from in UK motor where the replacement of final schedule payments with period payment orders on liability business continues to generate reserving uncertainty and rate increases of 20–30%," noted the analysts.

KBW reported that marine business continues to see 'sizeable' energy rate increases after losses such as from the Gryphon oil vessel in February, but more limited changes in hull and cargo. In aviation, major airline rates fell another 7% but other general aviation renewed more flat.

Retrocession rate increases were apparently significant, with a 25% increase in deductibles and another 15% increase in rates, according to KBW. "Those generally reliant on retrocessional cover were judged to be at a disadvantage and were typically seen increasing retentions to maintain the absolute amount of premium spent," added the analysts.

The KBW team said that no speaker found the eurozone crisis a topic for renewal negotiation. But they added that they believe there was 'implicit reference' to capital markets risk and queried why longer tail rates are not adjusting sufficiently for the current low yield environment.

The experts gathered by KBW agreed that the reinsurance industry had done well to absorb the 2011 natural catastrophes as an 'earnings event'. The analysts said that this, starting from a base of excess capital and confidence in reserve adequacy, explains why KBW is cautious about the ability of the reinsurers to impose meaningful, widespread rate increases.

The experts said that the losses from the Thai floods contained an ongoing risk of creeping estimate increases. "Whilst Japan and New Zealand were better-modelled losses, we believe they offer a similar risk given their size and complexity. Thailand was also referred to as a classic example of damage that can be incurred from unmodelled losses, which we can think forms part of the 'gratuitous cover' that some bemoaned ten years ago," stated the analysts.

"We think that some of the value of unmodelled risks is exactly why policyholders buy (re)insurance in the first place. That said, the underwriting view was that the Thai floods have exposed some areas of exposure that are potentially unmodellable, such as contingent business interruption, or at the very least grossly under-priced within the current structure," they added.

"The general consensus was that the Thai floods have been a wake-up call to underwriting behaviour that did not affect January renewal rates dramatically but have re-opened questions about exposure and the modelling of losses," concluded the KBW note.

Broker Willis Re said that because the majority of the 2011 catastrophe losses arose from unmodelled or inadequately modelled perils or territories, reinsurers pressed for greater transparency of data, or sought to sub limit their exposures to manageable levels.

In its latest renewals report entitled Change is in the Wind Willis stated that 2011 was the second worst catastrophe year for the market on record, with insured losses in excess of $100bn and reinsured losses over $50bn. Because of this there is 'work to be done' by the industry to better understand the nature of the natural catastrophes that caused these 'surprise' losses, stressed the broker.

Willis Re said that its early analysis showed that the market is increasingly segmented, with rate movements being driven by individual loss history and 'perceived exposure movements', rather than by an overall blanket increase. The report found that rate movements are largely being driven by the immediate 'earnings challenge' of 2011 rather than the classic capital shortage of past hard market rating turns.

The report states that overall, at the end of the third quarter of 2011, capital levels in the global reinsurance industry were only marginally down from the start of the year. "If 2012 underwriting results return to profitability it is unclear if a sustained market hardening will be seen," noted the broker.

The key to a sustained market hardening is more likely to be linked to the current economic turmoil, particularly in the eurozone, as it hits the capital bases of reinsurers, it added.

James Vickers, Willis Re Chairman of International Business, said: "After a bruising year of natural catastrophe losses, many outside the traditional key catastrophe zones, reinsurers have largely reacted as anticipated with differentiated rating approaches driven by individual client and territory results. With the exception of a few problem long tail classes reinsurers have concentrated on increasing prices for natural catastrophe exposed covers which is leading to wide pricing differences by class."

Other renewal trends highlighted in the report include:

US January 1, 2012 renewals are moving up in line with increases indicated by mid-2011 renewals but with greater differentiation by client and portfolio reflecting both individual results and exposuresImprovements in pricing for natural catastrophe risks have attracted fresh capital to the industry, primarily through specialised investment funds, rather than capital increases for existing market participantsThe new RMS 11 model for European Wind produced volatile results but it was released too late to be taken into consideration for the January 1 renewals; andDespite the reasonable levels of capitalisation, the investment income outlook for all reinsurers is 'increasingly bleak'. Returns available continue to fall and these lower returns have still not fed through to the rating of long-tail classes.

Peter Hearn, Chairman, Willis Re, concluded: "The poor results of 2011 appear to be largely an earnings event, though insurance company managers are concerned that, should 2012 perform in a similar fashion, they will be facing capital issues in 12 months' time. This has muted the traditional response of buyers to price increases of reducing reinsurance purchases. However, it has further highlighted the margin pressure between increasing reinsurance prices and the ability of insurers to obtain commensurate price improvements on their original policies at a time of weak economic growth."

In a separate report published just before Christmas, Willis Group said that the Protection & Indemnity (P&I) market managed to deliver a 'blockbuster' financial performance last year, but when faced with 'fragile' investment income and increased claims in 2011, would propose rate and deductible increases for the 2012 renewal.

This would lead to inevitable tension and conflict between insurers and their customers in this market as ship operators sought to cope with tough economic conditions by cutting costs, said the broker.

Willis said that a benign claims year in 2010/11 in which paid claims were down by over 11% against 2009/10 combined with stable income levels produced an overall market underwriting surplus of 3%.

The broker said that this may appear modest but described it as significant because it represents the highest underwriting profit ever recorded by the market. A 'respectable' 6.5% investment return, which, combined with the positive underwriting result, propelled free reserves to a new record level at 20 February, 2011, representing a 22% increase from the position at the end of the previous year, stated the broker.

Despite this good news for ship owners, Willis reported that next year's renewal will see a higher average rate general increase of 4.25% versus the 3.42% average rise in 2011. "The increases have been triggered primarily by the dramatic fall and subsequent fragility of world equity markets since August 2011, and increases in claims and their volatility in the current policy year," it stated.

This will not come as good news to ship operators, which face one of the most challenging economic periods in a generation, with many of them being forced to implement austerity plans, said the broker. As the 20 February, 2012 renewal approaches, the pressure to cut costs is likely to create tensions between buyers and underwriters, it predicted.

Ben Abraham, Head of Willis P&I, said: "When faced with decisions that potentially affect the survival of their companies, the pressure on most ship owners will be at least as great as that on their underwriters. Despite the relatively modest increases proposed, the 2012 renewal has all the early signs of being confrontational.

"It continues to be a notable feature of the general increases that they do not necessarily reflect the underwriting performance of each individual club. While the range of figures announced is modest, with two percent variance across clubs able to write 'large ships', there is a 36% variance between the best and worst underwriting results. The most obvious implication of the variance is that, rather than making the assessment purely on technical underwriting requirements, competitive market pressure is a major influencing factor."

Please sign up here to our full-time mailing list to ensure that you receive our weekly newsletter.

• More Catastrophe News
• More D&O News
• More Insurance News
• More Property News
• More Reinsurance News