There is plenty of reinsurance capacity in the market, but insurers expect – and are getting – tougher scrutiny this year from reinsurers under pressure from low investment returns and high catastrophe losses.

Reinsurance capacity is about the highest it has been, but although the sector is awash with capital reinsurers remain cautious on risk in the Asia-Pacific region.

“The focus is on data quality and there is more scrutiny of modelling results,” a Europe-based reinsurance executive told insuranceNEWS.com.au. “The second area of concern is claims handling.”

The executive, who spoke to insuranceNEWS.com.au on condition of anonymity, says investment markets have taken greater notice of insurers’ reinsurance arrangements after last year’s catastrophes, when local insurers had to reinstate coverage and pay more for it.

With the June renewals under way, Suncorp Commercial Insurance CEO Anthony Day and Wesfarmers Insurance MD Rob Scott were asked about reinsurance at the companies’ investment briefings last month, and both noted that reinsurers are looking more closely at insurers’ portfolios and claims management.

The amount of capacity undermines the reinsurers’ arguments for price rises to reflect the higher risk of covering natural disasters in the region. The companies achieved significant increases for contracts that renewed on January 1 – about 40% for Australia and 80% for New Zealand.

Despite this, Mr Scott says upward pressure on pricing continues and reinsurers are considering the risks posed by Australian insurers individually, looking at each insurer’s risk portfolio and management.

Swiss Re Chief Property Underwriter Asia-Pacific Mike Mitchell says a major part of the reinsurance process is about understanding the business and exposures underwritten by insurers to enable accurate loss modelling. This includes analysis of the underlying policies issued by insurers and the impact of any claims that would be recovered from reinsurers.

Mr Mitchell says capacity allocation decisions are influenced by the underlying portfolio quality and the price of a given reinsurance structure.

“Loss events reinforce the importance of these fundamental underwriting disciplines,” he said.

Last year’s record year of natural catastrophe losses proved the value of reinsurance, which bore a large share of the losses from the flooding here and the Canterbury earthquakes, and still left reinsurers with $US178 billion ($179 billion) capital at the end of the year.

They are building their reserves further due to reduced losses this year, according to Guy Carpenter Head of Business Intelligence David Flandro. He says the improving capital position is likely to contain any attempt at price increases this year.

But although this year has so far been relatively free of the sort of natural disasters that plagued the industry last year, reinsurers still carry significant claims from those events on their books and are also suffering from lower investment earnings and the turmoil on financial markets.

Guy Carpenter notes that the pricing of retrocession is increasing. It says the hardening rates reflect not only last year’s losses but also continuing uncertainty over the ultimate costs of the events, particularly from the Thai floods.

The European reinsurance executive told insuranceNEWS.com.au “there is no bumper increase” of additional capacity visible in global markets at this stage.

“There is more caution exercised by international reinsurers on Australian business and on New Zealand business in particular, since boards will re-determine their risk appetite and retrocession capacity might simply not be available to offload part of the inbound risks assumed.

“The retro pricing is constantly increasing, and universal global retro cover is less available than in the past. There is no large new retro market in sight.”

A Standard & Poor’s review of reinsurers has found that strong capitalisation, enterprise risk management capabilities and conservative investment strategies have ensured that last year’s losses were “an earnings event rather than a capital event” for reinsurers.

“These strengths continue to allow some players in the market to take advantage of current conditions,” the ratings agency says.

How this will play out for European reinsurers has yet to be seen, as they are also battling a weakening euro.

The signs so far are that last year’s losses and this year’s financial turmoil are combining to force restraint on reinsurers.