Best Comments on January Reinsurance Treaty Renewals

A.M. Best has published a comment on the recently published figures from a number of global reinsurers following the January treaty renewals, mainly focusing on Europe.

Best said most “global reinsurers are anticipating strong 2006 earnings, thanks to a benign 2006 catastrophe season but also because of an attractive pricing environment following hurricanes Katrina, Rita and Wilma in 2005.”

However, Best warned, “these developments are leading to increased competition in the market with ample capacity widely available. In addition, improving capitalization and earnings are allowing primary insurers to retain more risks—a trend that was already noted at the January 2006 renewals and one that is exacerbating the situation.”

The rating agency noted that “the softening of premium rates in Europe appears to be moderate, and pricing levels remain favorable. In A.M. Best’s view, global reinsurers continue to instill underwriting discipline and have reduced their exposure to lines of business that they regard as inadequately priced. In addition, SCOR’s improved financial strength has enabled it to regain clients it had lost during financially difficult times.”

Best also indicated that “although overall treaty renewals are showing flat to moderately softening rates, the picture can vary by lines of business and country. In France, reserve strengthening and claims inflation in motor liability have led to a reduction in capacity, and reinsurers who offered cover were able to increase rates between 20 to 30 percent. In aviation, prices for direct aviation continue to plunge as operating losses, especially for the larger airlines, remain limited.”

Swiss Re’s acquisition of GE Insurance Solutions, and the subsequent withdrawal of market capacity also affected thie January’ treaty renewals. Partially as a result, Best noted that capacity “remains scarce” in the retrocession market. “Reinsurers have been seeking alternative sources of capacity, such as sidecars or catastrophe bonds; however, they have not (yet) fully replaced the exited capacity.”

Best said that in its view “the recent winter storm in Europe with an insured market loss of between €5 – €7 billion ($6.6 – $9.1 billion) is a timely reminder of the volatile nature of non-life reinsurance. Although pricing levels remain favorable overall, the increasing risks from more frequent natural catastrophes should not be ignored. A.M. Best believes that overall risk management capabilities of reinsurers are becoming even more important in this changing landscape.”

Overall Best said it “expects that given the state of the reinsurance market, earnings in 2007 are likely to remain favorable, provided that natural catastrophes risk are adequately managed.”

The rating agency also indicated that it “believes that new capacity in the form of Bermuda startups and sidecars will become an increasing source of competition in Europe given the recent events in Florida, which is expected to free up an additional $2 – $4 billion in capacity.

“The new entrants, combined with the increased capacity of established companies from strong earnings, may prove to be the disruptive longer-term force to the current favorable pricing environment. However, A.M. Best anticipates that due to improved balance sheet strength, better risk management controls and overall adherence to underwriting discipline, European global insurers are positioned to absorb volatility of earnings from unexpected events.”