Reinsurers liked what they saw in the casualty insurance marketfor Jan. 1, but they may find the segment less appealing ifinsurance prices drift lower, experts predict.

According to Linda Johnson, executive vice president forcasualty in the Minneapolis office of Benfield Group, casualtyreinsurance conditions “are sitting at a comfortable equilibriumright now. There is certainly adequate capacity across all lines ofbusiness. Pricing is down slightly, but not overwhelmingly.Programs are being concluded at very strong security or at a slightdecrease–nothing dramatic.”

Kevin Kelley, chairman and chief executive officer ofBoston-based Lexington Insurance, noted that casualty business waseasier to renew than property for Jan. 1. “The [reinsurance] marketis much more robust and much more interested in writing casualty,”he said.

Despite writing a very wide range of exposures, “by and large,we find that the casualty [reinsurance] market has got a prettygood appetite for what we do,” Mr. Kelley said. “We meet frequentlywith the markets and have a chance to educate markets on what wedo. We do it not just at renewal time, but throughout theyear.”

Besides education, brokers pointed to favorable loss frequencytrends as the main factor increasing reinsurer comfort levels.

“Frequency is down–that has taken pressure off the system,” Ms.Johnson said, noting that the trends persist across the allliability lines. “That's not something I anticipated a year ago,”she added, highlighting an unpredicted plunge in securities fraudclass-actions that has impacted the directors and officersliability line, as well as declining accident frequencies inprivate passenger auto.

Still, Andrew Marcell, managing director for New York-based GuyCarpenter, said the casualty insurance market is stable. “Dependingon what class you're talking about, rates can be down 10 percent orup 5 percent. All-in-all, they're pretty flat,” he said–noting,however, that downward rate pressure is likely to accelerate withmore entrants to the casualty insurance market.

“There are more companies looking for reinsurance, and thosethat are in the liability market are looking more to alternativeforms of distribution,” he said, explaining that many are activelyseeking program business opportunities. “Before, they had fallenout of vogue. Now, they have come really back into themainstream.”

Mr. Kelley said the reinsurance market is competitive forcasualty business. “To the extent that upfront gross rates aredown–and they are down on casualty in general–reinsurers areaccepting the price decreases.”

But the reinsurance market “is still very well disciplined,” hestressed. “I sense based upon what we're seeing currently that 2007will be a very interesting year, because I think reinsurers arewilling to accept some amount of rate decrease–not a significantamount–and [they] will watch rate decreases very, very carefully onthe front-end business.”

Although Ms. Johnson said reinsurers are accepting primary ratedecreases and then some, agreeing to “give a little bit more” insome situations, she agreed that reinsurers are acting responsibly,and that they are generally concerned about the softness of theinsurance market. “To the extent that rates continue todeteriorate, I think reinsurers will be cautious–and they are goingto be less inclined to follow,” she said.

Mr. Marcell noted that a lot of casualty reinsurance is stilldone on a proportional basis, making the trend in original ratesthe “biggest influencer on reinsurance appetite.”

Mr. Kelley said a quickening pace of primary rate decreases isalready noticeable at the start of 2007. Primary casualty rateswere down 5-to-10 percent throughout 2006, “and we're seeing apick-up in rate decreases to where they're probably off now closerto the 10-to-15 percent range. That is a potentially troublingnumber,” he said, noting that insurers normally anticipate losscosts rising in the 5-to-6 percent range.

“If the [primary] market were to heat up and rate decreases wereto become more significant than that 10-to-15 percent, and/or losscosts were beginning to jump north of 5-to-6 percent, I think the[reinsurance] market would pull back,” he said.

Mr. Marcell said the reinsurance market continues to distinguishbetween insurers as they set prices on excess contracts and cedingcommissions on pro-rata business. “If you can demonstrate a decenthistory of results and a consistent buying pattern, you'll get someimproved terms. If you've had a poor loss history or reinsurers areconcerned about your strategy, then it's unlikely,” he said.

Going forward, he said, “I don't see reinsurers continuallyreducing prices as they have in the past soft markets,” pointing tothe increasing use of capital-adequacy models as a driver offinancial discipline. “There will be a point at which they're justgoing to say, 'I have to get certain return on my capital and thisis not going to meet it.'”

Stopping short of saying that reinsurers are exhibiting morediscipline than their primary carrier customers, he said, “It's adifferent discipline”–by necessity. He explained that while thereare thousands of primary companies, there may be less than 20reinsurers for a casualty segment, thereby creating riskaggregation issues. “They have to be much more careful about howthey're monitoring their accumulations and measuring theirdownsides,” he said.

Paul Kneuer, senior vice president for New York-based HolbornCorp., said for Jan. 1, the psychology of the reinsurance marketwas to have “very little patience” for casualty books–evenessentially good ones–that experienced some bad losses.

“There's been some frequency of medium-sized events. We're notseeing tons of $20 million events,” but a number of insurers hadlosses get into their reinsurance, he said, recalling a scenario ofa commercial vehicle hit by a private passenger car and promptingpayouts under several covers.

“Reinsurers' actions are very much addressing individualcircumstances,” he said. “Hope is not a business plan” in the mindsof reinsurers, who will ask, “'What are you doing differently?' Andif you're not doing anything differently, the reinsurers are goingto.”

Longer term, as enterprise risk management efforts pick upsteam, Mr. Marcell expects primary insurers to start asking morequestions. While ERM-type issues have been most talked about on theproperty side, the majority of U.S. companies that have gone out ofbusiness have not done so because of catastrophe losses, butbecause of inadequate casualty reserves, he said.

Insurers will ask, “What is my reinsurance really doing for me?How is it actually helping with capital management and managing myrisk of ruin?” he said.

The answers will be completely different for large nationalwriters and small regionals, he noted. “But I think, generally, theimpact will be that casualty reinsurance will be bought to dealmore effectively with the catastrophe element in liabilitybusiness,” he added.