Guy Carpenter & Company Inc., a global risk and reinsurance specialist and a part of the Marsh & McLennan Companies has released its annual, comprehensive study of the property catastrophe reinsurance market, The World Catastrophe Reinsurance Market: 2005. The report, which went to print before Hurricane Katrina made landfall, covers more than 90 percent of the worldwide market for catastrophe reinsurance.
“Despite the record global insured losses in 2004, soft market conditions continued to prevail through 2005. However, given the widespread uncertainties associated with Hurricane Katrina, it is too early to assess its impact on January 2006 renewals. At this point, at a minimum, we expect that the reinsurance market at January renewals will be less competitive than earlier predictions,” said Sean Mooney, Guy Carpenter’s chief economist.
Among the report’s key findings:
* The price of catastrophe reinsurance protection declined in most markets in 2005. The world rate on line index fell by 7.5 percent, a slightly slower rate of decline than the 8.7 percent decrease in 2004. In general, cedents experienced a more accommodating market, with the notable exception of programs that suffered significant losses in 2004.
* The current market appears to be more disciplined than the soft market of the 1990s, which is attributable to a number of factors. First, new market entrants made strong commitments that they will not chase market share. Second, the unprecedented storm season of 2004 and recent terror bombings in London and Egypt reminded reinsurers of the unexpected risks they face as they accumulate exposures. The increasingly technical marketplace also has led to a narrower range of price variability, and low investment returns are reflecting the low level of long-term interest rates. Finally, the market for retrocession support is disciplined.
* Terror risk continued to be a major concern for U.S. cedents, particularly as they face the scheduled expiration of the federal government’s backstop reinsurance program at the end of 2005. Outside the United States, however, terror risk was less of an issue, though this may change as a result of the terror incidents this summer.
Mooney added, “The sustained softening up until Hurricane Katrina appeared to be attributable to a number of offsetting mechanisms that reduced losses for private market reinsurers. For example, the four Florida storms caused significant cumulative damages, but no single storm caused losses high enough to penetrate most insurers’ retention levels – plus, the state’s government-backed pool absorbed a considerable amount of the losses. As another example, in the case of the typhoons in Japan, losses to insurers were partially offset by payments from catastrophe reserves.”
The report also indicated that in a number of countries, higher event limits were imposed on pro rata programs as reinsurers address increased concerns about catastrophic exposures. In countries where primary market rates are producing high returns, some cedents retained more exposure net, cutting back on their reinsurance purchases.
Copies of the report, The World Catastrophe Reinsurance Market: 2005, are available for download at www.guycarp.com. For printed copies, contact Guy Carpenter at firstname.lastname@example.org.
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