The January renewals confirmed a bifurcation of the market with rate increases and premium growth in property versus stagnation in casualty. Overall, risk adjusted property cat prices rose 10 to 15% in the US; were flat to 5% up in Europe; and saw more significant increases in loss impacted international accounts. Australia and Japan experienced rate increases of more than 50%. Overall, the market is fragmented with rate changes driven by loss experience and exposure changes.
Casualty rates have stopped the long-term slide in the US, but reinsurers are not achieving the material increases that are necessary to restore profitability despite declining returns. Underwriting discipline was maintained generally and under-priced programmes often did not get fully placed. Outside the US, motor markets in Germany and the UK have improved and French market conditions are essentially flat.
Growth will accelerate. 2011 saw premium growth as a result of exposures rebounding with the economic recovery, rate increases in property cat lines, and reinstatement premiums from the major cat losses. There is a gradual shift of mindset in the industry and of general perception by stakeholders. The direction of rate changes is clearly up, boosting rate growth and improving profitability. This happens against the backdrop of major challenges from the current economic and political environment.
Economic weakness, fiscal tightening and an accommodative monetary policy are keeping government yields low, particularly in Germany and the US. The low interest rate environment poses a huge challenge to the insurance industry, reducing investment yields and undermining the profitability of long-tail insurance and reinsurance.
The euro debt crisis poses a risk to insurers holding the sovereign debt of Greece, Portugal, Ireland, Spain and now Italy. In addition, insurers hold the debt of banks which, due to their exposure to sovereign debt, could be severely affected if the crisis becomes disorderly.
Emerging markets are not fully decoupled from the developed economies, so their growth is slowing, even as inflation remains elevated. Asset bubbles are forming, though unlikely to burst any time soon. Many insurers have been counting on emerging markets to support top line growth. The slowdown in mid-2011 and asset bubble risks have revealed a potential drawback to this strategy.
Further rate increases are expected in the future
Further rate increases are expected since there are fundamental challenges in the economic conditions that require re-pricing of rates.
Reinsurance profitability has suffered a massive setback. In part, profitability was affected by record catastrophe losses in the first half of the year and large investment losses in the third quarter 2011. Insurers’ operating profitability is also weakening. Beyond adjustments for catastrophe losses and reserves releases, underwriting results continued to erode mainly due to lower premium rates, although the situation differs by country and line of business. Additionally, the industry had weak investment returns. The weak returns are partially due to record low interest rates, sluggish cash flows, and feeble capital gains or capital losses. In addition, the widening spreads on corporate bonds and the weaker quality of sovereign bonds lowered mark-to-market valuations of fixed income securities. Challenging tenets of diversification, equity markets also performed poorly. Squeezed from all sides, the average profitability for the industry was low.
Immense catastrophic losses in 2011
2011 would have been the costliest year in terms of insured cat losses ever if Japan had been more fully insured. 2011 ranks as the highest in terms of economic losses and second highest in terms of insured losses. With USD 123 billion, 2005 still remains the most expensive year for the insurance industry. Katrina, Wilma and Rita combined cost over USD 100 bn. If we exclude the NFIP (National Flood Insurance Program) losses, then 2011 becomes the most expensive year of all for the private insurance industry. In both 2010 and 2011, the two most costly events were earthquakes. Four of the Top 5 costliest earthquakes occurred between February 2010 and March 2011. Japan earthquake was the most powerful known to have ever hit Japan and the fourth-strongest worldwide since 1990. The Japan event is the costliest in history, both in terms of insured and economic losses.
The insurance industry will pay an estimated 17% of the total economic losses for Japan, and 80% of the New Zealand event in February, due to marked differences in the earthquake insurance penetration rates of the two affected countries. Earthquake insurance penetration in Japan is considerably lower than in New Zealand, particularly for homeowners insurance. The immense catastrophic losses in 2011 have led to a hardening of reinsurance rates in property catastrophe lines. This is likely to continue due to changes in catastrophe models, the frequency of recent events, and increased exposures. A broader based hardening is expected to start later in 2012/2013 when adverse development sets in.
A sequence of unanticipated losses
Japan – severity the earthquake of was off the charts for planning and risk management purposes, tsunami impact, unexpected global CBI exposures. Thailand – unexpected magnitude of BI and CBI exposures, global interdependence of the supply chain. Tornadoes in US – the number and destruction were higher than expected. Losses from earthquakes – Tsunamis, aftershocks, CBI, BI, liquefaction in Japan and New Zealand. The number of multi-billion dollar events is on the rise. In 2011, there were 16 events that cost the industry above USD 1 billion (in 2010: 11 events). RMS (Risk Management Services) 11 model changes are a reflection of the lessons learned from prior years’ catastrophes. The implementation is progressing slowly.
Through it all the re/insurance industry has shown remarkable resilience
The industry has shown remarkable resilience in absorbing these losses; no major failures or sudden withdrawals of capacity. Reinsurers’ capital levels held up quite well during 2011.
Fair market valuations of fixed income assets are inflated by low interest rates. The European sovereign debt crisis led to mark-to-market write-downs on Southern European government bonds. In addition, uncertainty relating to sovereign debt is multiplied via its effect on the banking sector, i.e. the equity and bond holders of banks. After years of softening of rates, adequacy of claims reserves is increasingly questioned, especially against the background of rising inflation risks. And of course, the latest revisions to property catastrophe models resulted in higher exposures to natural catastrophes.