June and July 2012 catastrophe reinsurance program renewals include many U.S. hurricane catastrophe exposed insurers, most Australia / New Zealand exposed insurers, many Asia ex-Japan exposed insurers, and a meaningful component of Latin American exposed insurers. Reinsurance capacity, measured by capital, returned to its previous record high of USD470 billion at the end of the first quarter 2012. Insurers' capital too continued to grow to new records. There continues to be an excess of supply over demand for reinsurance globally.
The June and July renewals are the last substantial set of renewal dates in the year. While 2011 ranked second in insured catastrophe losses, it ranked first for reinsured catastrophe losses. Insurers in New Zealand, Japan, Thailand and Australia are and were extensive users of reinsurance and their reinsurance strategies protected their earnings and capital from very material direct losses. The renewals of these programs proved orderly. The reinsurance market continued to provide the required capacity at accretive terms and conditions for these insurers. The size of the 2011 ceded losses caused many reinsurers to fundamentally re-evaluate their risk assuming strategies in the affected regions. Some even called for global price increases.
Risk adjusted rate increases were targeted to non-U.S. catastrophe loss affected regions. Reinsurers, in the end, recognized that substantial reinsurance buyers in the U.S. and Western Europe already pay multiples of the pre-2011 reinsurance margins paid by insurers in the 2011 loss affected regions. Aon Benfield correctly projects that global reinsurance margins would not move materially until reinsurance margins in loss affected regions were equalized with peak region margins. Reinsurance margins paid by insurers outside the U.S. peak zones for hurricane and earthquake remain very low by comparison and reinsurance in these regions remains, even after significant compounding percentage increases, a highly efficient source of underwriting capital.
Despite record 2011 ceded catastrophe losses, new capital flows stand at one tenth of the new capital that flowed into the reinsurance market after Hurricane Katrina. New capital simply was not necessary to sustain the capacity demanded in loss affected regions. Price changes in those regions were again meaningful at June and July however reinsurance remains a very efficient source of underwriting capital for the regions' insurers. In a continuing 2012 trend, reinsurers rewarded insurers that grew catastrophe exposure with better risk adjusted pricing than they allowed insurers that reduced their catastrophe exposure. This trend weakens the value proposition of reinsurance, destroys demand and reduces the credibility of the reinsurance underwriting process.