Over the last twelve months, U.S. reinsurance programs with rate increases outnumbered those with decreases. In many areas, market minimum rates on line increased by meaningful amounts between mid-year 2011 and January, 2012. This is the first time since 2006 that the overall market has risen significantly. Many year-end renewals were completed later than in prior years.
In addition, primary rates in the U.S. have also been rising, with flat to slight increases in most commercial classes during the summer months, and moderate increases on most renewals in the 4th quarter. Personal property rates have been rising in many areas for over a year due to catastrophe concerns.
We expect that overall reinsurance market capital levels will be down when December 31 figures are posted. Reinsurers with disproportionate exposure to large foreign events or sovereign debt problems in Europe will show relatively larger declines. For most classes of business and for most U.S. zones, industry capital more than supported the current demand. Only in Florida and the Northeast were levels of demand above current supply.
A key driver of industry capital and results has been an unprecedented worldwide run of catastrophe losses, and to a much lesser degree, U.S. weather-related events. We expect development on these losses to reduce reinsurers’ profits in 2012, as the market has not yet fully reported the Time Element loss in Japan, the June aftershocks in New Zealand, or the flood damage in Thailand.
Part of the recent frequency of large events is simply chance. However, our review of large loss experience over the last 50 years shows a consistent trend in large losses that the market has now begun to reflect. A major cause is exposure growth outside of the U.S., and while reducing available capital, price corrections should be relatively gentler here. The factors increasing foreign exposure levels include the spread of the free-market economic system, especially in Eastern Europe and Asia, more economic development in many countries, increased financing (and insurance) on properties and autos, broader forms of insurance coverage and, until very recently, soft terms and conditions in what had been seen as reinsurance "cold spot" territories, such as Asia and Latin America.
Although there have been surprising developments in Europe, both positive and negative, exchange rates did not change much overall during 2011. Reinsurers partly wrote down the sovereign debt of Greece and other peripheral members of the Euro zone. Some European regulators are now suggesting that all government bonds need to be carried at less than par value. This would sharply reduce the capital levels and share prices of insurers and banks in the peripheral countries, and to a lesser extent in the stronger economies of France, Switzerland and Germany. The likely restructuring of the EU and the Euro zone may cause large swings in capital levels for certain reinsurers during 2012 and is a further source of uncertainty. Concern about sovereign debt has recently caused downgrades.
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