This article ties in with one on a similar vein last year entitled, “Beyond Reinsurance Convention Predictions” (https://insuranceguild.wordpress.com/2010/12/23/2011-beyond-reinsurance-convention-predictions/) and will follow on last year’s sentiment for 2011 to see to what extent the predictions and concerns of last year have come to pass and also to build the predictions for 2012.
One of the underlying topics in last year’s article was market cycles; i.e. the cost of capital versus catastrophes. We had no shortage of those in the course of this year so it would only be too relevant to make reference to this as well.
Prudential Regulation, Cost and Impact on Insurance / Reinsurance
In the course of the year, concerns over the rising cost of regulation with impending Solvency II have been echoed even by FERMA’s Peter Von Dekker as a cost that is ultimately likely to be absorbed by consumers.
The topic was revisited during this year’s Baden Baden symposium in a bid to quell concerns that Solvency II will discourage reinsurance models skewed towards non-proportional protections. Endurance’s CUO, Hans Joachim Gunther negated this, stating that proportional forms of reinsurance will continue to be sought by smaller companies and in markets where other forms of capital / capacity are not easily accessible. This is of direct relevance to most companies in the Middle East markets and one would expect that proportional forms of reinsurance will continue to persist despite an effort from leading reinsurance to shift the some emphasis onto non proportional.
Market Cycles and Catastrophes
Mr. Costas Miranthis, President and CEO of Partner Re perhaps encapsulated the whole of the Baden Baden discussions on pricing in one statement, i.e., “In the forthcoming renewal…. while there will be demand, and there will be capital to meet that demand, I am not sure whether all of that capital will be put to work.” In short, there is no market hardening in sight.
To a great extent this reflects the conclusions gleaned from the Montecarlo Rendezvous 2011, SIGMA (2011) report and the annual report and accounts of international heavy weights such as Munich Re and Swiss Re. Although the international markets have been hit by a hefty share of catastrophes, the market has paid up. Some of the major international reinsurers have suffered at least one technical loss over the last 2 – 3 years but in most cases, even post-financial crisis, investment returns have translated this into a net profit. The bottom line is that, demand for insurance internationally is again on the rise (reaching pre-financial crisis levels), in emerging markets double digit growth is again being witnessed and in some markets, such as the GCC, growth is already more than 50% higher than the aggregate growth rate of emerging markets.
All of this is indicative not only of availability of capacity but also the willingness by reinsurers to support existing reinsurance programmes and pricing in the Middle East. Is this reasonable? Is it long term? Anyone’s guess is as good a mine … but it will definitely prevail in 2012.
The following table shows the development of premium from 1990 to 2009. The blue boxes highlight the few episodes of market hardening in the market over the past two decades. These episodes, i.e. 1993 (post LMX debacle / property crisis), 1999 (uncertainties associated with the millennium change), 2003 (post Sept 11th) and 2003 (petro-dollar build up) were more related with cost of capital then with catastrophes.
The growth in premium from 2009 to 2010 is less than 5% when adjusted for inflation and is close to pre-crises levels. This indicates that we are still in the soft market prevailing for almost a decade. Will the cost of capital driven by the prolonged financial crisis in Europe put pressure on the cost of capacity and, therefore, on reinsurance pricing? It is too early to tell. Even if this is the case, there is sufficient capacity building up in the Middle East and imported from Asia that would substitute and capacity that comes in at higher prices in the short run.
Conclusion: Much of the same thing
Therefore, it is safe to assume demand, cost of protections and the structuring of outward reinsurance by most companies in the region will not witness significant change in 2012. Many will, of course, continue to blame dropping technical profitability on tougher reinsurance conditions but honest introspection would suggest otherwise.