Canadian Reinsurance Sector Hits Burning Point
On the back of last years record soaring loss ratios, Canadas reinsurance sector has reached a critical burning point that could see some companies rejecting business or closing shop before the 2002 treaty renewals are concluded, several leading industry experts predict.
Reinsurers have laid down expectations of an average 10-20 percent rate increase for 2002 renewals with some expiring multi-year contracts likely to attract hikes of 30 percent and more.
The Toronto-based Reinsurance Research Councils president, Peter Borst, expects the 2002 treaty renewal discussions to begin in earnest by as early as September this year. “Everyone is anticipating getting an early start this year,” said Mr. Borst, who also is Canadian chief agent for Employers Reinsurance Corp. in Toronto.
Traditionally, negotiations with ceding companies have occurred in the first half of December when nearly 90 percent of the $18.4 billion (in U.S. dollars) in annual gross written reinsurance premium (based on 2000 returns) is renewed.
The driving factor for nearly all Canadian reinsurers with the upcoming treaty renewals is to regain adequate pricing, according to various industry sources. Thus far the increases implemented in mostly selective lines of business have significantly lagged developments in the U.S. and European property-casualty insurance markets, sources said.
Glenn McGillivray, assistant vice president (and head of corporate communication) for Swiss Reinsurance Company Canada in Toronto, noted that two main issues have hindered earlier price corrections: market fragmentation, and the fact that over two-thirds of Canadian business is broker-negotiated.
The heavy weighting of the business on the broker side has created a power dynamic so that few of Canadas 30 active reinsurers can afford to “buck the trend,” he added. “There can be up to 20 players [reinsurers] per [broker-negotiated] treaty which aggravates the impact of the markets excessive competition.”
There is no question that the Canadian reinsurance market is highly fragmented, observed Mr. McGillivray. With 240 primary insurers and 30 participating reinsurers, the Canadian p-c insurance industry (valued at $12.5 billion, based on 2000 returns) is one of the most fiercely competitive marketplaces relative to other developed countries, he said.
This, combined with the control exerted by brokerages on the placement of business, has resulted in a significantly lower average cession ratio in Canada when compared with the U.S. and other developed markets, he said.
Gordon Crutcher, a consultant at reinsurance brokerage Towers Perrin Reinsurance, said that the reinsurers he has spoken to have all expressed a strong resolve toward a general price increase for 2002 covers. “Even the better clients are going to get itGeneral increases are coming for everybody, it doesnt matter what the class [of business is],” he said.
Although reinsurance capacity is readily available, “it definitely isnt freely available,” he commented. There is plenty of capacity in the market subject to 25 percent rate increases, he noted, but placing business below these levels will prove a challenge for brokers.
However, Mr. Crutcher emphasized the fact that “the mess reinsurers got themselves into took more than a year to happen, so companies will have to be realistic in their approach to implementing rate adjustments.”
Some of the smaller reinsurance operators attempted to bring in sizeable rate increases in the 2001 treaty renewals, and in the process they lost a lot of business, he added. “You lose one [client] nowadays, and it really hurts.”
The latest reinsurer financial results made available by the Reinsurance Research Council date to the end of the 2000 financial year. For the 12-month period reviewed, the RRCs 22 member reinsurers posted a meager 4 percent return on equity based on pre-tax profit of $134.2 million, which had fallen by 13 percent compared with the previous years $154.3 million.
Net earned premiums for 2000 remained stable at $827 million, while investment income notched up a 32 percent gain to $235.3 million, compared to $179 million in 1999.
The most damning signs on the sectors income statement relate to the 160 percent increase in the underwriting loss to $106.7 million, which boosted the loss ratio by seven percentage points to 81. As a result, reinsurers combined ratio for 2000 jumped to 113 from the previous years 105.
Although he firmly supports the resolve expressed by many reinsurance CEOs that treaty prices will have to rise next year, Mr. Borst, like many of his competing counterparts, shares a realistic concern that insurers may react to sharp rate adjustments by increasing retentions.
Brian Gray, Swiss Re Canadas president, said some lower business layers may fall away subject to reinsurance price increases (the lower layers tend to be the fat on the bone in terms of profit margin). However, he expects any increased primary retentions to be selective and mostly affect individual facultative business.
Faced with a sudden reduction in positive reserve developments from last years financial returns for the primary sector (following several years of growing reserve runoffs), ceding companies will likely be cautious of raising their retentions, commented Mr. McGillivray.
But Patrick Lacourte, chief agent at PartnerRe (Canada) in Toronto, believes that the targeted rate increases reinsurers are pushing to ink for next years treaty arrangements could open a door of opportunity for some of the larger ceding companies to retain exposures on the lower layers.
Furthermore, HartRe (Canada) General Manager Michael Rende pointed out that over the historical “ebb and flow” of the price cycle, “the pie tends to shrink with premium moving out of the traditional market.”
A market survey conducted by Munich Reinsurance Company of Canada on reinsurance pricing for 2001 renewals suggests that rates rose on average by between 10-15 percent, the companys president, John Phelan, pointed out. This increase was insufficient relative to the final loss ratios of the sector for the 2000 financial year, he observed.
As such, Mr. Phelan believes that the reinsurance market remains significantly under-priced–estimates by various companies within the sector suggest a 40 percent inadequacy–and that reinsurers will have to achieve an average 20 percent increase through the 2002 treaties. Munich has decided to take a firm stand on gaining proper pricing relative to loss history, even if this means losing business, he added.
Mr. Gray said that it is difficult to read where the market is going at this point. However, industry feedback definitely suggests that most reinsurers are going to take a tough stand in the upcoming negotiations, he added. While some companies may have been reluctant to lose business last year, Mr. Gray expected a greater number will be prepared this year to walk away from unprofitable underwriting.
Canadian reinsurers need to gain at least 20 percent across all lines to bring rates back in line with levels last seen in 1993/94, according to Patrick King, Alea Canada’s (formerly Rhine Reinsurance) chief agent.
Since then, he observed, rates have fallen on average by 40 percent, and to regain this will mean implementing increases of almost 80 percent. “There has been a lot of competition among brokers [over recent years] to bring in the best deals; this may have dampened rates. But, the market has now gone beyond the point where rates can be influenced.”
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.