Property Catastrophe Pricing Remains in Check: Where is the Hard Market?

Flood Missouri

Flood Missouri

Our recent Willis Insurance-Linked Securities (ILS) Update reported property catastrophe rate increases but hardly the return to a hard market that many have been predicting. Why is this so?

The Situation

The modest increases seem surprising given the confluence of events. We have seen earthquakes in Chile, New Zealand, and Japan, floods in Australia and Thailand as well as tornadoes in Missouri, Alabama and elsewhere. (Re)insurer investment yields remain depressed. Finally, model changes have elevated the perceived U.S. hurricane and European windstorm risk substantially.

The Leading Explanations

Although some market segments have seen hardening pricing — retro rates on loss affected accounts have moved substantially — it is appropriate to ask why we seem to have avoided a broader hard market so far. One idea is that the loss activity was spread widely among market participants. Another possibility is that (re)insurers were very well capitalized coming in to 2010-2011 and remain so despite losses and reduced asset returns. Yet another is that unlike in 2006 rating agencies have taken a restrained approach rather than compounding the other factors.

Willis Insurance-Linked Securities Market Update Q4 2011

Read Willis’ Insurance-Linked Securities Market Update Q4 2011

The Capital Markets Alternative

Both of these and other explanations may be true; however, an intriguing possibility is that the capital markets have also helped delay the return of the hard market. One of the ideas behind the initial insurance securitizations in the mid-90s was to diversify beyond traditional capacity sources. At the same time, some hoped it would diminish the frequency and severity of the (re)insurance cycle itself. The idea was that the additional capacity would provide partial inoculation against hard markets.

Perhaps that is what we are seeing now. Capital has been available to support cat bonds, insurance derivatives, and collateralized reinsurance. Sure, prices have increased but still well within the range of a healthy market. New insurance-linked investment vehicles have started up and substantial sidecar money is potentially available if the cycle takes a more severe turn.


The maturing, deepening and diversifying of the capital markets property cat participation from 2005 to now may partially explain the delay in the return of a true hard market in 2011-2012 in contrast to the rapid emergence of a hard market after Hurricane Katrina. If so, this bodes well for policyholders as it may mean the market can now better absorb some substantial shocks to the system without the immediate severe dislocation we would have seen in the past. It also suggests that (re)insurers outside the property cat space should consider the potential impact of capital markets (re)insurance participation in changing the cycle dynamics for their sector. Developing capital markets capacity beyond nat cat and other segments where it presently exists could partially inoculate additional segments against hard markets too. Finally, it validates the work done early on to develop alternative sources of capacity from the capital markets and it reinforces their importance in achieving similar cycle dynamics in the future.


Willis Capital Markets & Advisory (WCMA) is a marketing name used by Willis Securities, Inc. (WSI), a licensed broker dealer registered with the U.S. Securities and Exchange Commission and member of FINRA and SIPC, and Willis Capital Markets & Advisory Limited (WCMAL), an investment business authorized and regulated by the UK Financial Services Authority. Both WSI and WCMAL are Willis Group (Willis) companies. Securities products are offered in the U.S. through WSI and in the U.K. through WCMAL. Readers should not place any reliance on any forward-looking statements, noted by such words as “should,” “may,” “expect” and “believe” contained herein. WCMA is not providing any advice on tax, legal or accounting matters and the recipient should seek the advice of its own professional advisors for such matters. Nothing in this communication constitutes any legal or financial advice or an offer or solicitation to sell or purchase any securities. Information contained in this communication is based on sources believed to be reliable, but no representation is being made as to the accuracy or completeness of such information. Unless otherwise indicated, any information contained in this communication is as of its date only and is subject to change.

About Bill Dubinsky

Bill Dubinsky is Managing Director for Willis Capital Markets & Advisory, where he heads the WCMA insurance-lin…
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One Response to Property Catastrophe Pricing Remains in Check: Where is the Hard Market?

  1. Pingback: Capital market capacity could slow the return of a hard market | The Alternative Risk Transfer, Catastrophe Bond, Insurance-Linked Securities and Weather Risk Management Blog

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