Storms wreak havoc on property, marine lines pricing

The storm season of 2006 will likely not result in a hard market along all product lines as would normally be expected after major catastrophe losses, according to a January 2006 Guy Carpenter & Company report entitled ‘U.S. Reinsurance Renewals.’

“On an industry-wide basis, it’s fair to say that the catastrophes of 2005 were an earnings event, not a capital event,” Sean Mooney, Guy Carpenter’s chief economist, observes. “It is unlikely that we will see a hard market across all primary lines of business, which one would normally expect to follow losses of this magnitude. As a result, many primary insurers have not been inclined to accept rate increases across the board for reinsurance protection, since it would be difficult to pass these costs on to insureds.”

Published annually, the report is an “annual review of pricing, retentions and limits, capacity and terms and conditions covers for the property, casualty, marine and offshore energy, accident and health and life and annuity lines of business.”

“Roughly half of the total insured losses, which reached an estimated all-time high of more than $50 billion, were absorbed by the global reinsurance industry,” the report notes.

Guy Carpenter – the global risk and reinsurance specialist, a unit of Marsh & McLennan Companies – points out if Hurricanes Katrina, Rita and Wilma had not struck “the primary insurance industry would have reported a spectacular underwriting gain of $37.7 billion for 2005.”

However, the report also points out that the P&C industry has successfully transferred sufficient risk to the reinsurance market allowing profits to stay positive.

As a result, Guy Carpenter says the insurance industry has “sustained the largest loss in its history, with 2004 and 2005 marking the first years since 1978 that the U.S. insurance industry as a whole has been able to post an underwriting profit.”

The report found that the storms of 2004 and 2005 had a major effect on property reinsurance renewals, with the majority of the impact being indirect. The 2005 storms also placed great pressure on the marine and offshore energy reinsurance markets. The remaining companies that have not left this class will likely respond with a combination of price increases and a focus on retention levels, the report states.