Reinsurers to Take it on the Chin: Rates Likely to Fall 9% in January

The Jan. 1, 2010, reinsurance renewal is approaching fast, but a quiet year for catastrophe losses is causing the annual ritual to proceed slowly. Insurers and reinsurers are still dancing around an agreement on next year's rates, and an insider at a major reinsurance intermediary tells me that the process could extend well into January. Expect reinsurance rates to fall 9% for the property-catastrophe sector.According to this source, who is close to reinsurance renewal data for his company's clients, the low catastrophe losses sustained by property insurers in 2009 are putting downward pressure on rates this year. The actual amount by which pricing will decline will vary based on the underlying catastrophe models used, but he predicts a drop of 9% worldwide. Of course, we're still early in what will be a protracted renewal experience, and there is still plenty of time for this to change

Last year, reinsurance rates only increased 8% on average for the worldwide market, despite speculation that reinsurers would have to jack up prices because of the balance-sheet decimation they experienced in the wake of the September 2008 financial crisis. Property-catastrophe reinsurance prices fell in 2007 and 2008, and the Jan. 1, 2009, renewal was expected to be flat until Lehman Brothers collapsed and American International Group (AIG) approached the brink of failure.

The current reinsurance negotiations are expected to continue well into January, as reinsurers try to protect their revenue streams and insurers push for discounts based on favorable 2009 loss histories. The stakes are high, as the January renewal is the biggest of the year, resulting in a disproportionate effect on revenue, and sets the tone for the year's other major renewal periods – in April, June (for Florida) and July.

There is an unknown in the market that could change the dynamic substantially. "The wild card right now is AIG," said my source. "They still don't seem to have got their strategy straight yet and could change on North American commercial wholesale treaty programs [a segment of the property reinsurance market.] If they do [change their consumption of reinsurance or the price paid for it]," he continued, "they could change the ultimate outcome [of the renewal season]."

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