Reinsurance market in transition

$48 billion in losses at July 1 renewals deadline.

The July 1, 2011 reinsurance renewals revealed a market that is in transition, with reinsurers that are repositioning themselves following $48 billion (US) in losses over the past 16 months, according to Willis Re.

The company further estimates that natural catastrophes in the first quarter of 2011 have cost reinsurers about 10% of their total shareholders’ funds at the end of December 2010.

“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,” said Willis Re chairman Peter Hearn in a release. “More sophisticated capital management techniques and greater transparency over profitable market niches are driving fragmentation of the cycle into territory- and class-specific cycles.”

Willis Re’s June/July 2011 renewals report stated the key to a hard market is any event resulting in a further reduction of market capitalization. The report 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.

While the global catastrophe losses of 2011 have impacted reinsurers’ view of risk, the longer-term implications remain to be seen, according to Guy Carpenter & Company. This will come into sharper focus when recent event losses are fully realized and the industry reaches consensus on the integration of the model changes.

In the first quarter of 2011, the reinsurance sector’s dedicated capital position fell by 4.4% to about $165 billion (US), stated a media release. In the second quarter, reinsurance capital remained essentially flat and moderately down year-to-date.

“How the reinsurance sector’s capital position develops over the remainder of the year is heavily dependent on large loss experience, which will be influenced by the hurricane season,” said David Flandro, global head of business intelligence, Guy Carpenter & Company. “A light hurricane season with no significant landfalls could enable reinsurance capital to resume growth, while a heavy season with at least one significant landfall could mitigate growth or potentially result in an impairment of capital for 2011.”