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Reinsurers Suddenly Disagree On Value Of Their Capital

--Reinsurance rates for Florida coverage varied widely at June 1 renewals. --Variability of prices results from changes to disaster models and recent natural disasters. --Some reinsurers may be staying on sidelines in anticipation of rate increases. By Erik Holm Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- 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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