Despite the impact of the ongoing credit and liquidity crisis to most financial services sectors, reinsurance companies are well-positioned to sustain reasonably significant property catastrophe losses or other large sequences of non-cat losses while continuing to meet the needs of reinsurance buyers, according to an analysis by Aon Re Global, the world's largest reinsurance intermediary.


With the cost of reinsurance capital in continued decline, Aon Re Global believes insurers will find that reinsurance is now a substantially more accretive form of underwriting capital than it was a year ago. "Equity risk premiums and credit risk spreads have become significantly more expensive for insurers, and the incremental benefit of reinsurance as an alternative source of underwriting capital has become even more pronounced," said Bryon Ehrhart, president and chief executive officer of Aon Re Global Services.

Most insurers and reinsurers have had very manageable impacts to earnings or capital as a result of the credit and liquidity crisis. This reflects an enterprise risk management success for the industry and provides a strong foundation as the industry heads into what appears to be a softening global insurance and reinsurance market. Ehrhart further commented: "Indeed, even reasonably high levels of property or liability catastrophes could be sustained by insurers without material disruption of the global business."

Jan. 1, 2009 Renewals

Aon Re Global anticipates the credit and liquidity crisis will lead to a slower decrease in reinsurance pricing for Jan. 1, 2009 renewals than otherwise would have been available had the crisis not reached its current or projected level. The January renewals will reflect the first time the decline in reinsurance pricing has slowed since the credit crisis began.

Should significant insured catastrophes occur before Jan. 1, 2009, the fast pace of rebuilding capacity will be unprecedented since the reinsurance and insurance markets are now aligned with sufficient existing and contingent (e.g. sidecar) capital providers.

The Capital Markets

While the pace of bond form transactions in 2008 may not reach the record levels attained though the end of 2007, the market continues to develop at a significant pace. Paul Schultz, president of Aon Capital Markets said, "We expect this complementary capacity to continue to provide 10-30 percent of the capacity required by insurers that purchase more than $500 million of capacity."

Facultative Reinsurance

The facultative market is balancing between the desire of cedents to spend less on reinsurance to sustain net premium growth in a softening market - an influence that's also driving higher casualty net retentions - and the increased use of facultative certificates by underwriters that fear higher net treaty retentions. Aon Re Global anticipates rate, terms and conditions changes in the property and casualty facultative markets that are in line with the movements insurers offer to insureds. Catastrophe model miss continues to be a driver of facultative purchases.

Property Per Risk

Heavy industries such as mining, metals, pulp and paper and energy have contributed more than half of the insured losses in 2008. Aon Re Global anticipates neither capacity reductions on Jan. 1, 2009 renewals nor price increases on unaffected programs. Such programs are likely to see further rate relief.

Casualty

Reduced demand from cedents in 2008 continues to impact reinsurers. Casualty capacity layers may increase or reflect lower levels of decreases than would otherwise have been achieved had the leverage from the underlying layers not been lost by reinsurers.