CEE Renewals: Capacity & Retenions

This week – if nothing really sensational happens in the CEE/CIS (re)insurance markets – we’ll be posting insights about regional trends during the 2011 January renewal season. Today, our experts speak about the reinsurance capacity demand and supply in CEE and changes in retention levels of local ceding companies.

According to Aon Benfield, in the first nine months of 2010 the global reinsurance capital exceeded the record level set at 2007 and reached US$470 billion. The 17% capital increase on 9M 2009 was predominantly achieved due to realised and unrealised investment returns. Just as the broker predicted at the Monte-Carlo Rendez-Vous, deployment of the additional capital remained the key task for the industry. In the absence of attractive M&A targets and in presence of extremely low interest rates, ample capacity flew into basically all key regions of the world, and CEE was no exception.

Experts don’t give an exact capacity figure for the region; however, according to Guy Carpenter estimations, nat cat capacity, which takes up the bulk of the total volume, reached around EUR1 billion, with approximately EUR300-400 million allocated for risk excess of loss.

Opinions vary on whether this figure is enough or more than enough for CEE. “In the recent years, ceding companies have been actively increasing demand for cat protection, therefore Hannover Re considers the existing capacity in the segment quite sufficient and did not register a major increase during the January 2011 renewal season”, Alexander Guerassimenko, senior CEE treaty underwriter  at Hannover Re, told our blog. Hamish Dowlen, Guy Carpenter’s senior vice-presidend responsible for the region, believes the existing capacity was even “in over-supply”.

The key reason for interest of global reinsurers in the CEE treaty market is quite obvious: most local P&C players are subsidiaries of major insurance groups and their treaty risks are reinsured as group business. However, this past renewal season attracted new players to the regional market. According to Guy Carpenter, capacity was offered not only by established reinsurance companies but also by “new Lloyd’s syndicates and Zurich-based start-ups”. The newcomers were attracted by “increased rates and retentions for loss-affected programs,” Guy Carpetner stated.

2010 saw an increased frequency and severity of nat cats in CEE: according to Aon Benfield’s estimations, the region’s total economic losses related to natural disasters reached around US$12 billion. However, this development didn’t have a substantial impact on the total capacity demand. “Overall catastrophe capacity purchase in the region remains stable”, Aon Benfield noted in its renewal report. However, spring and summer floods and winter storms “resulted in an increased demand for frequency protection through catastrophe aggregate covers and increased pressure on loss affected layers,” the broker added.

However, costlier nat cats brough higher retention levels. “In general, reinsurers were reluctant to continue to support working layers and preferred to encourage an increase of retention levels to avoid the attritional losses ”, Guy Carpenter’s Hamish Dowlen, stated to our blog. “Retentions did increase for some of the loss-affected programmes where pricing on first layers would have reached an uneconomical level.” In addition, experts polled by our blog noted a higher demand for aggregate excess of loss programs protecting net retentions as an alternative method of reinsuring against multiple attritional losses.