Reinsurers continued to see soft market price declines through June and July renewals, but underwriters are not pricing for the next catastrophic event despite warning signs, an executive for Willis Re warned.
In its July 1 renewal report, Peter Hearn, chief executive officer of Willis Re, a subsidiary of Willis Group Holdings, noted that despite losses in the investment market and several catastrophic events throughout the world during the first half of 2008, reinsurers are inadequately pricing risk.
"Current pricing trends seem to indicate that the market is giving little weight to the potential for extreme events," wrote Mr. Hearn.
Two major catastrophe events--earthquakes in Asia and the spring typhoon in Myanmar--were devastating in their human toll but proved modest in insured losses. However, the first six months have seen an estimated $6 billion in major risk losses, plus losses from U.S. winter storms and tornadoes could "make the first half of 2008 memorable as one of the worst in almost a decade."
Still, those losses have not had a market impact, he said, but are reminders that this is a world "steeped in catastrophe risk," adding that the Atlantic hurricane season is just beginning.
Due to the market's tenuous condition, it is questionable whether there will be a substantial flow of capital into the insurance markets following a catastrophe event. This may indicate a need for "transient capital structures," primarily reinsurance sidecars, to cover reinsurance needs in the future, he noted.
Mr. Hearn observed that there is worry over the 400 legal actions filed concerning management and investment related to subprime mortgage loans, with more to follow, and "even a handful of adverse outcomes would have a meaningful impact on insurers and their reinsurance partners."
According to the review, depending on the line of business, risks with loss history are seeing modest increases, while risks with no losses experienced decreases.
Property reinsurance rates and capital markets prices experienced decreases of at least 5 percent and as much as 20 percent with no loss, depending on the region. With loss, rates rose as much as 20 percent.
Viewing specialties and workers' compensation, rates were flat for professional liability but down 5-to-15 percent for risks with no loss, and rose from 5-to-7.5 percent for risks with loss.
However, it is the unpredictable loss that is of most concern.
"Our industry faces numerous traditional risks, but it is these 'tail' events that drive change in the intertwined global reinsurance marketplace," Mr. Hearn said, noting such events as 9/11, Katrina and the decline of the banking investment house Bear Stearns.
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