Renewal Round-up - The Willis View - A Tale of Two Markets.

(From Reinsurance)

Hurricanes Katrina, Rita and Wilma have left part of the insurance and reinsurance world reeling. I deliberately say 'part' because currently, we have reinsurance markets such as retro, marine, energy and US property in significant turmoil, and undergoing major revisions of terms, conditions and structure. However, while generally we have seen an end to the 'softening' of the past 18 months in other parts of the reinsurance market, the environment is best described as 'stable' rather than 'hard'.

The question is whether this 'Tale of Two Markets' is temporary, or will be sustained - but first, one has to consider the backdrop. Certain factors would suggest that these conditions are temporary. While rating agencies have naturally focused their efforts on those companies suffering significant losses and/or starting up, their changed requirements in respect of the increased capital deployed against given loss scenarios will affect the insurance and reinsurance sectors globally.

Also, as catastrophe models are recalibrated to incorporate more aggressive assumptions regarding potential losses, these will impact across the world. We must also remind ourselves that while hurricane-loss estimates are extremely high, the values actually paid to date are currently still relatively small - though the actual pain of significant outflows of cash is always a reality check.

An end in sight?

However, there are also factors that suggest any hardening trend will be limited. When the World Trade Centre disaster occurred in 2001, the insurance and reinsurance balance sheets were generally in poor shape. This contrasts with 2005, where, prior to the hurricanes, balance sheets were strong, and combined ratios were healthy and improving. The hurricanes have severely damaged the financial health of certain US insurers, specialty line underwriters and many reinsurers, but outside of that, insurers have had several good years, and therefore appear reluctant to risk losing market share by striving to increase prices

Additionally, there is new capital arriving in the form of recapitalisation of existing participants, new start-ups and new types of structured products. The hedge funds are major players in all of these areas, and these are here to stay in some form. This new capital will provide a fresh supply of capacity, and will be encouraged to write business outside the distressed market, if for no other reason than the rating agencies are looking for the markets to diversify.