Aon Re Global announced from the Reinsurance Rendezvous in Monte Carlo that it has released its sixth annual Reinsurance Market Update.
Among the highlights included in the publication, Aon cited the following:
— Reinsurance market risk spreads are narrowing– directionally getting less expensive
— Worldwide credit market risk spreads are widening — directionally getting more expensive
— Worldwide equity market risk premiums are widening — directionally getting more expensive –
— To finance risk that otherwise would have been retained, insurers will be more likely to utilize the reinsurance market than the equity, senior and subordinated debt markets –
— Large buyers of property catastrophe reinsurance now utilize the capital markets to provide 10-25 percent of their catastrophe capacity. This is expected to expand.
Aon noted that the renewal pricing peaked in July 2006, following the losses engendered by the 2005 hurricanes. After that peak the market has been declining. “That decline comes as the cost of equity and debt capital will be increasing for insurance; as such, the reinsurance pricing and terms cycle can be uncorrelated with the cost of equity and debt capital for insurers and reinsurers.”
Bryon Ehrhart, Aon Re Services president and CEO, commented: “We see the 2008 market cycle as an exciting and challenging one as reinsurance has the opportunity to play a larger role in capital management strategies. He indicated that the softer market represented opportunities for Aon Re to “deliver new levels of value to clients.” He explained that “softening markets lend themselves to softening terms and conditions which allow Aon brokers to closely analyze and negotiate on behalf of clients, looking towards a fully transitioned post-Katrina landscape.”
In Aon Re’s opinion it would require ceded losses of between $15 to $25 billion to effect a change in the reinsurance market’s direction. As a result – unless those disasters occur – “to finance risk that otherwise would have been retained, insurers will be more likely to utilize the reinsurance markets than the equity, senior and subordinated debt markets.”
The bulletin added that as capacity has “greatly expanded since Hurricane Katrina in 2005, the reinsurance market now provides efficient property, casualty, life and insurance enterprise risk transfer and contingent capital solutions.”
In addition Aon Re noted that “large buyers of property catastrophe reinsurance now utilize the capital markets to provide 10 percent to 25 percent of their catastrophe capacity. From January through July 2007, the reinsurance markets have funded more capacity than was issued during 2006 in its entirety.”
Ehrhart described the current market as presenting “an opportunity in which to look closely at integrated risk management. Rather than producing reporting on the varied results of actual renewals, Aon Re Global is able to identify changes to the reinsurance markets in advance of key renewal dates to deliver more consultative value to clients when they need it.”
Factors such as insurer underwriting methods, data quality, capacity required, experience and current modeled margin levels can combine to create better or worse outcomes.
Detailed information and analysis from the Aon Re Global Reinsurance Market Update can be obtained at: http://www.aon.com.
Source: Aon Global Re
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