Insurers to rebound on break from calamities

With the July 1 reinsurance renewal season just completed, the verdict is that reinsurers were not as tough on prices as many had expected.

With the July 1 reinsurance renewal season just completed, the verdict is that reinsurers were not as tough on prices as many had expected.

That's good news for Australia's general insurers, some of which recently have been in London meeting Lloyd's of London brokers to try to place some of their reinsurance policies, worth hundreds of millions of dollars in terms of catastrophe and other protections.

With so many calamities hitting the insurance industry in 2010-11 - including earthquakes in New Zealand and Japan, floods in Queensland, storms in Victoria and eight big tornadoes in the US - the fear was that reinsurance rates might soar as much as 50 per cent for some categories.

Instead, the small regional players that didn't have big loss exposures are believed to have paid between 15 per cent and 20 per cent to renew their reinsurance policies. Reinsurance brokers in London estimated that the big players suffered price rises of 25 per cent, and in some cases higher.

An increase in reinsurance rates generally translates into higher premiums on general insurance policies as general insurers seek to pass on the higher costs. This was certainly the case last year when general insurance premiums rose about 15 per cent in many categories. But if the latest renewal season is any guide, the reinsurance price rises won't be enough to warrant significant price rises in insurance policies. The reason? The past 12 months have been relatively free of catastrophes and, therefore, losses.

A report released by reinsurance broker Guy Carpenter reveals that catastrophe-related insured losses totalled $US11 billion in the first six months of this year, compared with a massive $US76 billion in the first six months of last year. It was about this time last year that insurers such as QBE Insurance's outgoing chief, Frank O'Halloran, described the insurance environment and the frequency of catastrophes in the southern hemisphere as the worst he had seen in 35 years.

O'Halloran's gloom followed Suncorp revealing that the two big earthquakes in New Zealand cost it $2.1 billion in gross claims - $500 million in September 2010 and $1.6 billion in February last year - far worse than expected.

The report says fewer catastrophes, continued reserve releases and falling yields on high-grade fixed-income securities have played a more prominent role in bolstering capital and subduing pricing pressures so far this year. It contends that these factors will continue to influence the direction of the reinsurance market until January 1. However, this could all turn to dust if the US hurricane season is worse than expected. Much of QBE's risk comes as the hurricane season whips through the US.

Two experts in predicting hurricanes in the US, Philip Klotzbach and Bill Gray, at the department of atmospheric science at Colorado State University, who are relied on by the insurance sector, are predicting a below-average season this year, with two major hurricanes forecast.

Klotzbach and Gray's forecasts have had an 83 per cent success rate over 30 years.

The Guy Carpenter Global Reinsurance Composite index released yesterday found that reinsurers' capital position increased to $US184.5 billion, a 4 per cent gain over the previous year. "The inflow of new reinsurance capital has also been a significant feature, with between $6 billion and $8 billion of alternative capital entering the market since the catastrophes of 2011," the report states.

It also highlights the return of the catastrophe bond market as a source of capital. During the first six months of this year, 15 catastrophe bond transactions came to market, totalling $US3.4 billion of risk principal, which is a 113 per cent increase relative to the first half of last year. Risk principal outstanding now stands at $US13.5 billion, within striking distance of the high-water mark of $US14 billion established in 2007 after the hurricane Katrina-Rita-Wilma issuance surge.

The Guy Carpenter report touched on Australia and New Zealand, saying that reinsurance renewals continued to operate against a backdrop of few claims. The upshot was general casualty lines renewed within a range of down 4 per cent to up 3 per cent, with reinsurers seeking rate increases of 3 per cent to 5 per cent. It goes a long way to explaining why Suncorp managed to place its entire New Zealand catastrophe coverage with Warren Buffett's Berkshire Hathaway last month.

Just about everyone in the industry had expected Suncorp to face an extra tough time in its reinsurance renewal negotiations after it lifted its loss estimate for the second New Zealand earthquake by $400 million only 12 days after the cover had been renewed. It was a revelation that didn't go down well with reinsurers.

But it didn't stop Berkshire Hathaway from striking a deal that took most of Suncorp's Vero specific program on a three-year-deal at last year's terms, as well as taking a share of Suncorp's Queensland book on a three-year deal.

QBE does its renewals on January 1 but it is in the middle of a three-year deal for the bulk of its program, which doesn't expire until December next year. IAG renews on January 1, with the expectation that it will also get similar treatment.

Not surprisingly, the share prices of listed insurance stocks are starting to bounce back.

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