Rates fell 10% in 2008, says Guy Carpenter report
Catastrophe reinsurance rates declined for a second consecutive year, with price competition intensifying as a result of abundant capital, relatively low catastrophe losses, and strong profitability, according reinsurance broker Guy Carpenter.
Globally, rates dropped by ten percent on average in 2008, compared with six percent in 2007, the broker said in its annual World Catastrophe Reinsurance Market report.
“The big story of 2008 is not catastrophe losses, which have been moderate, but rather the meltdown of the subprime mortgage market and the subsequent credit crunch,” said Peter Zaffino, president and chief executive of Guy Carpenter. “While insurers and reinsurers suffered few ‘direct hits’ from the mortgage crisis, investment losses have put pressure on insurers and reinsurers to maintain solid underwriting results. The subprime crisis also has begun to penetrate the regulatory environment, which may spill into the insurance and reinsurance sector and lead to further changes in capital adequacy requirements.”
He added: “We continue to see a convergence of capital markets and reinsurance. With instruments such as catastrophe bonds and sidecars playing an increasingly prominent role, we would expect to see a rapid and substantial inflow of capital following the next mega-catastrophe. This added market elasticity should eventually help temper cyclical swings and tame the peaks we have seen in the past in hard markets.”
According to the report, North America experienced the most substantial drop in catastrophe reinsurance rates, declining by 16 percent in 2008. The Asia/Pacific and European regions declined at a slower pace – six percent and five percent, respectively.
Worldwide, insured/reinsured catastrophe losses in 2007 totaled $27.6 billion, higher than the relatively modest losses of $16.8 billion in 2006 but still well below the average loss of $37 million over the past ten years.
“The decline in rates, coupled with investment losses, has resulted in some strain on reinsurer profitability,” said Chris Klein, global head of business intelligence at Guy Carpenter. “After peaking in 2006 and declining slightly in 2007, profitability dropped substantially in the first half of 2008. Continued volatility in the investment markets may help to underpin the necessity for sound underwriting and steady the decline in pricing as we head towards the January 1, 2009 renewals. Overall, despite a number of pressures, the industry remains in a strong profit position.”
The report identified climate change as a development that could present substantial opportunities for primary carriers and reinsurers, as they seek to expand cover for 'green' exposures on both the property and liability fronts. In addition, the development of more advanced flood models may lead to an expansion of cover for this category of natural peril risks.
