Reinsurance Rates Continue To Cool

As Carriers Face More Competition

Still, prices depend on which line, state and particular exposure is involved

As reinsurers look ahead to the next major renewal period in July, a number of industry players from a global reinsurer to major brokerage firms say the reinsurance market is showing signs of softening, with property rates stable or in decline, while casualty premiums are either holding firm or rising more modestly.

However, these players noted that despite cooling rates, particularly on the property side, they are not yet seeing significant declines comparable to the steep drops of the late 1990s.

Some market experts also point out that despite a relatively healthy pricing environment, the industry is facing a number of challenges among them the fact that reinsurance capacity remains less than adequate in some casualty lines, along with a looming terrorism exposure as Congress debates an extension of the federal backstop program.

In the United States, property reinsurance rates continue to level off and are now flat to down, declining anywhere from 10-to-15 percent, according to Robert DeRose, an analyst at the Oldwick, N.J.-based A.M. Best Company. Rates for aviation classes are even more competitive, down over 15 percent, while marine, hull and cargo classes are experiencing flat-to-declining rates, he added.

Roderick Thaler, executive vice president and national director at Willis Re, confirmed that in the United States as well as London, “depending on the types of business, I have seen 10-to-15 percent rate reductions in property reinsurance.” (He said he prefers to stay away from the word “softening,” instead describing the property reinsurance market as experiencing “modest-to-moderate relief.”)

Mr. Thaler said despite increasing competition, there is still discipline in the market, with reinsurance underwriters focusing heavily on underlying exposures. He also said reinsurers continue to benefit from historically high deductible levels, protecting reinsurers from significant loss frequencies.

On the casualty side, it’ a different story with markets still very firm, especially for national and global accounts, Mr. Thaler observed. However, he also said he is seeing casualty reinsurance rates for regional companies “becoming somewhat more flexible.”

Mr. DeRose from A.M. Best added that among casualty lines, prices are generally flat or up slightly depending on the class of business. “Classes that are continuing to see some rate increases are workers’ compensation and medical malpractice,” he noted. In directors and officers coverage, however, “I am actually hearing it’s starting to become more competitive,” he added.

Mr. DeRose said the general consensus is that as 2004 rolls on, competition will continue to heat up among reinsurers, but “we’ll probably have to wait until January 2005 before we really get a good idea of what the future holds.”

Overall, he observed, capacity is still constrained compared with pre-2001 levels on the casualty side. “Obviously it’s improving, but I still think it’s constrained,” he said. “Certain classes probably are under more pressure than others.”

“You can look to what classes are softening namely in property. There appears to be more capacity chasing property risks right now that’s one reason why rates are coming down in property reinsurance,” Mr. DeRose commented.

He noted that there is also more capacity chasing casualty risks, but problems remain for those lines that were the least profitable.

Mr. Thaler from Willis Re observed that catastrophe capacity is sufficiently abundant. “The biggest boost would be the increase in property per-risk capacity. During the first half of 2004, there has been an expansion based on the very positive results on property per-risk programs,” he said.

On the casualty side, however, Mr. Thaler said he is still seeing tighter capacity for large global and national accounts.

Another top brokerage executive offered a similar observation. “On the casualty side, buyers are looking for more capacity, but often its not readily available,” said the executive, president of one of the largest brokerage firms in North America, who declined to be identified for this article. “If you are a buyer and if you are going to the reinsurance marketplace with a $25 million program, that’s not a problem. But a lot of primary companies are now looking to buy $25 million excess of $25 million umbrella or D&O capacity. That’s available, but pretty hard to find.”

In terms of pricing, however, the executive observed, “if you look at property, the pricing trend is stable-to-down. What I am seeing is rates are generally down 10-to-15 percent on the property side. In casualty, what I am seeing is continuing rate increases but just not as high as they have been in the past.” On the casualty side, medical malpractice and umbrella are among those markets that remain very hard, he said.

He also noted that when it comes to reinsurance rates, one should keep in mind there are significant variations depending on individual clients as well as product lines for example, property-catastrophe aggregate in Florida is still expensive, and so is California earthquake coverage.

“I think generally there remains good underwriting discipline on the reinsurance side. I just think that floodgates aren’t open yet, but they are definitely being more flexible,” he added.

Mark Lescault, head of the Divisional Underwriting Office at Swiss Reinsurance America in Armonk, N.Y., commenting on U.S. reinsurance pricing, observed that generally “we’re at the area around the top of the cycle, and it’s a little choppy up there.” Mr. Lescault observed that since January, he has seen more price decreases on the property side, but that terms and conditions generally remain firm. As far as premium rates go, he commented, on the property side they are continuing to decline slightly, but he stressed that reinsurers are generally holding the line at “responsible, healthy levels.”

“Certainly on the property side, we’ve seen capacity come into the market over the past few years, and we’ve seen relatively benign loss years, especially on the natural catastrophe side,” Mr. Lescault said. With some additional capacity coming into the market, “we’ve certainly seen rates come down on the property side, but still remain stable,” he added.

While property rates generally are falling, Mr. Lescault emphasized that reinsurers are still “acting responsibly. We’re not seeing significant declines in reinsurance pricing. We are not seeing anything like the soft market pricing of the last 1990s.”

In casualty reinsurance, pricing trends are mixed, with certain sectors problematic, according to Mr. Lescault. “We still have some areas going up, some flattening out, and some where its down a little bit, too,” he said. “But still, we are staying up right around the high part of the cycle as we need to to be able to produce adequate returns on equity for our shareholders.”

More specifically, in casualty reinsurance, medical malpractice is seen as still very difficult. Mr. Lescault observed that there has been much effort spent on passing tort reforms for “problem states,” but that he hasn’t seen many changes being carried out yet. “And we still see high frequencies and some significant severity you put those two together, and it’s still a very difficult line of coverage,” he said.

In workers’ comp, the market’s future may rest with the fate of the Terrorism Risk Insurance Act of 2002, set to expire at the end of 2005 if no further Congressional action is taken.

“TRIA is one issue that is really worrying people right now we don’t know yet what the federal government is going to do,” Mr. Lescault said. For primary insurers, this is a significant issue, he added, because workers’ comp carriers cannot exclude terrorism coverage. Thus, if the federal government does not extend its backstop, carriers could be left bare on reinsurance or have to pay exorbitant prices for coverage.

On the other hand, Mr. Lescault said he is seeing D&O reinsurance rates flatten out, adding that he is worried about this trend.

“I am not sure if this is going to be the right thing, because we’ve certainly seen a lot of activities in the D&O loss area,” he said. “There’s still a lot of loss that is in the court system. So we have to watch that very carefully to make sure that we are able to keep up responsible rates that can cover loss exposures there.” He added that with the heightened emphasis on corporate governance and fiduciary duties, when there is a problem that involves corporate big wigs, “it ends up in the newspapers and in the courts very quickly.”

Warren Neale, a Willis Re regional director based in London, remarked that the pricing environment in the European market is similar to what’s been seen in the United States and that Europe is perhaps even softer compared with U.S. markets.

“By and large there is an element of softening one of the key drivers in pricing is supply from the capacity and demand for the product. The United States is always going to be the tightest market on pricing simply because the demand is so vast. Around the world, the demand is a great deal less,” Mr. Neale explained. When the U.S. reinsurance markets are softening, the international markets generally soften a bit more, he said.

On short-tail lines, in addition to supply and demand, rates in European markets are driven by recent experiences, Mr. Neale said, noting that in the international arena, recent experiences particularly in catastrophes have been positive. “There haven’t been losses that really affected reinsurance contracts in a dramatic way,” he said. “So from the buyers’ perspective, there is a desire to see some recognition of benign catastrophe results in pricing.”

On longer-tail business, prices are generally holding firm in Europe, added Mr. Neale, who noted that litigation is a much smaller problem in European reinsurance markets. “In the U.S., they have the workers’ comp system, med mal, D&O the litigious areas. But in the European environment, litigation is not such an acute issue. But there is still pressure to try to price adequately, because there has been under-pricing in the past,” he said.

Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 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.