Small Rate Cuts Keep London Market Calm

Rates are definitely softening on property-catastrophe reinsurance in London, but so far everyone is remaining calm for a series of simple reasons, market experts here contend.

Rate cuts have been small typically 5-to-10 percent and coverage is above high retention levels, these experts report. Terms and conditions are being maintained and cutthroat competition has not emerged despite surplus capacity, they say. Moreover, casualty rates are holding or still rising.

Several factors that were not present during the late 1990s' downturn are keeping a lid on competition in London, these experts contend. They include the Lloyd's Franchise Board (a relatively new body which supervises the activities of Lloyd's syndicates), tighter corporate governance and tougher regulation from the U.K. Financial Services Authority.

In addition, shareholders are watching their capital more closely, while underwriters cannot rely on interest rates or investment income to the extent they did in the past. Finally, although few will admit it, some reinsurers are still patching up reserves in the wake of World Trade Center claims.

Julianne Jessup, head of research at Benfield in London, said developments since the start of the year reflect the predictions made in the reinsurance brokerage's late-2003 report, “Holding the Line.” “Catastrophe is generally softening somewhat, but there isn't any real evidence of very intense competition,” she said. “It's more that there is surplus capacity in the property-cat market, but there is no unbridled competition in evidence.”

Ms. Jessup pointed out that during recent Japanese renewals, reinsurers were particularly careful in selecting business to write. “Where the rates had dropped too far, a number of European reinsurers came off certain parts of programs rather than write at lower rates,” she noted.

Looking ahead, she expects two trends for at least the rest of this year in the London reinsurance market: property-catastrophe rates will tend to soften, while casualty rates remain firm. In this environment, therefore, a few points off rates on certain lines is not likely to deflect London underwriters from their aim of continuing to turn a healthy profit, she said.

Lloyd's insurer Beazley typified the upbeat mood in a recent statement: “While there is some evidence of rate increases slowing, we expect to achieve respectable increases in most of our lines of business and anticipate high renewal levels as well as opportunities for new business.”

Despite some weakening on property, airlines and energy lines, fellow Lloyd's insurer Wellington made the point that rates on all liability coverage in the marine, hull and cargo markets are still rising. “Importantly, terms and conditionsremain very firm, with little or no signs of relaxation,” Wellington reported.

Richard Finn, reinsurance underwriting director at Brit Insurance Holdings in London, emphasized that maintaining terms and conditions is vital to profitable underwriting. “If a deductible reduces to 5 percent from 10 percent, you're adding an enormous tranche of first-loss exposure to the reinsurance market. That has not been happening. Deductibles have remained static.”

Brit's experience on the property-catastrophe side this year suggests rates are down around 10 percent in Japan and perhaps 5 percent lower in North America, albeit with regional variations. “On some of the larger nationwide programs where they need all the capacity they can get in the peak zones of Florida and California, there haven't been any appreciable reductions,” said David Horton, Brit's property treaty underwriter, specializing in North America.

On the casualty side, rates are holding steady or in some cases rising. Again, underwriters are adhering to the tougher terms and conditions introduced in the last few years, according to Benfield's Ms. Jessup particularly in directors and officers liability, where feedback on rate shifts is mixed as more insurers enter the market.

“There is a lot more capacity available for D&O, and some people would say that means there will probably be some slackening of the rates and the terms,” she said. “But on the other hand, it is still viewed as the highest risk area to be in, so it's not that attractive to a broad spread of underwriters even now.”

As in any softening market, however, there are concerns. In London, these range from worries about the effect of surplus capital in Bermuda to the usual reports of rate-cutting by big global reinsurers. Brit's Mr. Finn said Bermuda will be interesting to watch “because they are awash with cash, [which means] you either have to write premium or give it back to the shareholders.”

Money has flowed into Lloyd's syndicates as well since Sept. 11, 2001, reflecting the market's flexibility, but Mr. Finn is confident that it will be used wisely. “We've raised a lot of capital since the [World Trade Center's destruction], and there is surely an expectation on the part of the shareholders that we get it right in the longer term through the softening market,” he said. “It is about discipline, and I believe there is enough discipline surrounding us now to lead us to underwrite far more strongly than we have in the past.”

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.

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Small Rate Cuts Keep London Market Calm

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