New Report Finds that U.S. Reinsurance Market Segments Follow Divergent Paths after Record Storms
New York, January 6, 2006 – Guy Carpenter & Company, Inc., the leading global risk and reinsurance specialist and a part of the Marsh & McLennan Companies (NYSE: MMC), has published U.S. Reinsurance Renewals at January 1, 2006. This annual review of pricing, retentions and limits, capacity and terms and conditions covers the property, casualty, marine and offshore energy, accident and health and life and annuity lines of business. The new report found that overall, the record storm activity of 2005 resulted in major price changes in property and marine lines, while casualty and accident and health lines were mostly spared.
The report noted that in 2005, 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. In addition, if not for the insured losses incurred overwhelmingly by Hurricanes Katrina, Rita and Wilma, the primary insurance industry would have reported a spectacular underwriting gain of $37.7 billion for 2005. A combination of successful risk transfer to the reinsurance market and high profitability enabled the insurance industry to sustain 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.
“On an industry-wide basis, it’s fair to say that the catastrophes of 2005 were an earnings event, not a capital event,” said Sean Mooney, Guy Carpenter’s Chief Economist. “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 onto insureds.”
Major findings of the January 1, 2006 renewals report include:
- Property The storms of 2004 and 2005 had a major effect on property reinsurance renewals, though not via a capacity shortage. The impact was mostly indirect, as key market players insurers, reinsurers, modelers, rating agencies and regulators recognized that the existing viewpoint grossly underestimated both the frequency and severity of North Atlantic hurricanes. Reinsurers pressed for and, in some cases, received substantial rate increases on property lines at January 1, 2006 renewals.
- Casualty Neutrality was the dominant theme in casualty renewals, with no pronounced effect of the storms on rates or capacity. Reinsurers tended to approach various casualty lines based on rate and claims trends particular to each line. In some instances, such as excess casualty, reinsurers looked to raise rates on the basis of the cost of the increased capital that they now need to protect their security ratings.
- U.S. Marine and Offshore Energy The 2005 storms continued to put great pressure on the marine and offshore energy reinsurance markets. Several companies have already exited this class of business, and those that remain will likely respond with a combination of price increases and a focus on retention levels.
- Accident & Health The life and personal accident and disability markets have been hardening, with the medical segment remaining largely stable in 2005 and for the January 1, 2006 renewal season. Pricing for life and personal accident catastrophe reinsurance continues to be driven by both the type of coverage sought and the concentration of exposures within a given portfolio. Negative profitability trends due to higher incidence, decreased terminations, lower investment income and other factors have resulted in disability rate increases and tightening contract terms. The consistent state of capacity has helped create a relatively stable and competitive pricing environment for medical reinsurance.
- Life & Annuity The life reinsurance markets hardened in 2005, with increased expenses, adverse lapse results, slowing improvements in mortality rates and a limited base of retrocessional reinsurance capacity all playing a role. Legacy reinsurers are exercising increased pricing power as the majority of in-force business ceded is now concentrated in the top five life reinsurance companies. At the same time, the hardening market has attracted several new entrants that are competing purely on capacity, rather than a traditional full-service approach.
Copies of the report, U.S. Reinsurance Renewals at January 1, 2006, are available for download at www.guycarp.com.
Guy Carpenter & Company, Inc. is the world’s leading risk and reinsurance specialist and a part of the Marsh & McLennan Companies, Inc. Guy Carpenter creates and executes reinsurance and risk management solutions for clients worldwide through 2,600 professionals across the globe. The firm’s full breadth of services includes 16 centers of excellence in Accident & Health, Agriculture, Alternative Risk Transfer, Environmental, General Casualty, Investment Banking*, Life & Annuity, Marine & Energy, Professional Liability, Program Manager Solutions, Property, Retrocessional, Structured Risk, Surety, Terror Risk, and Workers Compensation. In addition, Guy Carpenter’s Instrat® unit utilizes industry-leading quantitative skills and modeling tools that optimize the reinsurance decision-making process and help make the firm’s clients more successful. Guy Carpenter’s website address is www.guycarp.com.
