On rates: What will turn the market?

Moody’s agrees with other reports: Rates on Jan. 1 renewals of the reinsurance market are down between 5% and 10%.

So the story is both depressing (from a reinsurer’s POV) and monotonous (from a blogger/journalist’s POV). So, a couple of twists:

  • Moody’s also doubts that the new version of the catastrophic model RMS will turn the market. RMS is the leader in modeling catastrophes and its post-Katrina work helped drive the last big jump in property rates. But RMS is telling the Wall Street Journal (NO sub req) that the new model, due out in a couple of months, will drive exposures significantly higher inland, while possibly giving coastal exposures a break.
    The 1-in-100 storm for a typical insurer could rise 15% to 25%, with exposures in Texas and the mid-Atlantic states shooting up even more. As far as I know, reinsurers weren’t using the leaked RMS information to increase rates, so when the information does flow into reinsurer’s computers, things could get interesting.
    Offsetting this is a tendency for reinsurers these days to prefer short-term risks, like property. It’s tough these days to justify buying bonds at today’s low interest rates to support long-tailed casualty business.
    Meanwhile, most insurers acknowledge that homeowners rates are too low, a point touched on in this story about CEO reaction to the looming model change. The rate inadequacy, though, is caused by underpricing risks in non-coastal states, something that cat modelers haven’t convinced the industry that they do well. And I think it would take a big jump in Texas exposures to create a shortage of capital to support the market in, say, Montana. But it is a dynamic market, so a change in one place can affect other places.
  • In a non-cat vein, stock analyst Keefe, Bruyette and Woods, said the market could harden “sooner than many anticipate.” However, from the report I saw, it looks like that is a single line, perhaps a throwaway, in a much longer report. I’d be curious what reasoning they were using.
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One thought on “On rates: What will turn the market?

  1. […] This post was mentioned on Twitter by Reactions. Reactions said: RT @jimlynch9999: On rates: What will turn the market?: http://wp.me/pSIxF-HK […]

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