Following the first quarter’s earthquake in New Zealand, floods in Australia, and earthquake, tsunami and nuclear disaster in Japan, the second quarter of 2011 brought more devastating natural catastrophes, including storms and tornadoes across the United States and damaging aftershocks in New Zealand. These events have further depleted insurers’ 2011 catastrophe claims reserves. 

Before the June 1 start of the Atlantic hurricane season, many insurers and reinsurers had already accounted for their anticipated annual catastrophe losses. Despite this, the international insurance market remains well-capitalized and generally competitive.

There continues to be ample capacity in the global insurance market. Although there has been no general impact on capacity from the quarter’s major events, there has been some withdrawal from catastrophe-affected regions and in loss-making sectors of business.

Accounts affected by losses, or with a significant proportion of catastrophe exposures, are experiencing tougher market conditions. Even on programs unaffected by losses, or with relatively small catastrophe exposure, reductions in property renewal rates have become harder to come by.

In addition, insurers have become more focused on increasing retention levels and reviewing other policy terms and conditions. Particular scrutiny is being paid to the breadth of contingent business interruption (CBI) coverage as well as to definitions of damage from flood, earthquake, and named windstorm.

Given its effect on the primary market, it should be noted that reinsurance sector losses this year are already more than double 2011 reinsurer natural catastrophe budgets. Nonetheless, reinsurers remain adequately capitalized at the start of the hurricane season, due partly to strong capital growth in 2010.

Given these events and trends, our view is that there has not been an overall change in market pricing and market fundamentals remain strong. However, expectations of an active U.S. hurricane season, combined with greater insurer discipline, increase the potential for a changing market dynamic through the balance of 2011.

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Key Risk Issues

Risk information – With rate reductions now less common, it is important that clients meet with underwriters to differentiate their operations and to discuss their risk management strategies and contractual liabilities. As global insurance market dynamics evolve, firms need to ensure their risk appetite is matched to their corporate growth ambitions.

Cyber risks – Recent multimillion dollar privacy cases have highlighted cyber risks as a growing issue for firms. Large losses in sectors such as retail, credit card processing and financial institutions have caused insurers to review rates and terms. However, the cyber liability insurance market is competitive and has ample capacity.

Supply chain – Companies’ supply chains face constant challenges, as exemplified by last year’s volcanic eruptions in Iceland and by the Japanese earthquake of March 11 and its ongoing impact on several major industry sectors. With supply chains lengthening, firms need to ensure they have comprehensive contingency plans in order to protect revenue and market share.

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Global Property Insurance

The global property insurance market had a mixed reaction to events in the second quarter. Renewal results varied widely depending on such variables as loss records, catastrophe exposure levels, catastrophe cover purchased, and the quality of data submitted. Generally, insurance programs with catastrophe exposures representing at least 25 percent of the total insured value were likely to face up to 15 percent increases in premium rates at renewal.

Renewal rates for Japan earthquake risk have increased by up to 30 to 50 percent, while New Zealand earthquake rates have increased by between 10 and 30 percent. Catastrophe rates in other territories, including United States and Caribbean wind exposures, are experiencing rate increases of between 5 and 15 percent.

Property programs that do not have a significant catastrophe exposure continue to enjoy competitive market conditions. Depending on territory, most policies are renewing at constant rates or with either small increases or decreases. In the United States, rate reductions of around 5 percent are being achieved, and in Asia, reductions of up to 15 percent are still possible. In the London market, small rate increases are being sought by some insurers. In all territories, account specifics will be the key determinants of final rate levels.

This relatively benign rate environment could change depending on the level of losses from the U.S. hurricane season, which is predicted to be above normal in storm intensity and frequency.

In the United States, a benign wind season is unlikely to lead to a return to market-wide reductions, but rather to a continuance of erratic market behavior through year-end. This is when insurers expect to incorporate into their cost structures the full effect of the introduction of the 11th revision of RMS’ hurricane model (RMS 11), as well as catastrophe losses from the first half of 2011 and the anticipated impact of January 1, 2012, reinsurance treaty renewals.

Some insurers are demanding more information from insureds. As demand for capacity increases, insurers are becoming more selective about the risks they choose to underwrite. The more comprehensive the underwriting information submitted, the greater likelihood of the insurer providing a quote.

Pursuant to the level of CBI losses following the earthquake and tsunami in Japan earlier this year, insurers are also asking more questions about the scale and scope of CBI cover being sought. Some insurers are capping CBI policies as they seek to understand better the loss effects of this type of policy after a significant insured catastrophe event.

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Global Casualty Insurance

Overall, the global primary casualty insurance market began to see small increases in rates for many lines of business, in many geographies. However, for excess layers of coverage, the market remains generally competitive.

In some areas there have been substantial rate increases. For example, insureds in the energy sector, especially those with pipeline exposure, have experienced up to 40 percent increases. Marine or energy insureds with Gulf of Mexico exposure have seen rate increases of up to 25 percent.

In the United States, casualty insurance market conditions remain stable to slightly soft, though rate reductions appear to be moderating; most insureds experienced near flat renewals in the second quarter. Although the market is favorable for most insureds, some challenges are emerging, especially for those with loss experiences in certain classes and in some workers’ compensation markets.

Exposure levels are increasing slightly in certain lines of business – a key driver that could affect the overall casualty market in the second half of the year. This is particularly acute in select industry groups, notably those that have rebounded dramatically, such as the technology sector.

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Financial and Professional Insurance

The U.S. directors and officers (D&O) liability market remains relatively soft, with most insureds experiencing flat to slight decreases in rates at renewal. Market capacity remains strong and policy terms and conditions continue to improve.

However, proposed government actions may impact the D&O market in the near future with the inclusion of whistleblower and clawback provisions in both the Dodd-Frank Wall Street Reform Act and the 2010 Consumer Protection Act. Additionally, there is an expectation that claims brought by the Federal Deposit Insurance Corporation against directors and officers of failed financial institutions are expected to increase throughout the year.

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Capacity Issues

There has been some reduction in available capacity for natural catastrophe risks, with many insurers now looking to reduce their exposure unless pricing is attractive and retention levels are higher. Some insurers have withdrawn from the Japan catastrophe risk market or have increased their pricing substantially. In addition, carriers are reducing capacity in casualty business on certain accounts.

Reactions have not been uniform across markets. For example, while some London market insurers have withdrawn capacity for certain risks, there have been no reported reductions of catastrophe capacity by Bermuda-based insurers. As a result of this uneven response, insureds are increasingly looking to international markets to fulfill earthquake capacity requirements.

As noted last quarter, RMS 11 has influenced the quarter’s reinsurance treaty renewals. In response, insurers are buying more reinsurance and have reduced their exposure to its effects by decreasing capacity in affected states.

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