Canadian Reinsurance Sector Hits Burning Point

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Canadian Correspondent

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Toronto

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On the back of last years record soaring loss ratios, Canadasreinsurance sector has reached a critical burning point that couldsee some companies rejecting business or closing shop before the2002 treaty renewals are concluded, several leading industryexperts predict.

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Reinsurers have laid down expectations of an average 10-20percent rate increase for 2002 renewals with some expiringmulti-year contracts likely to attract hikes of 30 percent andmore.

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The Toronto-based Reinsurance Research Councils president, PeterBorst, expects the 2002 treaty renewal discussions to begin inearnest by as early as September this year. “Everyone isanticipating getting an early start this year,” said Mr. Borst, whoalso is Canadian chief agent for Employers Reinsurance Corp. inToronto.

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Traditionally, negotiations with ceding companies have occurredin the first half of December when nearly 90 percent of the $18.4billion (in U.S. dollars) in annual gross written reinsurancepremium (based on 2000 returns) is renewed.

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The driving factor for nearly all Canadian reinsurers with theupcoming treaty renewals is to regain adequate pricing, accordingto various industry sources. Thus far the increases implemented inmostly selective lines of business have significantly laggeddevelopments in the U.S. and European property-casualty insurancemarkets, sources said.

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Glenn McGillivray, assistant vice president (and head ofcorporate communication) for Swiss Reinsurance Company Canada inToronto, noted that two main issues have hindered earlier pricecorrections: market fragmentation, and the fact that overtwo-thirds of Canadian business is broker-negotiated.

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The heavy weighting of the business on the broker side hascreated a power dynamic so that few of Canadas 30 active reinsurerscan afford to “buck the trend,” he added. “There can be up to 20players [reinsurers] per [broker-negotiated] treaty whichaggravates the impact of the markets excessive competition.”

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There is no question that the Canadian reinsurance market ishighly fragmented, observed Mr. McGillivray. With 240 primaryinsurers and 30 participating reinsurers, the Canadian p-cinsurance industry (valued at $12.5 billion, based on 2000 returns)is one of the most fiercely competitive marketplaces relative toother developed countries, he said.

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This, combined with the control exerted by brokerages on theplacement of business, has resulted in a significantly loweraverage cession ratio in Canada when compared with the U.S. andother developed markets, he said.

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Gordon Crutcher, a consultant at reinsurance brokerage TowersPerrin Reinsurance, said that the reinsurers he has spoken to haveall expressed a strong resolve toward a general price increase for2002 covers. “Even the better clients are going to get itGeneralincreases are coming for everybody, it doesnt matter what the class[of business is],” he said.

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Although reinsurance capacity is readily available, “itdefinitely isnt freely available,” he commented. There is plenty ofcapacity in the market subject to 25 percent rate increases, henoted, but placing business below these levels will prove achallenge for brokers.

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However, Mr. Crutcher emphasized the fact that “the messreinsurers got themselves into took more than a year to happen, socompanies will have to be realistic in their approach toimplementing rate adjustments.”

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Some of the smaller reinsurance operators attempted to bring insizeable rate increases in the 2001 treaty renewals, and in theprocess they lost a lot of business, he added. “You lose one[client] nowadays, and it really hurts.”

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The latest reinsurer financial results made available by theReinsurance Research Council date to the end of the 2000 financialyear. For the 12-month period reviewed, the RRCs 22 memberreinsurers posted a meager 4 percent return on equity based onpre-tax profit of $134.2 million, which had fallen by 13 percentcompared with the previous years $154.3 million.

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Net earned premiums for 2000 remained stable at $827 million,while investment income notched up a 32 percent gain to $235.3million, compared to $179 million in 1999.

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The most damning signs on the sectors income statement relate tothe 160 percent increase in the underwriting loss to $106.7million, which boosted the loss ratio by seven percentage points to81. As a result, reinsurers combined ratio for 2000 jumped to 113from the previous years 105.

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Although he firmly supports the resolve expressed by manyreinsurance CEOs that treaty prices will have to rise next year,Mr. Borst, like many of his competing counterparts, shares arealistic concern that insurers may react to sharp rate adjustmentsby increasing retentions.

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Brian Gray, Swiss Re Canadas president, said some lower businesslayers may fall away subject to reinsurance price increases (thelower layers tend to be the fat on the bone in terms of profitmargin). However, he expects any increased primary retentions to beselective and mostly affect individual facultative business.

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Faced with a sudden reduction in positive reserve developmentsfrom last years financial returns for the primary sector (followingseveral years of growing reserve runoffs), ceding companies willlikely be cautious of raising their retentions, commented Mr.McGillivray.

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But Patrick Lacourte, chief agent at PartnerRe (Canada) inToronto, believes that the targeted rate increases reinsurers arepushing to ink for next years treaty arrangements could open a doorof opportunity for some of the larger ceding companies to retainexposures on the lower layers.

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Furthermore, HartRe (Canada) General Manager Michael Rendepointed out that over the historical “ebb and flow” of the pricecycle, “the pie tends to shrink with premium moving out of thetraditional market.”

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A market survey conducted by Munich Reinsurance Company ofCanada on reinsurance pricing for 2001 renewals suggests that ratesrose on average by between 10-15 percent, the companys president,John Phelan, pointed out. This increase was insufficient relativeto the final loss ratios of the sector for the 2000 financial year,he observed.

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As such, Mr. Phelan believes that the reinsurance market remainssignificantly under-priced–estimates by various companies withinthe sector suggest a 40 percent inadequacy–and that reinsurers willhave to achieve an average 20 percent increase through the 2002treaties. Munich has decided to take a firm stand on gaining properpricing relative to loss history, even if this means losingbusiness, he added.

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Mr. Gray said that it is difficult to read where the market isgoing at this point. However, industry feedback definitely suggeststhat most reinsurers are going to take a tough stand in theupcoming negotiations, he added. While some companies may have beenreluctant to lose business last year, Mr. Gray expected a greaternumber will be prepared this year to walk away from unprofitableunderwriting.

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Canadian reinsurers need to gain at least 20 percent across alllines to bring rates back in line with levels last seen in 1993/94,according to Patrick King, Alea Canada's (formerly RhineReinsurance) chief agent.

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Since then, he observed, rates have fallen on average by 40percent, and to regain this will mean implementing increases ofalmost 80 percent. “There has been a lot of competition amongbrokers [over recent years] to bring in the best deals; this mayhave dampened rates. But, the market has now gone beyond the pointwhere 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 theserial publication. All rights reserved.Copyright in this articleas an independent work may be held by the author.


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