Prolonged Hard Re Market Unlikely

By Lisa S. Howard
Reinsurance Editor

The renewal market is being described as resembling a cr?mebruleehard on the top but soft underneath, according to observersin the London market and a report issued by Benfield Group Ltd.

“[E]xpectations of a prolonged hard marketare already looking unrealistic,” said the report issued byBenfield in London, called “The Big Squeeze: Reinsurance MarketReview 2002-2003.”

“The pricing cycle is alive and well and already beginning toreassert itself, reflecting the uneven distribution of capital,”the report said.

Nevertheless, Benfield said, cedents and rating agencies areincreasingly focused on capital adequacy, while shareholders aredemanding dramatically improved returns.

“To generate such returns in the current adverse investmentclimate means that most reinsurers will have to achieve combinedratios well below historic levels,” it said. “However, rates arealready showing signs of weakening in market sectors where there isa concentration of capacity, such as property catastrophe.”

The report said a key theme of 2002 is the increasingly unevenspread of capacity. “At one end of the scale, property catastropheis over-supplied with consequent evidence of weakening rates,” thereport said. “Given that only in 2002 did global catastrophe ratesreach a level in excess of adequate, evidence of softening inproperty catastrophe pricing is cause for concern.”

Other areas that appear to be over-supplied with capacityinclude aviation where rates are softening, the report said.

Benfield said that the use of modeling techniques for pricingand structuring property-cat coverage appears to have affectedpricing where competition has resurged, “particularly where cedentsexploited known modeling parameters to bring rates down,” thereport said.

“Trigger pricing became a common feature, with capacity oftenswinging from famine to feast when the designated trigger price wasreached,” Benfield continued.

“By contrast, capacity remains limited in many other specialistareas, particularly casualty classes,” such as directors andofficers liability, the report said.

Industry practitioners also discussed some of the principaltrends in the various market segments:

Aviation. Charles Cantlay, deputy director ofAon Limiteds U.K. reinsurance group in London, said this particularinsurance market had a quicker and faster kneejerk reaction after9/11 than perhaps any other industry segment.

“I think it was probably inevitable that the correctiondownwards [on the insurance side] was going to occur there firstrather than anywhere else,” because prices had initially risen sosharply in this segment, he said.

“Some of the airlines which renewed in Dec. 2002, most certainlydid go at a reduced spend [lower prices] than in 2003,” he said,noting, however, that theyre still at “profitable” levels, evenafter the reductions in the primary premium rates.

Henry Keeling, CEO of XL Re in London, said, “The overallreinsurance excess market in aviation has held up very well,despite the fact that were seeing softening in the primarymarket.”

Mr. Cantlay added that the normal threshold for which you canbuy retrocessional coverage for aviation moved up to the $500-$750million range as a result of withdrawals in the marketplace.

Casualty. Mark Lescault, chief underwritingofficer for Swiss Re Americas Division in Armonk, N.Y., said U.S.liability business continued to see significant corrective rateaction during the January renewals. “On average, we probably sawincreases between 25 and 50 percent, especially for the toughproblem linesmedical malpractice, D&O, umbrella and excess,workers compensation,” he added.

The reserve deficiencies coming out of the soft market became alot more apparent as long-tail claims started to mature, Mr.Lescault said.

“The other thing that led to strong increases this year” was thefact that “corrective actions in the prior two years just hadntbeen strong enough,” he went on to say. Although adequate ratelevels were achieved for property, not as much had beenaccomplished on the liability side, he said, noting that “liabilityneeded to catch up and it took some good steps during the 1/1renewals.”

Despite the improvements, Mr. Lescault said he is stillconcerned about this sector. “We really have to keep our eye on theball because loss costs are definitely continuing to escalate,” hesaid.

Rick Smith, president and CEO of global property and casualtyreinsurance for GE Employers Re Corp. in Overland Park, Kan, saidcasualty will continue its upward trajectory for a number of years,“as a result of the enormous hole that we, as an industry, dug forourselves during the late 1990s, combined with the unbelievably lowinvestment environment were in.”

“Reinsurers have got to improve their balance sheets, theirROEs,” said William Eyre, managing director and CEO for TowersPerrin Re in Philadelphia, referring to returns-on-equity. As aresult, he said, casualty pricing is going to continue its upwardclimb, especially in the specialty lines, such as errors andomissions, D&O, medical malpractice and umbrella pricing, headded.

According to Dirk Lohmann, group chief executive officer forConverium Ltd, the Zurich-based reinsurer, in the workers comparea, there has been some stabilization of rates after the enormousincreases seen last year. “Some people who bought at panic priceswere able to get more reasonable prices in 2003. But generally itwas still an issue given the terrorist exposure.”

Marine. “On the marine excess of loss side, themarket is still seeing rate increases, although theyre not as bigas they were,” said Mr. Keeling at XL Re. He said the 10 percentincreases seen on the marine side “are still pretty solid and, mostimportantly, the fundamental terms and conditions that were imposedduring 2002 remained in place, so the books are still pretty puremarine books.”

Mr. Cantlay said average rate increases in marine excess havebeen around 15-20 percent. “The top-end prices have probably goneup slightly more than that, to about 25-30 percent. But that wasstarting from quite a thin base,” he said.

The ability to do “composite reinsurance,” remains extremelyconstrained, he said, describing composite reinsurance asreinsurance covering both marine risks and non-marine risks in asingle package.

“This means that people have to buy pillars of cover for theirown particular class of business, rather than lumping it togetherinto one composite whole account cover, covering everything,” Mr.Cantlay said. “So they have to buy separate towers for marine,separate towers for non-marine, separate towers for aviation,rather than throwing it into a single whole account program.”

He said this has introduced a significant additional cost to thebuyer. “If you can throw everything into a single program, itsobviously going to be cheaper than having to buy six or sevendifferent specific pillars of cover,” he said.

Property. James Vickers, managing director withWillis Re in London, said the property pro-rata sector has beentough because results have been poor. “But there are signs of agrowing interest in some markets because the original commercialindustrial rates are picking up,” he said. “Some reinsurers arebeginning to hope that the business will produce reasonable oracceptable margins for them.”

Converiums Mr. Lohmann said, U.S. pro-rata property treaties,particularly in heavily exposed natural catastrophe areas were“challenging for many cedents.”

Commission reductions were common, as was the introduction ofeither a cap or a cessions limit, he said, noting that the ratewould depend on the past experience of the account, how distressedit is. “Some accounts probably renewed at expiring because theyvealready gone through a couple of rounds of tightening up as far asterms and conditions are concerned.”

Mr. Lohmann said there has been more pronounced movement in ratein the property risk excess area, which came from a “much deeperhole.” “Much of the business still is priced at levels, which justbarely make the return hurdles that reinsurers are targeting,” hesaid. “Property risk excess in the United States, is still an area,which we find to be marginal as far as attractiveness isconcerned,” he said.

Despite the concerns of industry observers that theproperty-catastrophe sector is softening, Mr. Lohmann maintainedthat “pricing discipline is good.” In the North American market,“where nothing material happened in 2002, [we] saw reinsurancerating on cat level off,” he said, noting, however, that totaldollars paid to reinsurers increased, “because the underlyingadjustment, the premium base, has gone up because primary rateincreases.”

Mr. Lescault agreed that property saw flat to modest increases.“The good thing is were generally at an adequate level,” he said,due to strong rate increases seen over the past two years. “I thinkthere was also some impact in the United States where theres beenlower than average [natural] cat losses, so it doesnt put as muchpressure on the property side,” he said.

“International property treaty reinsurance is tighter than theUnited States, by and large, because the international arena hastraditionally been dominated by Munich Re and Swiss Re, [companiesthat] are being very conservative at the moment,” said DavidShipley, active underwriter for MAP, a Lloyds managing agency. “Theeffect of them tightening their underwriting is much greateroutside the United States,” he said.

Mr. Vickers said the property cat market is responding to supplyand demand. “Theres a lot of supply for property-cat business,” hesaid, noting that the market is being described in London as “acr?me brulee market.” “Its quite difficult arguing and negotiatingwith the leaders and coming to terms, but once the terms are set,[risks] are placed very, very quickly,” he said.

In a number of territories, people have achieved flat rates orslight rate reductions. In others, they may have seen rate hikes ifthey suffered losses, he said.

Reproduced from National Underwriter Edition, February 3, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.