In the first half of 2011, we have seen an unprecedented frequency of natural disasters. The loss burden to the insurance industry is substantial – perhaps in the $60 to $80 billion range – and economic losses will be significantly greater. These losses have had a meaningful effect on the capital position of the reinsurance industry. Although the industry as a whole continues to have a healthy balance sheet, additional catastrophe events may change this.

Perhaps equally surprising has been the fact that we have witnessed several events that according to most models should be very rare in a short period of time. This, coupled with the fact that some widely used industry models have been revised to predict substantially higher losses following specific events, is beginning to change the industry’s view of the true cost of bearing risk.

Over the last few weeks we have seen an upward trend in catastrophe reinsurance pricing driven principally by this new appreciation of risk. In the longer term price structures that adequately reflect the true cost of risk are in the interest of both cedants and reinsurers. Reinsurers are prepared to absorb volatility over the short term, but we must over the medium term deliver appropriate returns on equity. 

Amidst these short-term factors, we are also challenged to look at the long term trends that could shape the industry. Inflation, for one, is a persistent threat. Both economic and social inflation have been low and manageable for some time now, but it looks increasingly likely that we may see a reversal of these benign trends as developed economies deal with public sector debt and borrowing requirements, growth in developing economies increases demand for raw materials and tort liability systems become the outlet for addressing perceived social injustices.

Regulation also poses a threat. Good regulation is always welcome, but regulation that is not relevant may be damaging. We support the drive for professionalism in our industry, but a wider political drive to regulate the financial sector has potential implications for the insurance industry, including a potentially more expensive operating environment, and therefore more expensive product.

While times like these certainly bring an appreciation for the risk transfer product, it is only half the story. It is up to the reinsurance industry to stay relevant to primary writers. Our role is to help the industry manage volatility better. There are always new risks, and as we realize what they are, there will be a need for new products and new ways to structure risk. We need to listen to our clients, to understand what you are after, and see if we can provide solutions at a price that doesn’t undermine our long-term value proposition: an unquestioned ability to pay claims. 

As we navigate our changing environment, we are paying close attention to all of these trends, with a focus on preserving the value we provide you. We remain committed to providing a relevant partnership, backed by those qualities you have come to expect from PartnerRe: reliability, stability and a respectful discussion partner.