Reinsurers Suddenly Disagree On Value Of Their Capital
June 02 2011 - 9:51AM
Dow Jones News
The price reinsurers charge for disaster protection in Florida
has suddenly become wildly variable, a result of a shift in how the
industry measures potential hurricane losses and a long roster of
recent natural catastrophes.
The variability has come into focus only in recent days, as
companies selling home and business insurance in Florida sought
price quotes for reinsurance contracts that reimburse them for
losses after a major natural catastrophe. Most of the Florida
reinsurance contracts renewed Wednesday, the first day of a
hurricane season that officially lasts until the end of
November.
The wide range of prices reinsurers were demanding for their
coverage indicates that the industry has suddenly stopped agreeing
on what its capital is worth, according to brokers who help arrange
the coverage. But it is largely a matter of degree: Many reinsurers
say their capital is worth more than it was a year earlier, the
last time Florida insurance companies went shopping for hurricane
protection.
That means many reinsurers are raising rates, which
could--barring a major catastrophe--boost their returns at the
expense of the primary insurers and their customers.
This year's Florida renewals happened as the insurance industry
was tallying up potential losses from the massive earthquake in
Japan, two other major quakes in New Zealand, severe windstorms in
Australia and potential losses from the recent tornadoes that have
plagued the U.S. The finally cost of those disasters will take
months to become clear, but are estimated to be tens of billions of
dollars.
Some reinsurers have lost more than their share from the recent
catastrophes, eating into capital and forcing them to be selective
while rivals are unconstrained. But others may be may be conserving
capital solely on the expectation that reinsurance rates will
continue to rise, said Brian Meredith, an analyst with UBS, in a
note to clients Thursday.
"Those that were capital constrained were paring risk back, and
some were just saying our capacity is worth `x,' so if we can't get
that price, we'll put out less capacity," said Rod Fox, chief
executive of reinsurance broker TigerRisk.
But insurers and reinsurers are also grappling with adjustments
to two widely used disaster models that help determine potential
claims costs from U.S. hurricanes. The models drastically increased
their estimates for the cost of some disaster scenarios and are
causing some insurers to re-evaluate the risks they carry on their
books.
The just-released revision from modeler Risk Management
Solutions Inc. is responsible for the biggest changes in many
cases. For some insurers, RMS's "Version 11" doubles the
one-in-100-years estimate for insured hurricane losses in Texas,
and raises that so-called probable maximum loss estimate, or PML,
in the mid-Atlantic by more than 75%.
The new models are causing some reinsurers to revisit their
assumptions about how much risk they and their customers are
carrying, while others may have already been assuming more losses
than the models indicated and weren't severely affected by the
changes.
Both the disasters and the model changes help explain the wide
disparity in prices that home insurers found when they went
shopping for reinsurance coverage this year, said Lara Mowery, head
of the Global Property Specialty practice at reinsurance broker Guy
Carpenter.
In 2009 and 2010, the average price quote from reinsurers
competing for the same business varied by plus or minus 3% from the
average, according to a Guy Carpenter analysis of June 1
reinsurance renewals to be published Thursday. But in the
just-completed round of renewals, that increased five-fold, and
ranged from 15% below the average to up to 16% above the average,
Guy Carpenter found. Guy Carpenter is a unit of Marsh &
McLennan Cos. (MMC).
"There had been a very tight, very consistent view of pricing
for the Florida renewals" in recent years, Mowery said. "That has
not held up at this renewal as reinsurers adjust to changes in the
environment."
While the price quotes varied, the amount the primary insurers
ended up paying was less surprising. Mowery said rates were up 5%
to 10% from a year earlier, while Fox put the number at 5% to 15%.
Both are about in line with what many in the industry had predicted
before the renewals were completed.
Several in the industry have argued that the changes in the
disaster models are having a larger impact on reinsurance prices
than the recent natural disasters, even though estimates indicate
the insurance industry is on the hook for tens of billions in
disaster claims.
"Although Japan and New Zealand have had an impact, RMS is a
greater factor for the U.S. property market," said James Kent,
president of Willis Re North America, a unit of broker Willis Group
Holdings Plc (WSH). "RMS version 11 means that not only are
insurers' PMLs generally increasing, but so are reinsurers'. That
means they are having to allocate more capital for each deal and
consequently a number of reinsurers have cut their capacity on June
1 renewals."
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
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