Insurance buyers should enjoy the reduced premiums now — because the soft market won’t last forever.

Despite the declines, “2010 will prove to be the beginning to the end of a six-year soft market cycle,” MarketScout CEO Richard Kerr said in a statement. “While rates were still down for all of 2010, they did moderate and held steady at smaller reductions in a tight range,” declining 3% to 5%.

“We anticipate slight reductions on competitively marketed placements for the first six months of 2011 and flat renewals for accounts not under market pressure,” Mr. Kerr said. “By year-end 2011, the longest soft market period in the last 70 years will finally come to a close.”

What’s the saying? All things end badly. Otherwise they wouldn’t end.

Get it while the getting’s good.

In the report, “April 1 Reinsurance Renewals: Rates Lower; Returns Under Pressure,” the risk and reinsurance company covers regional developments as well as key issues and trends, which includes:

JAPAN

• Rates at the April 1 renewal showed a declining trend in most classes.  Specific changes varied by line of business, and there were occasional exceptions on problematic lines, such as marine hull proportional treaties.
• Total capacity sought by buyers for their major catastrophe exposures was similar to the expiring year, with reductions by some cedents and increases by others.
• The effect of the Chilean earthquake was limited, though it is possible that timing may have played a part, as many of the major placements were quoted, priced and, in some cases, completed before the effects of this loss could be fully realized.

US PROPERTY CATASTROPHE

• Pricing for U.S. property catastrophe reinsurance at April 1 saw the continuation of the decreasing pricing trend in evidence at January 1.  Capacity continued to be plentiful – a critical element in companies’ ability to secure favorable terms and conditions.  Individual renewals vary significantly, based on each company’s own experience and positioning.
• U.S. catastrophe pricing for nationwide companies decreased 8 percent when not factoring in the impact of the catastrophe model changes, and by 13 percent on average when adjusted for these changes.

LATIN AMERICA

• Although not a significant source of April 1 renewals, the Latin American region provides an early indication of the implications of the Chilean earthquake for pricing and terms and conditions.  Preliminary estimates of the aggregate loss arising from the earthquake vary widely. The market may continue to evolve going into the July 1 renewals.  Overall terms and conditions in the region as a whole appear to be only modestly affected and, in some cases, unchanged by the earthquake. However, pricing varies by country.

REPUBLIC OF KOREA

• In the property catastrophe segment, price changes ranged from decreases of 7.5 percent to increases of 2.5 percent, reflecting the variety of changes and experiences that included increased aggregates, deductibles and, in some cases, limits.
• Korea’s property risk segment was affected by the Samsung loss of late March 2009, which occurred too late to be reflected in the April 1, 2009 renewal.  There was a second large loss in November 2009. Both losses were factored into the April 1, 2010 renewal, and loss affected treaties sustained increases of 10 to 15 percent. For loss-free treaties, rates were down by 5 to 10 percent.
• Pricing was down by 10 to 20 percent in the liability market.  Loss experience has been light, making the business more attractive to underwriters.

As Chris Klein, global head of business intelligence at Guy Carpenter said, “There are several significant renewals at April 1 in the U.S. that did not show signs of impact from the recent global loss activity. There was some evidence of price tightening in parts of Latin America. The Chile situation remains uncertain, and earthquake losses generally develop more slowly than wind events.  Up to half of catastrophe loss ratio budgets were consumed, causing reduced headroom for a larger catastrophe later in the year.  This scenario, along with buoyant balance sheets, lower investment yields and thinner reserve releases, will put pressure on returns — sustaining active capital management and perhaps, in time, stabilizing the market.”

We will keep an eye on this potential stabilizing of reinsurance rates for the P/C market — stay tuned.

We were all thrilled with the spectacle of the just-completed 2010 Olympic Winter Games from Vancouver. Winter sports are known for their inherent high levels of riskiness, so it should not be too surprising that some valuable lessons related to “personal risk management behavior” can be drawn from the way the athletes make decisions and how the competitions are conducted and judged. As risk professionals, when we watch the action on the snowy mountains and icy rinks, we can get another view on the choices made in the taking of risk or in mitigating risk. Here are just a few lessons that offer additional insights:

• Risk reward tradeoff in men’s figure skating. The most notable example being the quadruple jump. The new scoring system provides more points for a successful quadruple jump than, for example, a triple axel. The number of additional points, however, is marginal. Most skaters felt the additional reward did not match the increased risk of failing to execute the more difficult jump. Gold medalist Evan Lysacek opted not to do it, much to the chagrin of silver medalist Evgeni Plushenko, who did put in a quad. The lesson here: the scoring system drives behavior.

• Peer pressure leading to excessive risk taking in freestyle ski moguls and downhill ski. In order to contend for a medal in moguls, skiers needed to balance high speeds, precise turns and spectacular jumps. One skier’s results could lead subsequent skiers to modify jump choices or speed based on what they perceived to be necessary to win a medal. We also saw this in the women’s downhill, where eventual gold medalist Lindsey Vonn’s impressive time had two knock-on effects. First, many of the skiers who followed her crashed in their effort to match her time. Then the final skier, Maria Riesch of Germany, a gold medal favorite, was so intimidated by the crashes that she skied tentatively to an eighth place finish. The lesson: peer behavior can lead to excessive risk taking.

• Judging risk-based performance in freestyle ski moguls. Judges need to essentially quantify the qualitative. Judgment decisions are based on a combination of speed measurement (objective), turning quality (subjective), and aerials (subjective and objective). Assessment of aerials is based on the execution of the chosen trick. Each trick has an assigned degree of difficulty, and the overall weighting among the three categories is set beforehand. This provides a good framework for making risk preference / appetite decisions. Choose a set of independent factors, measure what can be measured (speed) or adopt a scale. For scaled factors, use multiple assessments (judges) and hedge against outliers (average the scores of multiple judges). Also, regularly review the scoring to ensure appropriateness and get feedback. The lesson: we CAN develop a scientific system for making decisions using expert judgment.

Sports provide us with benchmarks, analogues and evidence to illuminate the way the human mind deals with risk and reward. Applying this understanding to the rationale for companies’ risk decisions demonstrates that some actions may not be in the companies’ best interests. They may be driven by pressures to “perform” and to “follow the pack.” We were all thrilled with the spectacle of the just-completed 2010 Olympic Winter Games from Vancouver.

The report, “Cat Bond Update: Third Quarter 2009,“  says that various trends and activity within the cat bond market could result in a total of between $3 billion and $4 billion worth of issuance in 2009. Also encouraging is the report’s statement that new risk capital issued in the third quarter of 2009 rose 28.8% compared with the same quarter of 2008.

Though the cat bond market is still severely behind its 2007 performance, the conclusion of the fourth quarter of this year may see 2009 catch up to 2008 in terms of issuance.

David Priebe, chairman of global client development for Guy Carpenter suggests both caution and optimism with views of the cat bond market:

Given the increase in risk capital and the performance of the two bonds issued in the third quarter — both in terms of pricing and size — a fourth quarter that would account for more than 40 % of the year’s total issuance is not unattainable. [However], redemptions resulting from cat bonds maturing and a fairly light Atlantic hurricane season should also increase demand for new issuance.

The report offers the following fourth quarter 2009 outlook:

• Improvement in global financial market conditions and advances in the insurance-linked securities (ILS) collateral solutions — coupled with a stronger demand for issuance and the increasing capacity of investors — have resulted in a shift in the ILS market relative to the beginning of 2009.
• Investors are increasingly focusing on capital deployment and stimulating additional primary issuance, which is contributing to spread tightening.
• The consensus estimate for 2009 total issuance remains from $3 billion to $4 billion, implying a fourth quarter issuance rate of $1.2 billion to $2.2 billion.

Eleven more weeks of cat bond market activity will prove this prediction right or wrong.