Canada Reinsurers Dropping Like Flies; Over $100M Of Capacity Gone

Canada Correspondent


The Canadian reinsurance market has seen unprecedented consolidation despite the fact that licensed reinsurers have increased total premiums by more than 75 percent over the past two years of the hard market.

From September of last year to date, four licensed reinsurers, representing about $140 million in annual capacity, have either withdrawn from the marketplace or indicated their intention to do so by the year end.

In the words of one senior reinsurance executive, who preferred not to be named: “They are dropping off like flies.”

While the withdrawal of Gerling Re (which ranked among the top 10 reinsurers in Canada with about $77 million in net written premiums) related to the global groups financial woes, the other players that exited the marketplace cited adverse local conditions as the prime cause for their retreat. (All dollar amounts are reflected with a U.S. dollar value, based on the Canadian dollar exchange rate.)

Most recently, Alea Europe Ltd. notified brokers and clients that its Toronto-based branch will cease to write new business by the end of this year. The company wrote about $3.8 million in premiums for 2002 after having cut loss-making business back from 2000s premium high of $30 million.

This move followed Hart Re Canadas announcement that it would cease to write new business in 2003. The decision was forged by the global parents decision to withdraw from the reinsurance sector.

This resulted in Hart Re Canadas book of business falling into “limbo,” while Bermuda-based Endurance Specialty holdings (which acquired the Hart Re global book of business) decides whether or not it wants to become a licensed Canadian reinsurer. Hart Re wrote about $13 million in premiums during 2002.

Another company that has joined the ranks of those companies that have exited the market is Terra Nova Insurance, located in Toronto, which wrote about $5.8 million for 2002.

Notably, Alea, Hart Re and Terra Nova all wrote less than $15 million in annual premiums, which has prompted market speculation that additional smaller players may be forced to withdraw from Canada by the end of this year as they struggle to achieve cost efficiency.

A benchmark of about $20-$23 million in annual premium has been touted by various reinsurance executives as a necessary breakeven on operational and claim loss costs.

Brian Gray, president of Toronto-based Swiss Reinsurance Co. of Canada, said in order to maintain an infrastructure in Canada, companies need to achieve a bottom-line economic return of between $7.7 million to $11.5 million.

In this respect, he predicted that further consolidation in the Canadian sector is possible, largely as a result of an unsustainable “reinsurance infrastructure” established during the 1980s and 1990s, which cannot be supported by the current demand for reinsurance.

“Its clear that reinsurers are fighting for capital, and today theres more global flexibility in moving capital, which means the focus has to be on [bottom-line] returns,” Mr. Gray said.

In the words of Gilles Meyer, CEO of Alea Europe: “This decision [to discontinue writing reinsurance in Canada] was taken because of the branchs diminishing premium volume and the continuing inadequate level of profit available for Canadian reinsurance business.”

However, not all would agree that the Canadian reinsurance sector is over-populated.

Two of the new “9/11 start-ups” have indicated a strong interest in establishing a long-term foothold in the Canadian market, said Don Smith, the newly appointed Canadian chief agent for Zurich-based Converium and Bermuda-based Platinum Re.

Converium gained a license to operate in Canada in June of this year, he added, while Platinum is in the process of applying with the expectation of being licensed before the end of the year.

“The withdrawals have helped our case for licensing [approval]. Both companies have A-plus ratings, and each company is looking at achieving annual ceded premium of $19 million within the next three years. By becoming licensed, it implies that they are here to stay and grow,” Mr. Smith noted.

In addition, the former general manager of Hart Re Canada, Mike Rende, confirmed that he has been retained by Endurance Specialty Holdings to “develop the [former Hart Re] business in Canada,” although no decision has been made yet by the Bermuda-based company with regard to licensing.

Peter Borst, chief Canadian agent for Employers Reinsurance Corp. in Toronto, noted that new players entering the marketplace should not necessarily be disruptive to pricing, assuming the companies in question apply discipline, which Bermuda companies have accomplished in other markets.

However, Mr. Borst also holds the view that the Canadian reinsurance market is too fragmented. “I dont think the withdrawals [of companies] have just been about economic efficiencies, but also the fact that the market has been over-serviced. We probably need some dislocation of the fringe players. I wouldnt be surprised to see further withdrawals.”

Pierre Dionne, vice president at Toronto-based Caisse Centrale De Reassurance, suggested that the ongoing poor results of the reinsurance sector tie into the markets excessive competitiveness.

“I think the reinsurance sector in Canada is still too fragmented. The withdrawals [of companies] will hopefully see more stability in pricing. I think we will likely see further consolidation because of global [sector] capital problems,” Mr. Dionne said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 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.