Similarly, reinsurers imposed a rate hike of just “a few percentage points” on Zurich Insurance Group Ltd. at its Jan. 1 renewals, says Dan Loris, a senior vice president and head of group reinsurance for the Americas.

Insurers are “seeing pretty stable capacity and pricing,” Loris adds.

“It's not nearly the hardening that was expected,” agrees John Ward, CEO of Cincinnatus Partners LLC, a Loveland, Ohio-based private-equity firm specializing in the insurance industry that tracks reinsurance trends as part of its investment research.

Ward says he has seen catastrophe rates increase by low-single-digit percentages: “nothing really dramatic by any means.”

Flandro estimates that property-catastrophe rates were 8 percent higher at Jan. 1 renewals.

Observers point to two key factors that are keeping reinsurance prices under control.

One is an abundance of capacity—and at most stable or, in many cases, diminishing appetite for reinsurance cover among carriers.

The other key reason: RMS Version 11 is having much less of an impact than many had anticipated.

CAPACIOUS CAPACITY

The combination of ample reinsurance capacity and lackluster demand from insurers has resulted in a renewal environment that can be characterized as “very orderly” so far this year, says Bryon Ehrhart, the chief strategy officer for top reinsurance broker Aon Benfield.

Catastrophes last year caused $380 billion in economic damage, according to Munich Reinsurance America. And a record $105 billion of that was insured. Domestically, catastrophes caused $75 billion of economic damage, about $35.9 billion of it insured—the fifth-highest U.S. annual total.

Reinsurers covered a significant portion of those losses, according to the Insurance Information Institute (see chart).

As a result, even insurers with no catastrophe losses were expecting sizable rate hikes this year.

But despite 2011's enormous cat figures, reinsurers' $455 billion of capital at year-end 2011 was down just 3.2 percent, or $15 billion, from the industry's record $470 billion a year earlier.

Capital fell only a fraction of the amount reinsurers paid out on catastrophe losses for several reasons, Flandro explains. For one, reinsurers released significant reserves; in addition, interest rates fell, which drove up the value of bonds in reinsurers' investment portfolios.

As a result, reinsurance capacity overall remains robust—but in an environment where carrier demand is tepid.

It's an “unusual phenomenon,” says Ehrhart, that so much reinsurance capacity exists and that insurers are not demanding it a year after particularly large catastophe losses for both insurers and reinsurers.

What accounts for carriers ceding less risk to the reinsurance market?

Insurers, “pressed for margins,” are retaining more risk, especially on the casualty side, Ehrhart observes.

Zurich's Loris agrees. “As insurers' balance sheets strengthen, they're not as reliant on reinsurance,” he says. As a result, insurers are “squeezing every dollar of profit out of the balance sheet” by increasing their casualty retentions.

Zurich, however, did not increase its retentions this year, as it already had adjusted them a few years ago, Loris notes.

Philadelphia reduced its catastrophe-reinsurance purchase at its last renewal in two ways: On its first reinsurance layer (which provides $5 million of coverage in excess of $5 million in carrier loss), Philadelphia increased its retention to 50 percent from 40 percent.

In addition, Philadelphia reduced its book of windstorm-exposed properties in Texas, a move that reduced its total catastrophe exposure.

So even with the marginal rate hikes reinsurers are imposing, many insurers are paying no more in total premiums for their property-catastrophe coverage because they are retaining more risk and buying less coverage, notes Ehrhart.

RMS 11: WHAT RATE REVOLUTION?

Many industry experts thought the upward-pricing impact of the RMS Version 11 U.S. Hurricane Model, introduced in February 2011, would be substantial—as the revisions to the model significantly elevated the total-exposure estimates for most property portfolios.

But as it turns out, this has not been the case.

Robert Andrews, head of ceded reinsurance at XL Group of Exton, Pa., says he “noted a degree of property- cat capacity constriction early in the year,” which he attributes to reinsurers' early response to the updated windstorm model. “But that seems to have evened out a great deal by May.”

The reason the rate and capacity impact has been less than expected: Reinsurers' are not relying solely on the new model to guide their decision-making, market executives note.

“Reinsurers are being reasonable,” and they understand that many insurers dispute certain projections the new model makes, says Henning Haagen, head of reinsurance at Allianz Global Corporate & Specialty, a division of Allianz Group.

Insurers' objections to some elements of the model “globally caused insurers and reinsurers to question the rigorous use of models,” says Guy Carpenter's Flandro.

Instead, reinsurers typically are using a blend of different models, including their own, he adds. “We think that's healthy.”

“[Most] everyone has implemented RMS 11 to a certain degree,” says Michael Finnegan, chief operating officer of Liberty Mutual Reinsurance, a Stamford, Conn.-based unit of Liberty Mutual Group Inc. But the new model is “only one of the tools” reinsurers are using, he says.

“The impact of RMS Version 11 is fascinating,” observes Andrews of XL. “Depending on your point of view, it has been either the most polarizing event in insurance history, or it has been the impetus for frank debate on modeling and its rightful place in our business.”

And what's his perspective?

“Clearly, it has been the latter, as companies are ever-more critically evaluating the various cat models' underlying loss and damageability factors—particularly as they relate to their own books of business,” he adds.

Munich Re is one reinsurer that did not implement the new RMS model since it relies on an internal model, says Pina Albo, president of the Reinsurance Division at Munich Reinsurance America.

Munich Re also has updated its model—but the reinsurer continually refines it and the latest adjustments were not a response to the RMS update, Albo notes.