Aon Benfield Sees Downward Pressure on Reinsurance Rates

Reinsurance renewals for January 2010 are expected to see static pricing trends, with downward pressure for most global programs in the absence of any significant catastrophe events, according to one prominent broker in the market.

With the capital bases improving for both reinsurance buyers and sellers, expectations are for "an orderly renewal" on core reinsurance programs, said Aon Benfield in a market outlook report. The reinsurance broker forecasts that the reinsurance market "will soften globally" in with no impact from major catastrophe events up to the January 2010 renewal season.

"While rates, terms and conditions held firm globally and increased mildly for U.S. hurricane, a global hard reinsurance market has not occurred as a result of the credit and liquidity crisis," said Aon Benfield in the report. Overall, core reinsurance programs globally were able to be renewed in market at terms and conditions that remained accretive to insurer earnings and capital.

Throughout the credit and liquidity crisis, the reinsurance market has remained resilient without assistance from governments, new capital flows or recapitalization.

"Reinsurers consistently provided material and accretive capital to insurers, most of whom were suffering from the affects of credit and liquidity crisis," said Bryon Ehrhart, chief executive of Aon Benfield Analytics.

"While the reinsurance market firmed, it remained functional and in that manner differentiated itself nicely from other markets for insurer capital that had closed or operated at highly dilutive levels," said Ehrhart at the Monte Carlo Rendez-Vous.

Price hikes were focused "squarely on reinsurer's peak aggregate risk" for the U.S. hurricane programs, and they were "mild" compared with the increases experienced after major natural catastrophes in the past, noted Ehrhart.

The reinsurance industry is "in a strong position" for the January 2010 renewals, said Andrew Appel, chief executive of Aon Benfield. Sound risk management practices and conservative investment strategies contributed to the reinsurance sector's overall resilient in the crisis.

Reinsurers continue to provide critical coverage and liquidity to cedents, said Appel. Although capital levels dropped mildly due to the financial crisis, reinsurers generally retained the core economic capital necessary to serve their clients.

In the first half of 2009, reinsurers' capital bases rebounded well, primarily due to improved investment returns and good underwriting performance, said Ehrhart.

Strong profits and an upturn of capital markets led to a 7% growth of shareholders' funds in the first half of this year, according to Aon Benfield's report on financial results of 24 global reinsurance entities. Realized and unrealized investment losses of the tracked reinsurers dropped to US$1.5 billion (1.04 billion euros) by the first half of 2009, from US$16.7 billion last year's first half.

Better expense performance drove the combined ratio of the reinsurers down by 0.9 point to 91.9, while gross written premiums decreased 5% in the first half, according to Aon Benfield. However, improved underwriting performance and lower investment losses were not sufficient to offset the decline in recurring investment income, leading to a 15% fall in pretax profit for the 24 reinsurers, totalled US$9.3 billion.

Overall, Aon Benfield said reinsurers retained sufficient capital to meet cedants' needs and are well-positioned to withstand the current hurricane season and other significant catastrophes for the rest of 2009, the broker said.

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