Monday, 20 February 2012
Year-end renewals suggest global programmes will be hit by Thai and Japan losses
Reinsurers restrict BI coverage as impact of 2011 losses felt but loss-free programmes remain flat. Stuart Collins reports on the big themes from the year-end reinsurance renewals.
Devastation following Japanese earthquake and tsunami
Buyers of catastrophe exposed global programmes and business interruption cover face lower limits, higher prices and requests for more information, following a tough reinsurance renewal in January.
Reinsurers, stung by near record catastrophe losses in 2011, demanded higher prices in loss-affected areas. However, despite depressed financial markets and changes to catastrophe models, a continued excess of capacity meant that rates for many property and catastrophe lines were flat, or even falling.
The January renewal period is a key time for insurers in Europe as they buy their annual reinsurance protection. According to Aon Benfield, the world’s largest reinsurance broker, $80bn of reinsurance is renewed in January, more than half the total annual premium of $145bn. Almost 90% of European reinsurance is placed in the last weeks and days of December, while 50% of US business is also renewed.
This January saw an acceleration of the trend seen in 2011. Reports from the three largest brokers, Aon Benfield, Guy Carpenter and Willis Re, showed that rate reductions were less frequent and that reinsurers continue to achieve rate increases in a growing number of regions.
In particular, reinsurers learned lessons from losses in 2011 that are having implications for international reinsurance and insurance programmes.
Last year was ‘unprecedented’ for catastrophe, according to Aon Benfield. It generated a record total catastrophe loss of $143bn, leading to a $100bn bill for insurers, the second largest insured catastrophe loss on record after 2005, the year that included Hurricane Katrina.
Some 50% of the insured loss has been born by reinsurers, according to Willis Re.
Other than US tornado losses, the earthquake in Japan and storm damage in Denmark, a significant number of catastrophes were in non-peak zone countries in Asia Pacific. Flooding and cyclone losses in Australia, earthquakes in New Zealand and flooding in Thailand all resulted in surprising losses for reinsurers.
Coming late in the year, the losses in Thailand—which are estimated at between $10bn and $20bn—had an impact on the renewal, according to Dominic Christian, co-Chief Executive Officer of Aon Benfield. “There were no large wind or quake losses in 2011, but reinsurers took the opportunity to reshape their catastrophe portfolios,” he said.
Reinsurers were shocked by the losses in Thailand, said James Vickers of Willis Re.
UK supermarket chain Tesco closed some 40 out of almost 900 stores in the country because of the floods while the Big C hypermarket chain owned by French Casino Group was also affected. Production at car manufacturers Honda, Toyota, Nissan and Ford, and at computer hard-drive companies Western Digital and Seagate were also hit.
Last year’s catastrophe losses have permanently changed reinsurers’ view of cat-exposed emerging markets, said Mr Vickers. “They are willing to give cover in emerging markets, but only for as long as they are paid and know what they are getting into. Reinsurers will now want far more transparency,” he said.
Both the earthquake in Japan and flooding in Thailand revealed how little reinsurers understand about concentrations of catastrophe exposed commercial business and business interruption exposures.
Insurers were caught out by the losses in Thailand and had underestimated just how many corporates were operating in the country, said Tim Pritchard, head of the UK Risk Management Property/Casualty Placement Practice at Marsh in London. “Thailand has not been modelled by insurers as a catastrophe zone and, where they would usually take an aggregate position, many gave cover at full value,” he said.
Last year’s catastrophe losses were a wakeup call for insurers that they need to model correctly and understand their aggregate position, said Mr Pritchard. As a result there will be lower limits on offer under some global programmes and insurers will request more information on exposures in emerging markets, he said.
Reinsurers, keen to diversify their portfolios, had offered favourable pricing to non-peak zone risks (those outside the US, Europe and Japan), however the January renewal signalled a change in attitude among underwriters. Many reinsurers have established higher minimum rates on line for catastrophe business in some non-peak zones, said Aon Benfield.
For example, the retro reinsurance market is restricting cover in non-peak zones and emerging insurance markets, said Mr Vickers. “Retro reinsurance is now more expensive and limited to named perils and named territories. Retro for emerging markets is no longer being given away for free.”
Multi-national insurance programmes will have to go the same way as reinsurance treaties, said Mr Vickers. “Global coverages will get more difficult for buyers to purchase. Insurers and reinsurers will want better data and modelling. They will also want to charge for the cover, so global cover will cost more.”
Corporates with loss-affected accounts are already seeing significant increases. Some businesses with Thai exposed programmes have experienced a 25% increase and have had loss limits introduced, said Mr Pritchard.
Overseas exposed accounts are getting tougher, but property and casualty mid-market and corporate business in the United Kingdom, for example, are still seeing reductions at renewal, said Pritchard. “Currently rates for European and UK exposed large commercial business are relatively stable.”
Reinsurers have also grown nervous over business interruption and contingent BI after suffering losses for the Japan earthquake and Thai floods.
Reinsurers have begun to apply more restrictive clauses for BI and CBI in emerging markets, said Mr Vickers. “It is all about transparency. At renewal reinsurers were applying sub-limits and are pressing for more information on what insurers are offering..
As reinsurers push for restrictions, primary insurers will have to adopt the same approach or run the risks net. It will become harder for buyers to get CBI cover.”
Reinsurers have warned that they are looking closer at CBI, said Mr Pritchard. “CBI cover for unspecified suppliers could become more challenging to purchase and insurers will require more information so that they are able to model known suppliers.
“Cover will be available, but insurers won’t give CBI cover away for nothing. They will look to underwrite it specifically and will expect a premium.”
Reinsurers have not reacted to last year’s near record losses with market-wide increases, according to James Vickers of Willis Re. Instead they differentiated between accounts and lines of business at renewal, adjusting rates for loss affected and poorly modelled catastrophe business, said Mr Vickers.
For business that was not affected by last year’s losses and that showed good data, the January renewal was calm. There was a modest uptick in prices for European wind exposed reinsurance, with very few rate reductions being given by reinsurers, said Vickers.
The reinsurance renewal season has been a ‘mixed bag’, according to Hartmut Mai, board member of Allianz Global Corporate & Specialty (AGCS). “We’ve seen a smooth renewal for established business with proven track records while portfolios with exposures to cat risks are under serious scrutiny.”
“For example, where there is a stable loss record—say in parts of the liability market—I’d say it’s a more or less stable market, but if you look at loss-prone or nat cat exposed risks—particularly in respect of BI exposures—capacity is harder to find at the right terms and conditions. This is also true for energy and financial lines risks where reinsurance capacity has been much tighter.”
The Thailand floods have been a wake-up call to many reinsurers and this is being felt at the primary level for these types of risks, said Mr Mai. “But despite a reduced appetite in cat markets, there’s still plenty of competition among insurers at the primary level for better quality risks—but leadership capacity of good quality is a key factor which is more restricted,” he said.
“Although there’s plenty of capacity for some business, there’s not always plenty of high quality capacity. This affects insurers and clients alike, especially in the primary market for insurers in leadership positions or covering long tail risks such as in the pharmaceutical business or indeed where clients face accumulation risks in one area.”
In response to higher catastrophe reinsurance costs, direct insurers may retain more risk rather than pay more for their cover, said Mr Pritchard. “Direct insurers will either have to offer lower limits or buy facultative reinsurance cover where they are most concerned about exposure. Some carriers have been taking advantage of cheaper facultative reinsurance for some time, but it is getting harder to come by. As a result, there is likely to be a squeeze on limits and price for cat exposures direct insurance.”
“The next quarter is expected to be more challenging,” said Mr Pritchard. “Pure UK business is unlikely to move much, but we expect to see movement for global business. Critical cat exposed business will see substantially more pressure on price and reduced limits.”
However, buyers are not in a position to pay more for their insurance, given wider financial constraints, he said.
“Reinsurance is just one factor on the supply side—albeit very influential,” said Mr Mai. “You can’t ignore the demand side and here clients are under pressure. We need to balance the need to get commercial rates over the long term with terms and conditions which support our clients here and now. “
On 1 April the UK ushered in a new regulatory regime with two new bodies, the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA), replacing the Financial Services Authority (FSA) that was established in 1997 to replace the numerous regulatory bodies that previously supervised the country’s financial services industry.