Casualty Re Not Quite A Sellers Market

Although casualty reinsurers tried for exorbitant rate hikes in December 2001, by the time most deals were done in mid-January, reasonable and adequate price changes had been agreed upon, market participants report.

“In the early part of this renewal cycle, there were reinsurers throwing out quotes–sort of like throwing something on the wall and seeing if it sticks–a little on the high side,” said Gregory Sandvik, managing director for Guy Carpenter in Stamford, Conn. “And a lot of that was not sticking and they were willing to back off [later],” he added.

But in the end, they were still “getting reasonable increases,” he said.

“There was a lot of testing going on in the early part of December,” agreed one representative of an insurance company that also places reinsurance. As a result, “a lot of business was placed in the last week of December and the first 10 days of January,” said the insurer, who did not want to be identified for this article.

“A lot of people thought [the reinsurance market] was going to be a sellers market and that capital was available at the price named by the seller,” Jay Fishman, chief executive officer of The St. Paul Companies, said during a recent investor conference call. “Its not that way. Theres still competition.”

Speaking from the perspective of a seller of reinsurance, Mr. Fishman said that every reinsurer brings its own rate-of-return goals, loss assumptions, investment income and pricing assumptions to reinsurance deals. “We dont always win a contract because we lose on price,” he said.

The perception that new capital would influence casualty rates was thought by some observers to be a factor that brought initial price quotes down to more reasonable levels.

They speculated that the new capital was not tapped because of concerns about placing long-tail business with insurers that, initially, did not have ratings. In addition, they said, there was a propensity to want to place business with reinsurers that carried them through 9/11 losses, and the start-ups had a greater appetite for property-catastrophe business to support their speculations.

In the end, reinsurers and intermediaries typically said price changes for casualty renewals averaged in the 15-25 percent range, but they also said that “average” was a notion absent from pricing equations.

“The only consistency, to some degree, was that everything was up. And a lot of reinsurers were pushing harder to get those increases than last year,” Mr. Sandvik said. But prices were “scattered all over the lot,” he added. “The degree to which they’ve gone up has varied quite significantly depending on the circumstances of the individual deal.”

Mr. Sandvik said he had worked on some casualty deals where renewal pricing was up over 100 percent, along with increases in attachment points on excess-of-loss contracts. He identified one such deal as having had “not very good, but not horrible, experience” as well as a question over whether the treaty would have a 9/11 loss.

On the other hand, he said, some working layer reinsurances with good experience and talented individuals saw hikes of only 5-to-10 percent.

“I think whats important is that we didnt have a one-size-fits-all pricing. It was very much targeted to the specifics of the individual account,” said Mark Lescault, head of the divisional underwriting office at the Americas division of Swiss Re in Armonk, N.Y.

While reinsurers “made tremendous progress” towards pricing adequacy, he said individual hikes varied based on exposure or the price deficiency of the individual client. He went on to cite a range of possible increases of 10-to-100 percent. He identified classes such as medical malpractice, D&O, pharmaceutical business and the oil petrochemical industry among those that could “easily see 25-to-50 percent increases,” with Main Street firms getting the lowest price hikes.

Market participants said negotiations were prolonged by a tension between the desire to raise rates and concerns about new capacity. Concerns about terrorism were another factor dragging out renewal talks. “I’ve heard there were some reinsurers concerned about signing lines until after the first of the year because of a perceived vulnerability to attacks that the New Year might cause,” said one insurer who didnt want to be identified.

Some of the delay related to the fact that a possible federal terrorism reinsurance backstop was still being debated in Congress late last year, Mr. Sandvik said.

Beyond that, “I think reinsurers were waiting to see how much stuff came in,” said Steven Kiernan, president and chief executive officer of Burns & Wilcox Re Inc. in Upper Saddle River, N.J. “They wouldnt quote things early, because they wanted to see what they were going to be presented with–to pick the best of the best,” he said. “That definitely slows everything down,” he added. “And once you start slowing down, [suddenly its Jan. 1 and] everybody’s on an extension.”

He also said that reinsurers analyzed programs far more deeply this year from an “actuarial point of view.”

Rod Fox, CEO of Benfield Blanch in Dallas, said “another phenomenon of hard market reinsurance situations is that authority is withdrawn so that underwriting decisions end up having to be made by committees” at reinsurers.

“If you’re a client or broker waiting for your terms, it’s going through multiple committees,” he said. Then, to the extent that terms are getting changed, its got to go back into the committee, he noted, “so it does take forever.”

“The other thing you find is people get very hardened on certain points. So if youre looking to bring in large blocks of capacityto bring markets togethereverybodys got their own little pet peeve,” he said. Typical “pet peeves” involved the use and wording of nuclear, biological, and cyber-terror exclusions, reinsurers say.

Bonnie Boccitto, senior vice president of the specialty division of American Re in Princeton, N.J., said a second issue that prolonged negotiations related to primary rate hikes. “We certainly want to give our clients credit in our pricing for rate increases that they have taken or they’re planning to take. But it’s delving into that issuegetting the documentation, looking at price monitoring reportsthat is taking time,” she said.

Related to the terrorism issue, she said casualty reinsurers also have to do more in-depth analyses of aggregation issues that surround workers compensation books of business.

Regulators decisions to allow exclusions in primary policies in most states in late December and early January opened up some discussions about securing some terrorism coverage in reinsurance contracts, market participants report.

“We were successful in that, to mixed degrees, depending on the nature of the contract and what the individual client invested in its approach to handling the terrorism exposure and educating their reinsurers on what they were doing,” Mr. Sandvik said.

For example, he said, primary insurance clients worked to demonstrate that they were categorizing risks in various tiers, trying to avoid those with high potential terror exposure, as well as filing ISO exclusions where allowed.

As a best case, “we were able to get follow-the-fortunes language without exclusion,” he said. But “that was not an easy thing to get,” he added, noting that such language could only be secured for insurers whose books were not viewed as having “typical terrorist target risks.”

Several market participants said there was also a push for mold exclusions that had mixed results.

“Cyber-liability is another area that has been focused on in the past year,” Swiss Re’s Mr. Lescault said, noting that Swiss Re would agree to reinsure separate cyber-liability policies directly, but would be much less likely to reinsure a ceding companys general liability policies that included cyber-liability coverage.

In that case, “the risk assessment and the pricing are not going to be targeted to specific exposures presented,” he said.

When all was said and done, “your run-of-the-mill casualty business” was priced 15-25 percent higher on Jan. 1 renewals, Mr. Fox and others said.

Coming in with higher increases were reinsurance contracts covering D&O, he said, citing a 20-30 percent range, even though the line was not affected by World Trade Center losses. “Theres been a huge amount of claims [and] the looming Enron situation” is contributing to a “significant uptick,” he said, adding that there is shrinking capacity in the public-company D&O market.

Ms. Boccitto expressed price changes in terms of what primary companies are getting (since many of American Re’s treaties are on a quota-share basis). She said that D&O increases ranged from 20 percent (for non-profits) to 100 percent (for large publicly-traded and high-tech companies). She also said that lawyers’ and architects’ E&O price increases were in the 5-to-15 percent range.

In the medical area, she said, there were very wide ranges with physicians and surgeons at the low end, and managed care organizations and nursing homes at the high end.

American Re’s appetite for reinsuring such specialty lines “depends on what the primary company is doing,” she said. “Our appetite for D&O has not been dampened. With those price increases, this is not the time to run away from D&O.”

While the market has not turned as much for the medical liability classes, she said “there are some companies out there that are doing well. If they have taken rate where they need to, we will support them.”

Mr. Kiernan said that on more traditional casualty lines, like general liability, in addition to pricing, reinsurers are taking a close look at the expense side of the formula. He suggested that 2-to-3 point commission reductions were typical. And “every party in the food chain has to decide where that reduction is applied,” he said, referring to carriers, managing general agents and retailers.

The insurance company representative who wanted to remain anonymous said that while some insurers were seeing significant rate increases on commercial umbrella business, in general the general liability, clash and umbrella market is changing more slowly. He attributed the slower rate of increase to longer loss emergence patterns, noting that reinsurers may not have completely recognized the development on the 1998, 1999 and 2000 years yet.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 18, 2002. Copyright 2002 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.

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