When the world's top reinsurers and their clients gather for renewal discussions at Les Rendez-Vous de Septembre in Monte Carlo, they will be anxious for evidence of stabilized financial markets while trying to read a mix of macro-economic conditions that could have profound implications on underwriting conditions.

Global financial turmoil has depleted the balance sheets of reinsurance and insurance companies alike. Under deteriorating markets conditions, capital and capacity availability are primary concerns of both buyers and sellers of reinsurance.

One key factor influencing negotiations for reinsurance renewals this year is definitely the supply and demand for insurance and reinsurance, said Thorsten Jeworrek, a member of the management board at Munich Re.

"We're seeing two trends at present," he said in an interview in May, "Firstly, further capital-base reductions, with excess or even more capital being shed, and secondly, a lower demand for insurance on account of the recession."

Financial Crisis Impact

Low interest rates, widening investment losses and declining investment returns have limited the availability of fresh capital. When it comes to capacity, reinsurers have been pressed to deliver stable and profitable underwriting results because of weakening financial performances.

The financial turmoil has "dried out the offer of alternative reinsurance capacity because hedge funds and private equity investors are short of funds," said Rudolf Enz, senior economist at Swiss Re. Although securitization of catastrophe risks has recovered, life insurance securitization still suffers from market disruption for asset-backed securities.

The financial crisis has caused a "considerable effect" on reinsurers' capital positions, which were down by 15% to 20% coming into 2009, said Andrew Appel, chief executive officer at reinsurance broker Aon Benfield.


This impact was "far greater" than any catastrophe loss in 2008, Appel said. As the crisis starts to ease in the absence of major catastrophe losses or influx of capacity this year, he said the hardening market "should begin to level off" in nonlife business.

Capital remains costly and difficult to acquire under ongoing volatile market conditions. There will be increasing pressure on pricing and terms for capital-intensive business lines, said Willis Re International chairman James Vickers in an interview in May. Portfolio diversification is required to lessen the pressure in a tightening capital environment.

Capitalization is expected to remain tight, with "no appreciable additional capacity being added in the short term," said Jeworrek. A capacity shortage is already apparent in big catastrophe and retrocession lines. This also puts pressure on prices for natural hazard and large liability programs, which require high capitalization.

The financial crisis has three broad impacts on supply and demand of reinsurance for the 2010 renewal discussion, according to Chris Klein, managing director and global head of business intelligence at reinsurance broker Guy Carpenter & Co.

First, losses from hurricanes Gustav and Ike last year and asset devaluation have depleted reinsurers' balance sheets, which should "in theory restrict supply and put upward pressure on prices," said Klein.

Second, falling investment income has reduced support for underwriting, putting pressure on underwriters to maintain or widen technical margins.

Third, the recession "is causing reinsurance budgets to be reviewed with the aim of cutting costs," noted Klein.

Demand and Capital

Most insurers have faced sluggish premium growth in a tough economic and consumption environment. The recession has restrained premium hikes that would have lifted underwriting profitability against investment loss.

In the United States, total property/casualty premiums decreased by 1.8% in 2008, following 2007's 0.4% drop. This was "the first occasion" of premium drop in consecutive years since 1932 and 1933, said Klein. Decreasing primary premium rates, intense competition in most personal and commercial lines and loss of market share to non-U.S. players contributed to this downturn. All these factors, coupled with economic recession, act to suppress reinsurance demand.

However, the financial crisis has constrained insurance companies' capital tools "noticeably," and reinsurance is one of the few remaining possibilities to "swiftly" obtain the capital they need, said Jeworrek.

Vickers said insurers will place bigger demands on reinsurance in order to stabilize underwriting results. There will also be increasing numbers of smaller regional reinsurers who will stick to what they know best in the markets.

In the short to medium term, investment return is not expected to increase. With limited capitalization options, insurers can either reduce their exposure by writing less business or seek additional capacity through refinancing and reinsurance. Demand for reinsurance will increase, reversing the previous trend of increasing retention.

Recent signs of reviving stock markets have rekindled investment sentiment, as capital markets have stabilized by mid-June to a more normal level of volatility after extreme conditions in 2008's third quarter. Investors are more likely to put money back into security markets, buoyed by improving confidence, reinsurance experts say.

While the global economy is facing an uncertain time for recovery, the latest macro-economic developments will influence reinsurance negotiations for January 2010 renewals. Volatile equity markets remains a concern, although capacity conditions have not worsened through 2009.

Catastrophes and Health


The U.S. hurricane season is usually a significant influence on pricing for January renewals. "However, the current market situation is unusual in that reductions in reinsurers' capital and consequent rate rises are a result more of investment losses than catastrophe losses," said Appel.

"If there is a recovery in the equity and bond markets, there may be less pressure for potential rate increases," he said.

Florida catastrophe programs generally saw a 10% to 15% rate increase in June renewals, according to Aon Benfield. One key concern of insurers continues to be availability of cover from the Florida Hurricane Catastrophe Fund "on a fully and timely basis" for anticipated significant loss reimbursements. For the June renewals, insurers generally found capacity necessary to renew their programs at prices, terms and conditions within their expectations.

The short-term North Atlantic storm forecast for 2009 predicts a below average to near normal season for the year. In Asia, "a normal level" of tropical cyclone activity is predicted for the Northwest Pacific and "a below-normal frequency" for storm landfall in China, according to Guy Carpenter.

As claims development from natural catastrophes has a significant impact on renewal negotiations, one major weather event could turn a normal season to a bad season. Therefore, reinsurance pricing for natural catastrophe is sensitive to events.

The emerging influenza pandemic may also be a factor at Rendez-Vous in September. The reinsurance market has developed means to transfer some large-scale mortality risks into capital markets through insurance-linked securities and swaps, said Klein.

The flu pandemic provides a reminder to the industry in terms of risk exposure and contingency plans. "The swine flu outbreak caused many companies to reassess their preparedness for such a threat," said Appel.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)