January P/C Reinsurance Renewals Flat or Up Slightly: Towers Watson

January 1 renewal rates for U.S. property/casualty reinsurance premiums showed firming with changes from -5 percent to +5 percent on an overall basis, with loss-affected property catastrophe business up considerably more.

That’s according to reinsurance broker Towers Watson, which cites severe event losses, the impact of the Risk Management Solutions (RMS) version 11.0 hurricane model, low interest rates that could impact earnings and overall competitive pressures as affecting the pricing.

Towers Watson characterizes the renewal period as being “on the firming side of stable.”

James Hole, a managing director in Towers Watson’s Brokerage business, noted that over the past two years the industry has sustained nearly $150 billion of insured catastrophe losses. “The key issue is that many of the largest losses occurred in areas where the industry and modeling firms thought of as less exposed to catastrophe risk — for example, the flooding in Thailand — which raised significant concerns on how models are viewed as well as the amount of risk the industry is taking on,” Hole said. “This is also very much the case with tornado losses in the United States, which resulted in astonishing levels of insured losses.”

Hole also noted that four of the 15 costliest global catastrophes occurred in the past year: the earthquake in Japan (approximately $30 billion in insured losses), the Thailand flood (approximately $15 billion), the earthquake in New Zealand (approximately $11 billion), and the combined April and May U.S. tornadoes (approximately $13 billion).

“The industry, however, is extremely well capitalized, so 2011 did not prove to be a capital event for most reinsurers, with aggregate capital levels remaining strong,” said Hole. “Still, interest rates remain low, and they are having a material effect on reinsurer investment returns. As such, we expect reinsurers to continue to engage in disciplined underwriting practices and push rate levels to improve results.”

The key factors contributing to property catastrophe prices included severity of loss and layers affected, the frequency of events and regions of exposures, and the magnitude of the RMS version 11 hurricane model, which was introduced in February 2011.

As a result of RMS version 11, several companies saw their probable maximum loss (PML) more than double. As such, some reinsurers fully applied the RMS loss analysis, while others only partially applied it, according to Towers Watson, which said this led to pricing discrepancies among the reinsurers more so than in previous renewal cycles.

Additionally, the competitiveness of expiring prices, along with the size of the catastrophe limit and the level of attachment, were other drivers for property catastrophe renewals.

“We found many companies did not choose to buy additional cover in response to RMS version 11, as exposure change and actual losses drove prices to a greater degree than the model change, with reinsurers using blended results and proprietary PML approaches,” said John DeMartini, leader of Towers Watson’s Catastrophe Risk Management practice and U.S. Property Reinsurance specialty practice. “Underwriters, by and large, used last year’s quotes and, in many cases, even for loss free programs, pushed for increases in excess of 20 percent.”

With the primary focus on the property catastrophe market, casualty renewals were less in the spotlight. Towers Watson said that, for the most part, reinsurance rates were a point or two to either side of flat. In some casualty lines, reinsurance companies kept pace with increased claim trends, benefiting from positive, original price increases on current underlying portfolios, one example being workers compensation — but only in select states.

“The supply for casualty insurance continued to remain relatively flat,” said Keith Harrison, managing director of Towers Watson’s North American Reinsurance operation in London. “The key concerns among both cedants and reinsurers were similar, including rate adequacy at the primary level, sluggish economic activity which continued to depress casualty rating bases, increasing frequency and medical inflation in the workers compensation market, the potential for systemic loss events and large extra contractual obligations (ECO) losses.”

From a third-party liability perspective, Harrison said rates were flat to down 2.5 percent, compared to January 2011 renewals. He added that umbrella reinsurance net premiums were also flat to slightly down, with appetites among onshore U.S. reinsurers still strong. He noted little change in structure or conditions.

Turning to professional lines, the core long-term group of reinsurers remains stable and, albeit apart from a few exceptions, there exists a “disciplined” softening of rates reflective of favorable experience.

Workers’ compensation catastrophe reinsurance pricing did soften slightly, although not as much as in 2011, with reductions reaching only 2.5 percent on average. Per-person exposed treaties, however, saw increases of up to 2.5 percent and reduced reinsurer appetite within the first $1 million of cover.

Towers Watson projects that supply and demand factors will continue to support a moderate shift in reinsurance renewal pricing trends and that several factors, both event- and finance-driven, could accelerate hardening market conditions. These include — but are not limited to — significant and/or unexpected wind, quake and convective storm losses; regulatory and/or legislative changes; a reignition of a global financial crisis; rating agency downgrades; and the exhausting of redundant reserves.

Towers Watson’s 2012 pricing outlook calls for stable pricing on casualty reinsurance, firming pricing on non-catastrophe exposed property reinsurance and continued firming on catastrophe-exposed property reinsurance.

DeMartini said that the release of A.M. Best’s supplemental rating questionnaire (SRQ) changes may pressure some reinsurance buyers to reconsider their approach to catastrophe risk management and reinsurance buying habits in 2012. As part of the SRQ, insurers are now requested to provide a view of their catastrophe risk, relative to that of the model output — regardless of the type or number of models used. There is also an increased level of transparency required.

“While we do have rates firming, as we have noted in our most recent Commercial Lines Insurance Pricing Survey, they are not keeping up with loss cost trends,” said Thomas Hettinger, sales and practice development leader for Towers Watson’s P&C Insurance Brokerage and Risk Consulting and Software business in the Americas.

“Accident-year results are continuing to deteriorate, and this could lead to additional reinsurance demand as companies look to stabilize their results,” added Hole. “Overall, we see flat demand for traditional coverage but strong interest in trying to manage net volatility as a result of both higher retentions and concerns regarding convective storm activity.”