Gross Premium Decline Seen As A Badge Of Honor

Some reinsurers wont put profitability atrisk by chasing top-line revenue growth

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A nearly 20 percent decline in gross premium that was reported byHannover Re earlier this summer might not, at first glance, seemlike something to crow about. But in the European reinsurancemarket of 2004, it could be seen as a badge of honor and proof thatat least the reinsurers are no longer chasing top-line revenues atany cost.

Hannover Re's chairman, Wilhelm Zeller, certainly seemed to thinkso.

"A significant decline in gross premium income, due in part to ourproactive cycle management, is in no way cause for concern," hesaid in the company's earnings release. "Quite the contrary, wehave once again demonstrated that profitability alone is whatcounts in our industry, not volume."

Europe, however, is not the only continent across the ocean thatinterests reinsurers. Throughout the Eastern Hemisphere,reinsurance pricing trends and opportunities vary. And whileregulation plays a role in some regions, competition is taking holdin others.


Europe: Premium Drops Reveal Discipline

For European reinsurers in general,property-catastrophe remained the line where rates trended down,according to the annual "Reinsurance Market and Renewal Review" putout by the London-based Benfield Group Ltd. in January. But thosedeclines should be put in perspective.

"European floods and the Turkish earthquake had promptedsignificant increases in previous years, and it was neitherunreasonable nor surprising to see the softening in some regions,although a general expansion of capacity was clearly recorded inthis line of business across the area," the report stated.

For the major industrial countries such as the United Kingdom andFrance, property-catastrophe price declines were kept under 10percent, and in Germany prices were virtually flat, according tothe report.

James Vickers, a broker for Willis Re in London, said it isremarkable how well the reinsurance industry has been able toremain disciplined in property pricing, considering some of theforces at play.

"It was a lot more difficult on the primary side, where acombination of rising rates [in recent prior years] and improvingconditions, and a freakishly good run of lack of losses producedsome wonderful figures, which in turn led to some rate cutting[this year]," Mr. Vickers said.

"With reinsurance, there is definitely a softening trend, but whatwe are seeing is that [reinsurers] are not prepared to play toomany games," he added. "If the price deviates too far from whatthey think is acceptable, they will just pack up their pens and goaway."

In addition to Hannover Re, Munich Res top-line slowdown alsoprovided proof that this trend is for real, Mr. Vickers added. "Tobe fair, if the market softens and you want to maintainprofitability, then you will have to shed [premium] income," hesaid.

A rising interest rate environment will put pressure on casualtylines, he said, since the long-tail nature of those risks allowscompanies to hold premiums longer and use the additional funds totry and gain market share through lowering prices.

A general flight-to-quality, which brokers and other experts sayhas taken hold in the reinsurance arena, will likely gain even moremomentum in Great Britain, where new capital requirements will takeeffect at the end of this year. There, the U.K. insuranceregulator, the Financial Services Authority, announced earlier thissummer what FSA insurance sector leader David Strachan described asa "radical program of reform of insurance regulation."

According to an FSA statement, non-life insurers will continue tomeet the statutory solvency requirements based on European Uniondirectives. But in addition, they must provide a risk-basedenhanced capital calculation to the FSA on a private basis, alongwith an assessment of their own capital needs.

"These, in turn, will be used by the FSA when we give firmsindividual capital guidance reflecting our own view of the capitalrequired to support their individual profiles," FSA said.

The Benfield report noted that while buyers are not insensitive toprice, security is taking on more importance. "Typically cedantsdemanded not only a minimal security rating, but also limitedexposure to any one reinsurer and requested inclusion or exclusionof certain reinsurers by name," the report said.

Andrew Carrier of the London-based Kiln Syndicate said that whilecarriers may be looking for higher ratings in their reinsurers moreso than in the past, they also have a greater choice now thatLondon, Bermuda and North American reinsurers have gainedcredibility in the marketplace.

"The catalyst was the 1999 storms in Europe, which created turmoilin the market and widened the exposure. Up until that time Europeanbusiness had for the most part been placed within a tight circleoperating on the European continent," he said. The London markethas stood to gain the most from this trend, being the closest tothe action, Mr. Carrier said.

One factor in keeping prices firm, at least in the Scandinaviancountries, has been the introduction of new computer storm modelsthat have predicted higher probable-maximum-loss figures, and thusled to industries seeking more primary coverage, according to Mr.Carrier.

In France, while property-catastrophe rates headed downward, largeincreases were recorded in the motor third-party liabilityaccounts, and more moderate increases were reported in professionalliability accounts. "Capacity was broadly similar to the previousyear, but an increase was evident in property-catastrophe andpersonal accident lines," the Benfield report stated.

In Germany, Austria and Switzerland, pricing trends held, withproperty down and liability coverages up. But the one notableexception was the Austrian Terrorism Pool, where rates fell byabout 50 percent, according to the Benfield report.

In the United Kingdom, downward pricing pressure remained despitethe withdrawal of Erie, Hartford, Europa Re and Tokio Marine UKfrom the market in 2003. "Buyers continued to focus on cost,although reinsurer security was also a key," the Benfield reportstated. "This was reflected in cedents imposing minimum ratingrequirements, restrictions on line size, and in some cases throughthe use of downgrade clauses."

Ken Brandt, who recently took over as leader of North America andAsia Pacific for GE Insurance Solutions (formerly known as GEEmployers Reinsurance Corp.), does not see too much "drama" aheadin 2005. "I think the story for Jan. 1 will be relatively stable.When you look at the pricing on property, it has shown pressurefrom an original rate standpoint, and from a reinsurancestandpoint. But the good news from an exposure standpoint is thateveryone is exposure pricing," he said.

Mr. Brandt explained that this process involves taking in the datafrom properties all around the globe and modeling them usingcatastrophe models. "And so then you put a price against the actualexposure rather than saying this has been loss-free, so why dont wejust cut the price 20 percent?" he said. "This is a very bigdevelopment in the industry."



Asia: Japanese Market Softens

Moving east, the two Asian giantsJapan andChinarepresent two ends of the reinsurance market spectrum.

Despite its well-documented economic troubles, Japan is still thesecond-largest economy in the world, and the one reinsurance marketlarge enough so that it is not easily buffeted by single events orcompany actions, experts say. Chinas reinsurance market is dwarfedin comparison, but will likely explode in the coming decades iftrends in the primary market are any indication, these expertscontend.

Sean Mooney, chief economist for New York-based Guy Carpenter Inc.,said the April 1 renewal season this year brought a lot of softprices in the property-catastrophe market in Japan, particularlyfor non-proportional excess of loss catastrophe covers. "We saw thecapacity expand. And in addition, there have been no major lossesin Japan lately," he said.

Mr. Vickers of Willis Re agrees there is new capacity in one sensein the Asian property-catastrophe market. "But it is not so muchthat people are discovering Asiait is just that existing playersare getting a little bit more open and aggressive," he said.

But with a market as large as Japan, one or two players taking amore aggressive tack will not upset the balance all that much, headded.

Analysts disagree over whether primary companies are looking toproportional or excess-of-loss reinsurance for property-catastrophecovers. Mr. Mooney said primary companies are looking forproportional reinsurance covers, and his companys 2003 report backshim up. "The recent trend [in Japan] of reducing proportionalcapacity halted this year, partially due to the bundling by cedantsof excess-of-loss signings with participation in pro rataprograms," the report stated.

But Neil Maidment, director of the London-based Beazley Group PLC,disagreed. "In general, there is a continued trend from pro rata toexcess of loss," he said. "Reinsurers prefer the transparency ofexcess covers, particularly in the case of Japan, with all thesemergers and balance sheets that are very large."

Mr. Maidment said that while there is not an overall shortfall ofcapacity in Japan, earthquake insurance remains at a premium. "Bothfrom a primary and reinsurance viewpoint, they [marketparticipants] will manage their [earthquake] capacity verycarefully," he said.

This comes at a time when, according to the Guy Carpenter figures,over the past 12 years the percentage of Japanese homeownersobtaining dwelling earthquake protection has risen from 7 percentto 16.2 percent.

Chinas eventual move toward a free reinsurance market will see theevaporation of China Res statutory 20 percent cession dwindle tonothing over the next several years. "It is a way primarily ofproviding a soft landing from a state bureaucracy to a free marketenterprise," Mr. Vickers said.

The China Reinsurance Company was one of the units spun off inMarch 1999 from the old Peoples Insurance Company of China tooperate as an enterprise in many ways like a private sectorbusiness, but one nonetheless that is still state-controlled.

In the two prime markets of Southeast Asiathe Philippines andIndonesiareinsurers are rapidly acquiring more data through theCatastrophe Risk Evaluating and Standardizing Target Accumulationssystem, developed by reinsurers to better assess risk withinspecified zones within countries. "In general, this will lead tohigher pricing as companies gather more data, but the oppositecould also happen," Mr. Mooney said.

With the inadequacy of primary pricing, and its concomitant effecton proportional reinsurance, reinsurers are for the most partsticking to excess covers if they want to play in the SoutheastAsia property market, Mr. Mooney added.

The number of reinsurers located in Singapore has been more thanhalvedfrom 40 to less than 20over the past couple of years. Butthat market continues to provide the majority of the capacity forinsurers in Southeast Asia, according to the Guy Carpenterreport.

"Those Singapore reinsurers that remain have been activelycompeting for excess-of-loss programs. At recent renewals, leadersrequested minimum shares of 30 percent to 50 percent for eachprogram," the report stated. "As a result, many excess-of-lossprograms were oversubscribed."

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 3, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.