Reinsurance market responds in fragmented way to historic losses of 2011

After absorbing historic catastrophic losses in 2011 in excess of $100 billion, reinsurers responded in a fragmented way during the Jan. 1, 2012 renewal season, according to a report by Guy Carpenter.

The report, Catastrophes, Cold Spots and Capital, notes that “while the market has tended historically to respond to loss activity or model change in a relatively uniform fashion, there was a much greater degree of customization in reinsurers’ responses at this [Jan. 1] renewal.”

Consequently, this led to “significant market fragmentation and increased market volatility” as of the Jan. 1 renewals.

Despite the large-scale catastrophe losses in 2011, insurers’ capital levels rebounded by the end of the year, Guy Carpenter observed. As a result, reinsurers didn’t necessarily follow a traditional supply-and-demand economic pattern in their responses (i.e. replenish lost capital as a uniform response). Instead, they could afford to step back and pinpoint how model releases were used in their underwriting processes.

“This gap in the perspective of risk is growing as reinsurers are becoming increasingly sophisticated in deconstructing models, making adjustments and even creating their own models so as not to be dependent on someone else’s changing view of risk,” the report says. “The ultimate result of this is a market that is becoming more fragmented and more customized in its view.

“A thorough understanding of a company’s risk profile from a variety of perspectives, analysis as to the most appropriate representation of a company’s risk and very candid dialogue with reinsiurers on understanding the risk and its drivers are absolutely essential in order to navigate this shifting environment.”