While some reinsurance market participants shared tales of earlyturbulence in the renewal process for Jan. 1, once the dustsettled, both sellers and buyers got a little less than theybargained for, brokers reported. “It's almost a situation now whereI think everybody's a little bit displeased with the outcome, whichis probably an okay settling point,” said Timothy Gardner, globalleader of property at Guy Carpenter in New York. “Clients obviouslystill feel like they're paying too much. Reinsurers probably didn'tfeel like they got quite what they wanted.”

“Maybe that's the sort of state we should be targeting,” hesaid. “I think, overall, the market's in a pretty healthyplace.”

Focusing on the property-catastrophe reinsurance market, brokerssaid the renewal process went far more smoothly for Jan. 1, 2007,than for Jan. 1, 2006–and stood in marked contrast to the “crisisconditions” at midyear 2006. But that doesn't mean the process wasentirely uneventful.

“There was some turbulence,” said Paul Kneuer, senior vicepresident and chief reinsurance strategist for New York-basedHolborn Corp. “A lot happened in the second and third weeks ofDecember.”

Brokers such as Mr. Kneuer reported that reinsurers went intothe renewal process with expectations “that 1/1 was going to feellike 7/1″ in terms of pricing, when 100 percent hikes onproperty-catastrophe risks were widely reported.

“Clients sure didn't have that expectation,” Mr. Kneuer said,noting that “the economics of the business” were different for Jan.1, adding that the types of clients that renew on Jan. 1 are alsodifferent from midyear, which is when a lot of national accountbusiness and Florida-specific accounts renew.

National personal lines writers “went out last spring and said,'We've got to buy this. We don't really care what it costs.'” Incontrast, “people who are insuring Pizza Hut franchises in Kansasdon't feel that way,” referring to the more typical 1/1 client.

Explaining the change in economics, brokers highlightedreinsurer profits in 2006. “We had a business that had a 30 percentreturn-on-equity–and most of the money is back on the table,” Mr.Kneuer said.

While numbers have not been officially tallied, Charles Hewitt,executive vice president in the Boston office of London-basedBenfield Group, said during a mid-December interview the overallcapacity increase for property-catastrophe seemed about 20 percent.Mr. Gardner put the magnitude in the 10-to-25 percent range.

Still, on the pricing side of the equation, Mr. Kneuer said, “wehad a real divergence between what reinsurers initially quoted onmany accounts and the final price.”

Giving an extreme example, he said he'd seen catastrophebusiness quoted at 60 percent increases that got done at 15percent. In such cases, he explained that reinsurers got a 30percent boost last Jan. 1 and were looking for another 60 to bringthe cumulative hike to the 100 percent they achieved at midyear fora different set of clients. The reality at the end of the day wasthey saw a cumulative 50 percent in these situations, he said.

“We also had working-layer business quoted at a 25 percentincrease that got done at single digits,” he noted.

For July 1, Mr. Kneuer said, “there was a little bit of a herdmentality [among reinsurers]. The whole herd was running hard andkept running [at Jan. 1, 2007] even though the economics didn'tsupport it.”

While he described a wider initial divergence between buyers andsellers than other brokers, all agreed that getting to a firmmiddle ground was hardly a tug of war–also agreeing that no onefaction of reinsurers showed a lack of discipline or willingness tobreak from the pack.

“It was hard, factual broking,” Mr. Kneuer said, noting thatbrokers went through presentations about client experience andexposures “point by point, fact by fact, market by market”–pointingout instances where modeled losses for particular insurers didn'tgo up, or to inconsistent pricing of particular layers.

“I think we've actually done an okay job as an industrybalancing where the cat business needed to go–and getting there,”Mr. Gardner said. Brokers helped clients show that “they thinkabout cat risk better.”

Refuting a popular assumption that “prop-cat is simply acommodity play” with no real differentiation in pricing or terms,he said, “we're finding that's less and less true.” The ability ofinsurers to demonstrate they can actively manage cat accumulationsand move their portfolios is increasingly important. “Reinsurersare responding.”

He also said there was more consistency among reinsurers onprice targets than was the case for Jan. 1, 2006, explaining thatreinsurers were at sea last year because pending model changes fromthe biggest vendors–RMS, AIR and EQECAT–had not yet comethrough.

Mr. Hewitt said stories of extreme market difficulties atmidyear coaxed parties to start the 2007 renewal process early,adding that while it was protracted, it was also orderly.

It could have been disorderly if reinsurers had “dug in theirheels” to try to force prices to July 1 levels, or clients refusedto pay more than they did at Jan. 1, 2006, he added. “The fact thatthey were willing to find that middle ground comes out of a lot ofthe groundwork we did” prior to negotiations, he said.

From a buyer's perspective, Kevin Kelley, chairman and chiefexecutive officer of Boston-based Lexington Insurance, saidreinsurance market conditions that existed for Jan. 1, 2006renewals were well within his expectations, commenting specificallyon noncatastotrophe property treaties and casualty placements. (AIGbuys catastrophe protection on Lexington's behalf, while the restof Lexington's reinsurance needs are purchased in Boston.)

“We have a lot of long-term relationships with reinsurers, so wehave a real good sense of where the market's headed relativelyquickly,” he said.

For property-catastrophe, if it sounds as if reinsurers cameaway less satisfied than cedents, brokers are quick to point outthat's not the case.

“There's lots of disappointment to share,” Mr. Kneuer said.Clients coming off a good year in 2006 are seeing 10-to-15 percentprice jumps instead of declines, and saying, “If that's what theproduct costs, I'm going to have to arrange my business to needless.”

For example, he said that insurer actions previously taken onlyin Florida–or just on the coasts–are now showing up in other areas.Media reports about how hard it is to buy homeowners insurance onLong Island and Cape Cod reflect real consequences of insurerdecisions to shed business or impose deductibles and new businessmoratoriums, among other things, he said.

“Those are things everybody did in Miami five years ago, and noweverybody does in Suffolk County, N.Y,” he said, adding that suchactions are also evident in the Gulf, the Carolinas, and along theNew York, New Jersey and Massachusetts waterfronts.

In the reinsurance market, Patrick Denzer, CEO ofMinneapolis-based Collins, said that while the Northeast was oneclear topic of conversation going into Jan. 1 renewals, initialconcerns about insufficient capacity didn't materialize. “Marketsupply is meeting demand,” he said. Buyers have responded to modelchanges by reducing exposures dramatically, he said. “So other thanin the Northeast, we haven't seen big increases in the amount oflimit demanded.”

While Mr. Gardner said that demand for property-catastrophecapacity was not up by more than 15 percent overall, the brokersall said the largest buyers, by necessity, are looking intoalternative sources of capacity, such as sidecars, cat bonds andprivate placements.

“It almost resembles a patchwork quilt,” Mr. Garnder said. “Theyneed to maximize capacity in syndicated markets and haveconversations with alternative sources of capacity to meet theirneeds.”

Turning to property per-risk and pro-rata contracts, brokerssaid those are simply being priced on underlying experience andexposures, and that reinsurers continue to limit the catastropheprotection in such contracts–an activity that began in 2006.

Mr. Kelley, who said Lexington buys “a fair amount” of pro-ratauncapped reinsurance, said the supply is shrinking.

Reinsurers prefer to put a cap on recoveries, he said. “We don'tthink that's fair. If you're getting a pro-rata share of thepremiums, you should pay the pro-rata share of the loss,” Mr.Kelley said, noting that Lexington has had “to be more creative andsmarter in trying to get [needed] capacity.”

For example, last August, Lexington entered into a sidecaragreement with Bermuda-based Concord Re Ltd., which agreed toaccept a quota-share participation in commercial property insurancebusiness written by Lexington.

“It was a way for us to utilize alternative capital” to dealwith the fact that pro-rata property protection oncatastrophe-exposed business was becoming more limited, Mr. Kelleysaid.

“Creating a one-to-one relationship with a special purposevehicle…has allowed us to write more business than we otherwisewould have, as well as to continue to control our net wind andearthquake aggregate positions,” he said.