Revisions in catastrophe models most likely won't offset the lack of demand in the reinsurance market, Moody's Investor Service said today.
In a brief outlook, Moody's said reinsurance demand remains stifled because primary insurers have tighter reinsurance budgets and lower volumes due to reduced economic activity. This is not expected to change due to the model revisions, "despite the expectation of increased modeled losses in certain peril zones," Moody's said.
Insurance executives have openly wondered about the latest version of Risk Management Solution's (RMS) U.S. hurricane model and the potential effects it could have on rates. The model is said to make adjustments to the impact of wind during a hurricane—possibly putting more risk inland as the modeler looks at the interaction of wind and the surface of the sea.
Still, Moody's said, "absent a transformational catastrophic event, we expect pricing to continue to deteriorate during 2011 and believe that the eventual 'turn' in the reinsurance pricing cycle may still be two or three years away."
Excess capacity was boosted by increased capital from reinsurers' retained earnings and unrealized gains on fixed-income securities, Moody's said.
The weakness in global reinsurance pricing now reported by Aon Benfield, Guy Carpenter, Willis Re and Towers Watson is "credit negative" for reinsurers, since it puts added pressures on underwriting margins and profitability in 2011, Moody's said.
Property reinsurance rates in the U.S. are reported to have declined 5-10 percent at Jan. 1 renewals.
Casualty rates were flat to down 10 percent, with terms and conditions holding, except for weakening in certain liability lines, Moody's said.
"This is something we will continue to monitor closely in light of substantial losses that resulted from a meaningful weakening of terms during the last market downturn in the late 1990s," Moody's added.
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