Signs of Over-Capacity, Competition In Some ReAreas

By Lisa S. Howard
Reinsurance Editor

Although there are signs during the recent renewal season thatcompetition has returned to parts of the reinsurance marketplace,industry officials are not concernedyetthat reinsurers arereturning to the slippery slope towards a soft market.

“Weve had any number of our reinsurance markets on the phone,post 1/1, saying that theyre short of income, [asking if] we [had]additional business that we could show them,” said Charles Cantlay,deputy chairman of Aon Limiteds U.K. reinsurance group in London.“Reinsurers are extremely concerned about their allocated marketshare post 1/1.

“Clearly thats not a very healthy sign. That seriously suggestsover-capacity,” he said, noting that this is true in aviation,marine and non-marine. “On the good quality business, the vanilla,transparent business, there is unquestionably over-capacityworldwide,” he added.

Mr. Cantlay noted that the more difficult to place programs areretrocessional business, or programs which are multi-line ormulti-year, or particular areas of the business where there isstill a capacity crunch such as North American casualty, or D&Oand E&O, he affirmed.

Most classes are still seeing rate increases, althoughcompetition from Bermuda “has now spread from property cat intoper-risk and workers comp catastrophe, producing pressure on bothrates and signings,” said David Shipley, active underwriter withMAP, a managing agency at Lloyds.

“Bermuda has been a big source of new capacity out there,particularly on the property market, although less so on marine andaviation,” Mr. Cantlay said. “They have some very aggressivetargets for growth in 2003. Sometimes there just isnt enoughbusiness around to fill those targets,” he said.

Nevertheless, most officials interviewed believe that thecompetition that is beginning to creep back into certain sectors isbeing done with thought, rather than a consideration of marketshare.

“Its a marketplace that will continue to show responsibility,”said William Eyre, managing director and CEO with Towers PerrinReinsurance, a Philadelphia broker. “Whether its the new players orthe existing players, I think most people are moving in the samedirection.”

Although some people say that the new Bermuda companies arecheapening the deals, Mr. Eyre didnt think that was true.

Henry Keeling, CEO of XL Re Limited in London, was not concernedabout property cat rates peaking in some areas. “As long as peopleare using the models in an appropriate manner, theyre all going tohave a similar view of what the right price for the business shouldbe,” he said. “So there tends to be a point up to which there isvery limited capacity available, and then once you start gettinginto peoples price rangeobviously theres a variationa lot ofcapacity becomes available.”

All officials interviewed agreed that just because some levelingoff of property cat rates may have occurred, it represents only asmall portion of the industrys global premiums.

Mr. Cantlay attributed some of the increased competition to theconsolidation of the client base over the last few years. “Thereare fewer, larger, more sophisticated clients, which have differentbuying patterns,” he said.

Mr. Cantlay said clients last year examined every possible wayof saving “on the spending that they incurred in 2002. That hasmanifested itself in quite aggressive stances by the clientstowards the renewal terms that they were being offered in 2003,” headded.

“A lot of them have looked very closely at the originalbusinessthe attractiveness, the rating and the excess points of theoriginal business, and come to the conclusion that they can retaina great deal more, buy less reinsurance and run co-reinsurance,” hecontinued. “Therefore, the amount of dollars being purchased incertain of the reinsurance segments is actually quite significantlydown,” he said.

At least for U.S. companies, the large increases that cedingcompanies saw between 2001 and 2002 did not repeat themselves inthe Jan. 2003 renewals, affirmed David Robb, executive vicepresident for the Hartford in Hartford, Conn. Mr. Robb is involvedin reinsurance buying for his company.

Indeed, he said, on the property side, the Hartford during therecent January renewals saw a leveling or a slight reduction inrates, particularly U.S. catastrophe business, he said. “Forproperty risk business, it really is more of an individual companyexperience kind of issue, but again my expectation would be thatrates would, in the absence of some adverse loss experience, beflat to down a bit, for property risk.”

“Looking forward, property cat business will continue to befairly straightforward during 2003, and will continue to weakenunless there are some big losses,” said James Vickers, managingdirector with Willis Re in London. “The question is what classes ofbusiness will the reinsurers turn to next to fill up any shortfalls in their premium, and probably the answer is property riskand then, ultimately, property proportional, if they can convincethemselves that the original rates are at a sufficiently attractivelevel.”

However, Mr. Vickers thought that casualty was probably the laston the list of areas reinsurers would look. “D&O and otherprofessional liability areas have become so difficult,” he said.“There is an enormous opportunity if you wish to write theseclasses, but people are very nervous in engaging in those classesat the moment.”

Mr. Vickers said there are a lot of issues in the liabilityarea, globally, both in terms of original premiums and the moneythat the reinsurers want, but also problems over coverage andterms.

For example, a lot of the major reinsurers have been pushingvery hard to limit exposures or exclude exposures frompharmaceutical companies, he added.

They also want to limit and/or exclude exposures from theFortune 500 or Fortune 1000 companies who have disproportionatelybig third party liability exposures, he noted.

“For some insurers that specialize in that business, its beenproblematical and theyve had to negotiate their way around that,”he said. “But the people who its probably the most awkward for arethe companies that write just one or two of those bigaccounts.”

Theyve had to do some hard soul searching about whether it isworth trying to continue including a handful of accounts which areimbalancing their entire portfolio and making the renewal of theirtreaties very difficult and expensive, Mr. Vickers said.

Commenting on the effects of the new Bermuda capacity, Mr. Robbsaid they were much more active during the January renewals.“Theyre much closer to fully staffed. Theyve been expanding theiroperations to other than property-cat, which was their originalreason for being created,” he said.

“As they expand that capacity and bring people on board with theunderwriting skills, I think it will continue to help thingsimprove from a buyers perspective over the next couple of years,”he added.

“Youll have an increasing number of qualified underwriters withquality balance sheets and good capacity available, so I think thatwill be a helpful thing for reinsurance buyers,” Mr. Robb said.

Mr. Cantlay didnt think a soft market was around the cornerbecause “the shareholder discipline and the management discipline”following the World Trade Center loss is still extremely firm.

Mr. Cantlay predicted that firm market rates would last betweenone and four years, with 2002 being year one. “I think thatshareholder discipline and management discipline is still verystrong, and I think were going to see a hard market going through2003, and who knows what might be out there in terms of a catloss.”

If there are no losses in the latter part of 2003, theninevitably the market again will see some softening, he contended.“However, theres a lot going on out there in terms of depletedreserves, which is a pretty strong barrier, because people needmoney badly to pay for the sins of the past,” he said.

Reproduced from National Underwriter Edition, February 3, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.