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US mid-year increases to continue in 2012

Renewing flat in the US is not likely to be an achievement matched by many short-tail cedants in 2012 - particularly for those with wind exposure.

"Most of the quotes we've been putting out have increases in the 10-15 percent up range. We're hearing from brokers that we're consistent with other markets out there," one senior underwriting source told The Insurance Insider.

"Last year 1 January (1.1) was down 10-15 percent, so even just to get back to where we were before last year pricing has to be up in that range," he said, adding that most quoting so far had been done for small to mid-sized US regional carriers.

A senior reinsurance broking executive from one of the big three intermediaries added that he is anticipating a continuation of what was seen at mid-year in terms of pricing.

"It's going to be a difficult renewal. Pricing is certainly not going down. I think it's fair to say it's the toughest renewal since 2006 and it's going down to the last weeks of December.

"You have to be straight with your client and tell them what to expect. If you're getting a range of quotes at 10-20 percent up, there's no point going to the client and saying 'they're only bluffing let's go in flat'. It's all about price discovery," he explained.

The executive added that it was also crucial for a broker to anticipate how reinsurers will react to an order.

"There are some reinsurers that will halve their line if they quote +10 percent and you put it in at +7.5 percent, or which will come off completely if you come in at +5 percent. There are others that have quoted +20 that will still write their full line if you put it in at +7.5.

"It's as much about knowing your reinsurer as your client," he suggested.

Regional challenges

Generally, renewals are expected to be toughest for regional carriers that have either passed losses onto reinsurers in 2011 or have been significantly impacted by RMS Version 11.0 (v11) - such as those with a northeast focus.

In several cases that is expected to result in insurers being forced to take a higher retention in order to free up budget to buy additional cover at the top of programmes.

"Some clients are looking to retain a bit more to buy more on the top. It's also basic economics that where they've passed losses to reinsurers for two or three years that buying reinsurance at a lower level becomes unaffordable," explained a reinsurance broker.

"There's a combination of increased modelled loss costs and increased actual loss costs through higher loss experience - that makes it very difficult to buy at the same level they have been," he said.

A reinsurance executive added that regional carriers are "trading off" by moving retentions up to avoid full payback on losses passed to reinsurers and are instead redirecting budget to obtain more cover at the top.

As previously reported by The Insurance Insider, the unusually high frequency and severity of losses in the US this year - notably the record $20bn+ tornado, hail and thunderstorm losses - meant hits for reinsurers on programmes designed to attach for so-called peak perils, such as hurricane and quake.

"You've got some regional players like Cincinnati Financial who hit their programme with both Hurricane Irene and the tornadoes. That's going to be a difficult renewal," a Bermudian underwriter predicted.

"Some buyers are going to see the combination of actual losses in their programme and model change come up for the first time at 1.1 - and those are going to see price rises at the high end of the range, maybe in excess of 20 percent," he continued.

The chief underwriting officer of one Bermudian reinsurer suggested that covers for the worst-hit midwestern regional insurers are now being priced on actual loss experience rather than tornado, hail and thunderstorm models.

"Historically people haven't spent enough time looking at the losses rather than modelled output. But there's finally a recognition that what they've been paying is woefully inadequate relative to what they've got back from reinsurers," he said.

He added that existing reinsurance panels for Midwest writers "have finally reached saturation point" and that regionals - also including northeast players hit by Irene and winter storms - are "taking a beating on covers and pricing".

Blended approach

According to Hans-Dieter Rohlf, managing director and chief underwriting officer of Hannover Re's North American treaty division, the market is yet to see the full demand impact that had been predicted when RMS v11 was officially launched earlier this year.

Generally, US insurers are presenting modelled data on their portfolios of business to reinsurers based on a blend of RMS versions 10 and 11, as well as AIR, and are consequently not looking to buy up to the top end of the expected loss output from v11.

The shift to blending models reflects a change in attitude from ratings agencies, which previously would have been likely to frown on an insurer moving from a one-model approach.

But ratings agency approval isn't the only factor influencing buying decisions.

"It's also a question of whether shareholders and supervisory boards feel comfortable with that approach, and that varies from company to company," Rohlf explained.

While regional players are changing buying in response to 2011 loss experience and model changes, nationwide carriers - who typically come to market later - are for the most part looking to renew their structure as expiring.

Instead they are "buying a bit differently, trying to be more precise in their purchasing", according to TigerRisk CEO Rod Fox, including the exploration of sideways protection for those that took frequency losses net.

Those that have largely retained losses net and don't have outsized model changes are expected to see rate rises at the lower end of the scale, in the mid-single digits.

Nationwide cat programmes in the market for renewal at 1.1 include Chartis, Liberty Mutual, The Hartford and Ace.

Smaller and regional accounts include Safety Insurance, Farm Bureau Mutual, Unitrin, Cincinnati Financial, Germania Insurance, Horace Mann, Hannover Insurance and RSUI - part of Alleghany.

In the North American market outside the US, Canada is also seeing increased demand for higher cat layers as a result of the country's insurance regulator requiring insurers to buy up to a 1-in-400-year return period - higher than the 1-in-380-year period required last year.

Meanwhile, casualty reinsurance renewals are expected to follow the pattern of recent years, with reinsurers cutting back in response to the soft market.

"Reinsurers have continued to support the companies and individuals they believe do a good job. But they've cut capacity, put pressure on ceding commissions, taken away profit conditions and tightened caps.

"Insurance companies still seem happy to retain a lot of that risk on their balance sheets," a leading broker explained.

But Rohlf suggested that, with underlying business seeing improving conditions on rates and exposures, there is a more positive outlook for casualty reinsurance demand.

"There's more money up front, and the more comfortable it is for insurers the more they can spend on reinsurance. Whether they do that is what we are negotiating," he said, acknowledging that there was little sign yet of new firm orders.

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