Softening in reinsurance ceased due to hurricanes

A.M. Best Co.’s expectation that significant price increases are mainly limited to business lines affected by the U.S. hurricanes, whereas European treaties (which account for approximately two-thirds of the renewable portfolio) saw relatively stable premium rates, has been confirmed by European-based global insurers recently published January 2006 renewals. This stability was also partially a result of a higher net retention by primary insurers that, according to A.M. Best, helped to ease the pressure and accept higher reinsurance costs. A.M. Best believes that the significant losses from Katrina, Wilma and Rita incurred by reinsurers have helped temporarily halt the downward trend in the underwriting cycle that seemed to be taking place just prior to 2005’s catastrophic storm season. However, A.M. Best expects that price competition is likely to resume if underwriting results in 2006 turn out to be favourable, as capacity for most lines of business remains readily available. The substantial improvements in premium rates, limited to loss-affected business lines comprised mainly of offshore marine and property catastrophe, are insufficient to compensate for the losses incurred by reinsurers in 2005, according to A.M. Best. In response to both the severity of Katrina and the expectation that there will be a future increase in frequency of catastrophic weather events, reinsurers are reassessing their internal models and their aggregate exposure. In some instances, this has already led to a reduction in limits by reinsurers. A.M. Best says that the hurricane seasons of 2004 and 2005 have highlighted the unpredictability and volatility of natural catastrophe reinsurance, which in turn raises questions about reinsurers’ ability to achieve sustainable earnings an indicator as to whether a reinsurer’s balance sheet is likely to improve. As a consequence, A.M. Best is placing a much stronger emphasis on how reinsurers evaluate and control their exposure to world-wide natural catastrophe risks, although the credibility of a reinsurer’s risk management practice can only be fully tested when such an event occurs. A.M. Best has also revised its capital requirements for underwriting such risks and expects rated companies to maintain certain capital levels even if a second probable maximum loss occurs. A.M. Best believes that the maintenance of the current financial strength of the European reinsurers will largely depend on their ability to generate earnings supportive of their risk-adjusted capitalization through a period of more frequent and more severe natural catastrophe claims. Reinsurers, according to A.M. Best, need to adapt both their underwriting strategies and their risk controls to this changing landscape. Also, if underwriting results continue to be extremely volatile, A.M. Best says that investors may be reluctant to provide additional capital, hence also negatively impacting the financial flexibility of the reinsurance sector.