Report: Reinsurers See Lower Loss Activity, Market Support

Reinsurers have seen more positive results in the first quarter of 2012 than in the previous two years.

“Lower levels of loss activity in both the U.S. and International markets, and a gradual improvement in rating levels seen in the primary market, have been overshadowed by reinsurers’ disappointing 2011 result,” found a Willis Re report, “Measured Response.” “Despite the market showing signs of positive development, most reinsurers are hesitant to increase their portfolios, preferring to focus on managing underwriting volatility and conserving capital whilst waiting for signs of further improvement.”

Also, “some primary buyers are reluctant to manage increased reinsurance costs through reduction in purchases and are restructuring their programs to maintain retention levels. This trend is not being seen in larger U.S. primary companies that are seeing a continuing increase in property cat retentions.”

Reinsurers “are taking a highly segmented and increasingly disciplined approach to terms and conditions, and are not seeking to apply blanket rate increases. This is leading to wider variations in rate movement by territory and class,” said Peter Hearn, Willis Re chairman.

Other findings in the report include:

• Thailand’s floods have caused reinsurers to seek greater transparency and control, particularly over contingent business interruption. The loss’ technical and psychological impact on the global insurance industry will outweigh the financial loss for years.
• Reinsurers are applying tighter limits on natural perils, including lower event limits on pro rata treaties.
• In an improving rating environment, new capital is drawn to the global insurance industry. But starting companies post-major events is falling out of favor. Investors now are concentrating on accessing the purest forms of (re)insurance risks through specialist funds and other structures.
• Mergers and acquisitions remain active, despite the uncertain economic backdrop and challenge of low valuations.

“The global reinsurance industry is largely reacting in a measured and logical fashion,” Hearn said. “Falling investment income, allied with increased loss trends on long-tail business, remain key to a broad and more defined future market hardening in the absence of a major catastrophic loss.”