Prices for reinsurance renewal coverage on January 1 will increase for certain property catastrophe risks despite the quiet 2006 season, according to a Standard & Poor's report.
The rating firm said pricing for renewals at the beginning of this year did not reflect new catastrophe models that were released showing greater potential losses from storms and were not priced in those rates. "However, even in U.S. peak zones, increases should be in the single digits," the report said.
After January, insurers will seek to pay less for reinsurance to make up for the losses that did not happen this year, or if catastrophe levels are projected to be low in 2007 and beyond. "Casualty pricing in general should remain flat, but should decline moderately in certain lines," the report said.
S&P analyst Laline Carvalho said that global reinsurers took several steps this year to improve their risk management and modeling by strengthening their own pricing models, risk accumulation controls and quality and consistency of data.
"Industry fundamentals were also strengthened, and some short-term uncertainties created by the 2005 losses were resolved," she said.
The report said that many global reinsurers increased their emphasis on bottom-line operating performance, as opposed to market-share.
"This should enable them to build and maintain much needed operating performance improvements in coming years," Ms. Carvalho said.
Recent observed changes should lead to more prudent underwriting decisions and reduce the probability of chronic underpricing and some of the earnings volatility as well, the report noted.
"Still, it is time for these companies to prove their management teams can achieve improved profitability over a sustainable period of time--something that has yet to be seen in this market," the report said.
In a similar vein, Bank of America reinsurance analyst Tamara Kravec said that the catastrophe-exposed property insurance and reinsurance market will remain catastrophe-constrained in 2007. "We are not likely to see excessive declines in renewal rates overall," she said.
Underwriting margins for casualty businesses probably peaked last year or earlier, but remain high by historical standards. "We expect premium rate reductions in some lines, but believe most business will represent a level of underwriting profitability sufficient for companies to achieve their financial goals," she said.
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