Willis Re Sees Reinsurers Reacting as $48 Billion Losses Take Their Toll

The Willis Re’s 1st View Renewals Report for June/July 2011, entitled – “Mixed Messages“- estimates that “a string of natural catastrophes in the first quarter of 2011 has cost reinsurers in the region of 10 percent of their total shareholders’ funds at the end of December 2010.

This “exceptional” run of natural catastrophes has cost reinsurers approximately $48 billion and primary insurers around $86 billion, according to Willis Re, the reinsurance arm of global insurance broker Willis Group Holdings.

However, the report notes that “share buy backs have been scaled down and $1.2 billion of new capital has entered the industry through side cars and fresh equity as some reinsurers start to position themselves for possible reinsurance rate hikes,” which somewhat offsets the reinsurance losses.

There have also been some changes in the widely-used natural catastrophe models in the U.S., used by reinsurers, Willis Re noted, and there will be “new releases of European catastrophe models generating similar issues. The report highlights this as yet another challenge facing buyers as they seek to understand the impact of model changes on their capital management and performance strategies.”

Willis Re Chairman Peter Hearn commented: “Given all the variations in loss experience, model change, exposure change, structure change, capacity demand and geographical scope it is not easy to generalize about rate changes. The reinsurance market as a whole has reacted reasonably logically with a differentiated approach driven on a case-by-case basis.”

The Willis Re report concluded that outside of natural catastrophe classes, this differentiation in approach is clear with “property risk excess of loss pricing movements driven by individual experience and a continued softness in longer tail Casualty classes, notwithstanding concerns over inflation and stubbornly low interest rates.”

Willis Re’s report comes down on the side of those within the industry who believe that what it will take to drive a harder market could be “any event resulting in a further reduction of market capitalization.” The report also “offers some of the most likely triggers, including a major natural catastrophe or potentially, a more damaging series of medium-sized catastrophes, as well as a financial downturn or contagion arising from European debt issues.”

Willis Re also indicated that “some industry insiders feel that in the absence of clarity around the final implementation of Solvency II and the impact of regulatory equivalence in markets outside Europe, it is premature to discuss market overcapitalization, as the new capital requirements have not yet been adequately defined.”

Hearn summed up the latest renewal season as follows: “The reinsurance market remains in a state of uncertainty regarding its short-term future direction, but what is clear is that any turn in the market pricing cycle is unlikely to follow historic patterns. More sophisticated capital management techniques and greater transparency over profitable market niches are driving fragmentation of the cycle into territory- and class-specific cycles.”

Source: Willis Re

Topics Catastrophe Profit Loss Europe Reinsurance Willis Towers Watson