Rates for property catastrophe reinsurance — a major industry in Bermuda — rose by around eight percent in January 1 renewals, according to global reinsurance broker Guy Carpenter & Company.

The industry had anticipated harder rates following high catastrophe losses in 2008, as well as a major erosion of capital caused by the turmoil on the world markets.

But in its report on the start-of-year renewal business, Guy Carpenter said rates had risen by nothing like the degree of those that followed previous years of major losses, such as Hurricane Andrew in 1992, the 9/11 terrorism attacks in 2001 and Hurricane Katrina in 2005.

The broker reported that rates rose by 11 percent on average in the US, though there were great regional differences. Continental Europe remained relatively stable, with rates increasing between zero and ten percent on a risk-adjusted basis. Rate changes in the UK ranged from -2.5 to five percent.

Casualty reinsurance rates rose five percent, as a lack of capacity forced rates higher. According to the Guy Carpenter, a number of programmes "could not be placed at any reasonable rate".

Marine rates rose ten to 15 percent on average, while offshore energy pricing, particularly in the Gulf of Mexico, was substantially higher. The aviation renewal showed little change, with pricing stabilising.

"Price increases at the January 1, 2009, renewals have been tempered somewhat by large capital positions, which have enabled carriers to absorb the year's losses, but the marketplace remains highly volatile," said Chris Klein, global head of business intelligence, Guy Carpenter.

"We have seen wide differences in pricing, dependent on a number of factors, such as loss history, geography, and line of business. At the same time, the expectation of another above-average storm year and the ongoing credit crisis underscore the need for disciplined capital management in the coming year."

The extent of the losses suffered by reinsurers in 2008 is borne out by the Guy Carpenter Reinsurance Composite, consisting of 16 leading firms that lost aggregate shareholders' equity of $17 billion (16 percent) by the end of the third quarter of 2008.

Reduced capacity also brought higher rates for retrocessional coverage — where a reinsurer spreads its risk to another entity. The market was constrained by an inability to replenish balance sheets as a result of the financial catastrophe, as well as the withdrawal of major players from the market.

Guy Carpenter found that a number of reinsurance buyers sought 2009 capacity in the form of Industry Loss Warranties (ILW), as early as October 2008. Several major purchases led to higher prices, as carriers increasingly looked to replace catastrophe bond capacity with ILW cover. Higher demand and a limited ILW capacity are likely to continue into 2009.

"Though the financial catastrophe has affected pricing, it has been less extreme than might have been expected," Mr. Klein said. "In the end, effective risk and capital management practices have enabled the industry to absorb the shocks of 2008 effectively.

"Looking forward, there are a number of unknowns that could negatively impact rates, such as another above-average catastrophe year or a financial surprise. On the other hand, a resolution of the credit crisis could restore asset values and improve the financial conditions of insurers and reinsurers.

"The first half of 2009 will therefore be a waiting game, with dramatic events having the potential to either negatively or positively impact the market and pricing."