First quarter pricing update

The latest Industry Loss Warranty prices from Guy Carpenter indicate that US hurricane rates continued to slip in the first quarter, but recent weeks have shown an upward trend. The cat bond market is also showing signs of rate increases. In Japan, the cost of catastrophe reinsurance - particularly earthquake cover  - continued to fall rapidly at the key April 1 date.  

Japan renewal season

April 1 is the inception date of most Japanese reinsurance contracts (coinciding with the start of Japan's financial year). Rates for Japanese earthquake cover spiked following the magnitude 9.0 Tohoku Earthquake in March 2011 (the most powerful Japanese earthquake ever recorded) and have been declining ever since - though rates for earthquake cover remain above the levels seen before the earthquake.

According to the reinsurance broker Guy Carpenter, rates for Japanese earthquake ILWs have fallen by 25%-30% in the last 12 months and rates for Japanese typhoon cover has reduced by 10%-15%. Willis Re, another broker, looks at the (indemnity) reinsurance market and estimated that rates for earthquake contracts had fallen by 10%-15% and 7.5%-10% for typhoon contracts.

Japanese insurers also succeeded in improving terms and conditions including changes in hours clauses and event definitions. Earthquake reinsurance is also bought on a proportional basis. Terms for these types of contract also improved for insurers through higher commissions and event limits.

A significant structural change was the trend to buy combined covers for earthquake and typhoon rather than separate contracts.

US Industry Loss Warranties

According to Guy Carpenter, rates for US wind ILWs fell by 2%-3% in Q1 2015  and fell 15%-20% over the last four quarters. Since April 1 very significant limits have been bound in the ILW market and falling trends in pricing are now being reversed. First event peak peril capacity is scarce and terms are bouncing back as a consequence

This chart shows the premium for a $50 billion industry trigger. Users who have registered (for free) can click here to see the interactive version which includes other loss triggers.

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Industry Loss Warranties are unusual in the reinsurance market insomuch as they rely on simple contracts that have remained relatively unchanged over long periods of time. This feature means that ILW prices provide a clean, timely signal of what is happening to reinsurance rates - though exposure growth can mean that the risk increases over time.

Secondary cat bond market

As discussed a few weeks ago, the pricing for new cat bond issuance has stabilised. The latest data from the secondary market indicates that risk adjusted yields have actually risen slightly over the last six months. This chart from RMS shows what has happened to risk adjusted returns for bonds exposed to both hurricanes and earthquakes. Registered users can click here to see all the data.


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Fund returns

Falling rates have a nonlinear effect of fund returns (and reinsurer profits) due to fixed fees (and expences). According to the Eurekahedge Advisors Index, average Q1 fund returns have fallen 45% from 1.5% in 2014 to 0.8% in 2015. This follows a 29% drop from Q1 2013 to Q1 2014. All three periods experienced very low loss activity.

The index estimated 2014 (full year) returns at 5.4%. If annual returns were to fall by the same 45% as Q1 returns (and loss activity remains very low) then 2015 fund returns would be 2.9%.

Posted: Monday, April 13th, 2015