Reinsurance Cost Pressures - 2009
Reinsurance, and in particular treaty reinsurance is a fundamental part of any insurers’ internal risk management plan.
The protection of the company balance sheet and capital base from
extremes in loss frequency and severity or aggregations is of critical
importance to the viability of an insurer.
Reinsurance is a global business heavily intertwined with the trade,
commerce and finance industries of most, if not every nation on earth.
Events of significance to, or which impact on the reinsurance industry will affect all insurers to some degree.
Recent events may combine to have a sizeable impact on 2009 reinsurance renewals.
Hurricanes Gustav & Ike
They did not have the same news profile as that attributed to Katrina
and the subsequent flooding of New Orleans but, the most recent loss
estimates suggest that Gustav & Ike will contribute significant
claims to reinsurers. In particular, the oblique angle at which Gustav
approached the Gulf Coast as it produced a greater than anticipated
impact on the rather dense concentration of oil and gas facilities in
that region.
Recently reported figures suggest a combined industry loss from
Gustav and Ike in the US$20 - $25bn range (A$28 – 35bn). Losses of this
magnitude will put pressure on many insurer and reinsurer margins.
Global Credit Crisis
The sub-prime mortgage problem in America has put the
international banking industry in the spotlight. Some have failed and
many forced to merge or seek funds from the State. The supply of credit
has evaporated or become prohibitively expensive as inter-bank lending
ground to a halt. In addition the dive in world share prices will bring
ratings, valuation and capital adequacy pressures to many other
companies across all market sectors.
Introduction Of more immediate concern to the Insurance Industry is
the potential for capital to disappear or be re-directed away from
reinsurance. In addition, poor investment decisions may have a profound
impact on otherwise secure businesses and downgrades may result where
ratings agencies are obliged to delve more fully into any affected
company.
Impact on Reinsurance
Reinsurance cost pressures will develop due to:
• Reinsurer difficulties in sourcing new capital and/or an increased cost of capital.
• Capital Market demands for increased returns.
• Capacity restrictions.
• A flight to quality (of security) – cedants to reinsurers and vice versa.
• Reduced return on investments.
• Write-downs in value of investments.
Recent comment from reinsurers suggests an upward pressure on treaty
pricing for the December 2008 renewal season with flow on effects to
insurance contracts during 2009.
Disclaimer: This bulletin is for information purposes only and is not legal advice.