Reinsurance prices may jump if more big claims seen

Mon May 23, 2011 3:31pm BST

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* Reinsurance rates for U.S. property seen up 5-10 percent

* Wider industry price rise not expected yet

* Industry needs more losses to boost prices -rating agency

By Sarah Mortimer and Jonathan Gould

London, May 19 (Reuters) - Reinsurance rates are set to rise up to 10 percent for U.S. property contract renewals, but price increases are not expected across the broader reinsurance industry for now.

At the start of the year brokers and analysts estimated it would take up to $50 billion in catastrophe losses to halt years' of declining reinsurance prices and push prices back up to more profitable levels for reinsurers.

The industry has reached that mark. Losses from the tornadoes that swept through the southern U.S. states will add to tens of billions of dollars in insurance claims arising from a string of natural disasters over the first three months of the year, including the Feb.3 cyclone in Australia, the earthquake in New Zealand on Feb.22, and the March 11 quake and tsunami in Japan.

Prices are expected to increase in U.S. property casualty lines by 5-10 percent, but not across the broader reinsurance market.

"It would take another $30 billion of losses to wipe out all the excess capacity and contribute to a broader market turn," said Robert Derose, vice president of reinsurance ratings at rating agency A.M. Best.

The 2010-2011 losses are widely expected to be a significant hit to industry earnings, rather its capital base. But a further major loss could bring the market closer to the elusive "hard" reinsurance market, when reinsurers can charge more for the risk cover they offer their insurance company clients.

"A turn of the market is getting closer," said James Vickers, chairman of Willis Re International and Specialty.

But it would take another big event or more accumulated losses to take it there.

"The reinsurance industry was strongly capitalized in 2010, but some of that margin has been eroded early," said Gregory Dickerson, director at Fitch.

Reinsurers typically face their biggest damage claims in the second half of the year, during the North Atlantic hurricane season, which runs from June - November.

Any big payout would make it easier for reinsurers to justify higher prices for insuring against risks.

U.S. HURRICANE MODEL CHANGE

Recent changes to a U.S. hurricane model from risk assessor RMS - used by insurers and reinsurers to estimate their exposures to natural disasters - may help to boost prices.

The model changes has increased loss estimates for the amount of damage an Atlantic hurricane can cause for inland states increase significantly by up to 90 percent.

"We're getting closer to a trigger point," said Brian Schneider, senior director at Fitch.

"Each individual event is not enough to move the market, but if you factor in the aggregation of all the different catastrophe events, the RMS model changes, as well as underlying issues with low investment yields or reserves running low, and there is the momentum for a harder market." (Editing by Louise Heavens)

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