Reinsurers took several large hits from the Asia-Pacific region last year, but have come back for more, with the April 1 treaty renewals proving there is still capacity to support the region.

The April renewals passed relatively smoothly, according to reinsurance analyses, although Japanese insurers saw large increases in property catastrophe cover.

Despite significant losses from earthquakes and floods being passed on to reinsurers last year, research shows the companies’ capital position remains strong.

Willis Re says the capital base of the reinsurance industry is largely unchanged from a year ago – “an extraordinary testament to the industry’s financial capability to absorb more than $US100 billion ($94 billion) of insured losses in 2011”.

Aon Benfield’s analysis of 28 leading reinsurers found their total capital reached a record $US251 billion ($244 billion) last year.

It calculates that global reinsurer capital fell 3% over the year to $US455 billion ($442 billion) at December 31.

But the reinsurers’ shareholders bore the brunt of the pain, with return on equity of the 28 measured by Aon falling from 10.4% to 4.6%, driven by catastrophe losses and poor investment returns.

The head of Aon Benfield’s International Market Analysis team, Mike Van Slooten, says 2011 showed the value of reinsurance.

“The reinsurance sector remains strong after a testing year in 2011 and continues to provide very efficient underwriting capital to insurers,” he says in a report.

Guy Carpenter says property casualty rates increased significantly in the Asia-Pacific region, but capacity remains available “at a price”.

“Reinsurers are becoming more sophisticated in their analyses, requiring more information and delivering more customised approaches,” the Marsh & McLennan-owned reinsurance broker says. “While capacity was available it was offered at a higher price and often with tightened terms and conditions.”

It says new capacity did enter the market from a few new entrants.

Most Japanese contracts renew in April, the start of the financial year there, so this year’s renewals were awaited as a sign of how the Tohoku earthquake and tsunami would affect the cost of reinsurance in Japan. 

Guy Carpenter says Japanese earthquake covers rose between 35-55% while earthquake excess of loss covers rose between 10% and 40%.

Aon Benfield says Japanese treaties stood up well, with modest reductions in event limits and ceding commissions.

“With the underlying earthquake exposures not growing there was limited need for additional earthquake excess of loss reinsurance,” it says.

Last year’s catastrophes hit Japanese insurers particularly hard as many of their clients had relocated manufacturing to Thailand after the earthquake, only to be hit by flooding there.

Guy Carpenter says the industry continues to revise loss figures from the floods.

“There is also a growing expectation that the Thailand floods will result in ultimate market losses of between $US15 billion ($14.6 billion) and $US20 billion ($19 billion),” it says.

Willis Re Chairman Peter Hearn notes that the floods have become one of the most difficult losses the global industry has had to manage. He says the magnitude of the loss came as a surprise and undermined the basic concept of geographic diversification in writing natural catastrophe perils.

“Exposures were significantly underestimated, especially as regards the extent of global connections across sophisticated supply chains,” he says in a review of the year so far.

Mr Hearn says it may take years to determine the overall loss, and the psychological impact on the global insurance industry will far outweigh the ultimate financial loss “for years”.

He warns that the industry’s major challenge is to earn acceptable returns on capital. Cash inflows to capital markets remain strong and the catastrophe bond market is absorbing large amounts of US hurricane risk.

According to Aon Benfield, nine catastrophe bonds were closed in the first quarter of this year, raising $US1.5 billion ($1.46 billion), the most active period on record for new issuance.

Reports note that loss activity during the first three months of 2012 is relatively light.

Guy Carpenter estimates the quarter’s losses will be less than $US5 billion ($4.8 billion), compared with more than $US50 billion ($48.6 billion) in the first three months of 2011.

Major losses so far this year include the sinking of the cruise ship Costa Concordia, regional tornadoes in the US and earthquakes in Mexico and Chile.