Guy Carpenter & Company, LLC has published its annual, comprehensive study of the global property catastrophe reinsurance market – “The World Catastrophe Reinsurance Market: New Capital Stabilizes Market.”
The report covers 23 countries and four regions, representing more than 90 percent of the worldwide market for catastrophe reinsurance. It found that the catastrophe reinsurance market is stabilizing following a tumultuous renewal cycle in 2006. “Globally, rates dropped by six percent in 2007, versus an increase of 32 percent in 2006,” said the bulletin.
“2007 will be remembered as the year the catastrophe reinsurance industry righted itself, following record-setting losses in 2005 and soaring rates in 2006,” observed Guy Carpenter CEO David Spiller. “The industry has absorbed the changes brought about by the mid-decade catastrophes, as well as the resultant pressures from rating agencies, regulators and modeling firms.”
Spiller indicated that one of the “primary reasons for this moderating trend has been the industry’s increasing embrace of the capital markets to transfer risk, whether in the form of catastrophe bonds, new start-ups or sidecars. Capital markets have become an integral part of the reinsurance business and are playing a key role in helping to reduce market volatility.”
According to the report, following the record loss years of 2004 and 2005, total insured and reinsured losses in 2006 reached $15.9 billion, down significantly from $83 billion in 2005. However, significant amounts of “new capital has been entering the industry at a record rate.” The cat bond market reached a new high “with 20 transactions totaling $4.69 billion in risk capital transferred to the capital markets, doubling the previous record total of 10 transactions in 2005, and, in terms of risk capital, representing a 136 percent increase over the previous record total of $1.99 billion in 2005.”
Tim Gardner, Global Leader of Guy Carpenter’s Property Specialty Practice, Indicated that “the central theme of global catastrophe reinsurance markets in 2006 was increased demand,” but the theme for 2007 has been increased supply. “The demand for additional capital that we saw in last year’s report has been met by a distinct upward shift in catastrophe bond issuance and the launch of new companies focused on the property catastrophe business,” he continued. “We are now starting to see these new ventures level out as the market returns to the downward phase of its cycle. Barring major disasters, we would expect to see further price declines at January 2008 renewals.”
In addition to providing a review of catastrophe exposures and the availability of insurance from private and government sources, the study analyzes market conditions in catastrophe reinsurance on both a country-by-country and regional basis, taking into account natural catastrophes caused by perils such as typhoons and earthquakes, as well as acts of terrorism. New to this year’s report are dedicated sections on India and China.
Among the report’s key findings are the following:
— Following the unprecedented North American catastrophe losses in to 2005 and 2006, there was more uniformity in the global marketplace in 2007, with most countries experiencing single digit declines in price.
— Catastrophe losses have remained low for the past two years, contributing to greater stability in the market.
— The risk of terror events appears to have increased, driven by ongoing developments in the Middle East and Pakistan and recent plots in the United Kingdom. The United States is expected to enact legislation aimed at making the federal government’s backstop role under the current Terrorism Risk and Insurance Act (TRIA) more permanent.
— In North America, catastrophe cedents found relief after one of the most difficult markets the industry has seen. In contrast to January 2006, when rates nearly doubled and continued rising in response to hurricane activity, January 2007 saw renewal rates on the decline. In the United States, the rate on line (ROL) index dropped by 9 percent in 2007, after increasing 76 percent the year prior.
Source: Guy Carpenter & Company, LLC
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