“I think the [primary insurance company] clients are pushing very hard, looking for reductions,” he said. The process took longer than expected, because while quotes went out, people were not getting early orders on the quotes, he said. Buyers were “constantly trying to adjust them, [asking,] 'Can we do slightly better?' he said.

On the whole, he said, the reinsurance underwriting market appears to be very disciplined.

While it is Mr. Childs' contention that primary insurers blinked when they grudgingly signed deals that weren't quite as attractive as they had hoped for, two reinsurance brokers recently reported that buyers saw better prices for 2011 than they did for Jan. 1, 2010 renewals.

“Overcapitalization in the reinsurance market continues to gradually push rates downward with price reductions at the Jan. 1, 2011 reinsurance renewals averaging between 5 percent and 10 percent,” London-based Willis Re said in a statement.

“Reinsurers are now lowering rates at the same, or faster, pace than insurers are lowering rates,” said Chicago-based Aon Benfield in a separate report.

In yet another report from a reinsurance broker, New York-based Holborn noted discipline on both sides.

“Reinsurers believe that some ceding companies are 'doing the right thing,' resulting in improved contract balances and lower exposures to reinsurers,” the Holborn report noted. The lower exposures, however, also translate into lower subject premium income (SPI), the report said, referring to the ceding company's premiums to which the reinsurance premium rate is applied to produce the reinsurance premium.

“Reinsurers, like primary companies, are struggling to keep their good accounts and maintain their volume, and thus have to reward good experience. But they also seek to preserve some balance between the premiums they accept and the limits they provide,” the report said.

“For accounts with lower SPI bases, this translates into a desire for [reinsurance] rate increases, even for preferred clients,” Holborn said, noting that the most common renewal situation in the market this year is flat to moderately lower rates-on-line (ratios of reinsurance premium to reinsurance limits), in tandem with moderately higher rates.

SUPPLY/ DEMAND DYNAMICS

Commenting on the demand for reinsurance, Mr. Childs said that over the last year and a half, primary insurers have looked to retain more risk, but that the situation could change in 2011 with a new model by Newark, Calif.-based Risk Management Solutions.

The new RMS model, which he said will “raise the bar,” is indicating that loss sizes are greater than anticipated. “It will mean that people will be looking to buy more cover because loss sizes will go up in the United States,” he said.

During Standard & Poor's Insurance Hot Topics Conference in late December, Taoufik Gharib, director and reinsurance specialist for S&P's Rating Services in New York, said “it remains too early to tell” what the actual impact of a model change in the works at RMS will be. He suggested, however, that higher property insurance prices for U.S. inland areas are possible, as well as lower prices along the Atlantic coast (See NU, Jan. 3, 2011, page 7).

In his assessment of the current market, Key Coleman, managing director for financial services consulting firm LECG in Chicago, joked: “The good news is that rates are definitely going to go up in reinsurance. The bad news is that it's not going to be this year—and worse, it may not be 2012, either.”

Mr. Coleman focused on reinsurance supply to support his view.

“What's impacting this is capacity,” he said. “Essentially, a lot of people will measure how much you can write based on what you have in the bank. To the extent that catastrophes don't eat into policyholders' surplus,” reinsurers have bigger banks, he suggested.

Insurers and reinsurers are expecting underwriters “to go out there and use the capacity and make a good return on it.”

“There's too much supply and not enough demand. That's what we're seeing again,” Mr. Coleman said.

Is it a buyers' market?

Rates in some areas have gone down a little, while others are stable, “but nevertheless, it is a soft market,” he said.

Although demand is not up this year, at some point Mr. Coleman said he expects that to turn around for reasons beyond the catastrophe model changes.

“If rates continue to go down, there will be some very astute buyers who will realize they are buying below cost,” he said. “When they determine that it is more advantageous to buy reinsurance than to hold [risk] net for their own account, that's usually a good signal you've hit the bottom and maybe things will change.”

Looking back at last year, he noted some major catastrophes, but even the Chilean earthquake, U.S. floods and other disasters weren't enough to change either the direct market or the reinsurance market, he said.

If something does happen to impact the market at the end of this year or next year, “potentially, reinsurance rates would go up and direct rates would follow. Then you would possibly see a spiral upward,” Mr. Coleman said.

At reinsurance broker Guy Carpenter, David Flandro, head of business intelligence in the London office, suggested that even a $50 billion hurricane event might not be big enough to fuel an upward spike. (See related article, page 14.)

In the liability lines, Mr. Coleman discussed the potential impact of loss reserve increases on reinsurance pricing going forward. “If we start to see some reserve increases for the 2008 and 2009 accident years, those could also impact both the direct and reinsurance markets,” he suggested.

To the extent that some insurers and reinsurers “start to true up” reserves for prior accident years, “that could also suck up capacity and could have the same effect as a catastrophe on the market, causing some hardening eventually,” he said. “But it's going to have to suck up capacity significantly just to have any rate changes by 2012,” he predicted.

Peter Hearn, chief executive officer of Willis Re, noted dual potential stresses of loss reserve changes and lower investment earnings on reinsurer profit margins. “Thin investment returns and declining back-year releases provide little cover for declining underwriting returns,” Mr. Hearn said. “In such an environment, any shock to reinsurers' capital base, either through underwriting losses or other capital events, is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear,” he said.

Mr. Coleman said another thing to watch is the municipal market, which he said is “touched in about 10 different ways by insurers.” For example, if the “city of Harrisburg, Pa., is considering bankruptcy, that rocks the bond market. It makes municipal bonds go down and insurers hold a lot of municipal bonds, which can impact their surplus and thereby capacity.”

The other side is that “they also insure them….So it touches a lot of nerves for insurers when the municipalities are having problems,” Mr. Coleman said.

(Separately, in November, analysts at Moody's Investor's Service said muni-bond exposure was not a big concern for property and casualty insurers, with Moody's analysts evaluating default risk and investment income impacts. See article titled “No Big P&C Problems Despite High Muni-Bond Levels: Moody's,” available on NU's website www.PropertyCasualty360.com.)

Providing another summary of the underlying drivers and trends impacting the reinsurance market in 2011, Brian Boornazian, chief executive officer of Aspen Re, focused on sagging investment returns overall as a factor that should eventually drive upward reinsurance price corrections.

Speaking on a conference call hosted by Credit Suisse early this month, Mr. Boornazian observed that a historically low interest rate environment continues, while underwriting rates are static—not moving upward to adjust for poor investment returns.

As a result, he said that although most carriers will show 2010 profits, “2010 will produce industry results that are weaker than 2009.”

Continuing his assessment, he added that “rate inadequacy in long-tail lines isn't yet being fully manifested on company balance sheets” and that property losses, while active, remained manageable.

So rates have only responded in specific areas that were impacted by large losses, Mr. Boornazian said. 

All this leaves reinsurers at Jan. 1, with rates that, in general, are inadequate for exposures. “We are generally seeing most reinsurers trying to react to this situation by looking for more adequate rate,” he said.

Overall, Mr. Boornazian said that the reinsurance market remains soft, but without dramatic reductions in most lines. “If I were to describe the market in general it would be one that is bumping along on the bottom—not where it needs to be, but not getting much worse,” he said.

“It appears that barring any significant event these conditions will remain the same for the balance of 2011,” he observed. “However, the factors contributing to rate inadequacy and the subsequent underwriting results will eventually bleed through company balance sheets.”

In the end, he said, rate needs to be “adequate for exposure, and it currently isn't. In some cases, insurance companies are retaining more of their business net, which will contribute to the recognition of the need for primary rate improvement.

“This will be compounded by the interest rate environment and potential drying up of prior-year reserve releases,” he concluded.

Paul Kneuer, Holborn's chief strategist, also suggested that current reinsurance market conditions are unsustainable. “The trends of falling prices and increasing capital can't both continue indefinitely,” he said. In addition, we see a number of forces that may accelerate a market correction, including inflation, weaker insurance-to-value, continuing active catastrophe seasons, Solvency II for non-U.S. reinsurers, and most particularly, underreserving.”

“Barring an extreme event, these items will not influence conditions in 2011 and likely not in early 2012. But at some point, financial constraints will start to influence reinsurance terms,” Mr. Kneuer said.

(Additional reporting by Mark Ruquet and Susanne Sclafane)