Benfield: Return to calm for reinsurers

Despite a severe mid-year US capacity crunch, the property reinsurance market has recovered rapidly from the record losses of 2005, and by the end of 2006 it was a case of “no wind, no problem”, according to a report published today by Benfield.

“After KRW [hurricanes Katrina, Rita and Wilma] you had people clamouring for coverage whereas this year it was a far more relaxed process,” said Benfield chief executive Grahame Chilton. “What we're seeing now is that some of the people have had the opportunity to readjust their books, taking care of more volatile areas, writing less in certain areas, they've also had a chance to review their reinsurance requirements and therefore to a certain extent the market is a far calmer market.”

The report finds that although post-Katrina market discipline has not evaporated, competition in both property and casualty is being fuelled by the drive for greater diversification, the appetite of newcomers and the determination of established reinsurers to protect market share.

At year end renewals, catastrophe rate increases in loss affected areas of the US were steep but less than buyers had feared, while elsewhere reinsurance prices generally gave up the gains seen last year.

“A lot of people believed the increase would be even larger [for US property catastrophe] – in line with the Florida market – but some of the over capacity, the chance to readjust one's book and new solutions meant the pricing at 1/1 was not as high as what happened in June 2006,” explained Chilton.

Looking at the prospect of continued diversification among reinsurers, a tactic that has caused increased competition and downward pressure on prices in certain lines, Chilton said: “Some people will go for diversification and then wish they hadn't because they go into areas they don't know and don't understand – and then there will be others who will stick to their knitting.”

The growing influence of alternative capital is one of several key market issues analysed in the report. It concludes that the increasing ease with which capital markets vehicles (such as sidecars and catastrophe bonds) can participate in the reinsurance market may have longer-term implications for the reinsurance cycle. According to Chilton, “Instead of having enormous peaks and troughs they should have a more gentle oscillation to them.”

Chilton believes there is still opportunity in the market for new investors. “For high quality teams and high quality profit hunters there are always opportunities. There aren't as many easy solutions to it but I think in certain lines there is undercapacity and therefore there is the need for more capacity still.”