While some reinsurance market participants shared tales of early turbulence in the renewal process for Jan. 1, once the dust settled, both sellers and buyers got a little less than they bargained for, brokers reported. “It's almost a situation now where I think everybody's a little bit displeased with the outcome, which is probably an okay settling point,” said Timothy Gardner, global leader of property at Guy Carpenter in New York. “Clients obviously still feel like they're paying too much. Reinsurers probably didn't feel like they got quite what they wanted.”

“Maybe that's the sort of state we should be targeting,” he said. “I think, overall, the market's in a pretty healthy place.”

Focusing on the property-catastrophe reinsurance market, brokers said the renewal process went far more smoothly for Jan. 1, 2007, than for Jan. 1, 2006–and stood in marked contrast to the “crisis conditions” at midyear 2006. But that doesn't mean the process was entirely uneventful.

“There was some turbulence,” said Paul Kneuer, senior vice president and chief reinsurance strategist for New York-based Holborn Corp. “A lot happened in the second and third weeks of December.”

Brokers such as Mr. Kneuer reported that reinsurers went into the renewal process with expectations “that 1/1 was going to feel like 7/1″ in terms of pricing, when 100 percent hikes on property-catastrophe risks were widely reported.

“Clients sure didn't have that expectation,” Mr. Kneuer said, noting that “the economics of the business” were different for Jan. 1, adding that the types of clients that renew on Jan. 1 are also different from midyear, which is when a lot of national account business and Florida-specific accounts renew.

National personal lines writers “went out last spring and said, 'We've got to buy this. We don't really care what it costs.'” In contrast, “people who are insuring Pizza Hut franchises in Kansas don't feel that way,” referring to the more typical 1/1 client.

Explaining the change in economics, brokers highlighted reinsurer profits in 2006. “We had a business that had a 30 percent return-on-equity–and most of the money is back on the table,” Mr. Kneuer said.

While numbers have not been officially tallied, Charles Hewitt, executive vice president in the Boston office of London-based Benfield Group, said during a mid-December interview the overall capacity increase for property-catastrophe seemed about 20 percent. Mr. Gardner put the magnitude in the 10-to-25 percent range.

Still, on the pricing side of the equation, Mr. Kneuer said, “we had a real divergence between what reinsurers initially quoted on many accounts and the final price.”

Giving an extreme example, he said he'd seen catastrophe business quoted at 60 percent increases that got done at 15 percent. In such cases, he explained that reinsurers got a 30 percent boost last Jan. 1 and were looking for another 60 to bring the cumulative hike to the 100 percent they achieved at midyear for a different set of clients. The reality at the end of the day was they saw a cumulative 50 percent in these situations, he said.

“We also had working-layer business quoted at a 25 percent increase that got done at single digits,” he noted.

For July 1, Mr. Kneuer said, “there was a little bit of a herd mentality [among reinsurers]. The whole herd was running hard and kept running [at Jan. 1, 2007] even though the economics didn't support it.”

While he described a wider initial divergence between buyers and sellers than other brokers, all agreed that getting to a firm middle ground was hardly a tug of war–also agreeing that no one faction of reinsurers showed a lack of discipline or willingness to break from the pack.

“It was hard, factual broking,” Mr. Kneuer said, noting that brokers went through presentations about client experience and exposures “point by point, fact by fact, market by market”–pointing out instances where modeled losses for particular insurers didn't go up, or to inconsistent pricing of particular layers.

“I think we've actually done an okay job as an industry balancing where the cat business needed to go–and getting there,” Mr. Gardner said. Brokers helped clients show that “they think about cat risk better.”

Refuting a popular assumption that “prop-cat is simply a commodity play” with no real differentiation in pricing or terms, he said, “we're finding that's less and less true.” The ability of insurers to demonstrate they can actively manage cat accumulations and move their portfolios is increasingly important. “Reinsurers are responding.”

He also said there was more consistency among reinsurers on price targets than was the case for Jan. 1, 2006, explaining that reinsurers were at sea last year because pending model changes from the biggest vendors–RMS, AIR and EQECAT–had not yet come through.

Mr. Hewitt said stories of extreme market difficulties at midyear coaxed parties to start the 2007 renewal process early, adding that while it was protracted, it was also orderly.

It could have been disorderly if reinsurers had “dug in their heels” to try to force prices to July 1 levels, or clients refused to pay more than they did at Jan. 1, 2006, he added. “The fact that they were willing to find that middle ground comes out of a lot of the groundwork we did” prior to negotiations, he said.

From a buyer's perspective, Kevin Kelley, chairman and chief executive officer of Boston-based Lexington Insurance, said reinsurance market conditions that existed for Jan. 1, 2006 renewals were well within his expectations, commenting specifically on noncatastotrophe property treaties and casualty placements. (AIG buys catastrophe protection on Lexington's behalf, while the rest of Lexington's reinsurance needs are purchased in Boston.)

“We have a lot of long-term relationships with reinsurers, so we have a real good sense of where the market's headed relatively quickly,” he said.

For property-catastrophe, if it sounds as if reinsurers came away less satisfied than cedents, brokers are quick to point out that's not the case.

“There's lots of disappointment to share,” Mr. Kneuer said. Clients coming off a good year in 2006 are seeing 10-to-15 percent price jumps instead of declines, and saying, “If that's what the product costs, I'm going to have to arrange my business to need less.”

For example, he said that insurer actions previously taken only in Florida–or just on the coasts–are now showing up in other areas. Media reports about how hard it is to buy homeowners insurance on Long Island and Cape Cod reflect real consequences of insurer decisions to shed business or impose deductibles and new business moratoriums, among other things, he said.

“Those are things everybody did in Miami five years ago, and now everybody does in Suffolk County, N.Y,” he said, adding that such actions are also evident in the Gulf, the Carolinas, and along the New York, New Jersey and Massachusetts waterfronts.

In the reinsurance market, Patrick Denzer, CEO of Minneapolis-based Collins, said that while the Northeast was one clear topic of conversation going into Jan. 1 renewals, initial concerns about insufficient capacity didn't materialize. “Market supply is meeting demand,” he said. Buyers have responded to model changes by reducing exposures dramatically, he said. “So other than in the Northeast, we haven't seen big increases in the amount of limit demanded.”

While Mr. Gardner said that demand for property-catastrophe capacity was not up by more than 15 percent overall, the brokers all said the largest buyers, by necessity, are looking into alternative sources of capacity, such as sidecars, cat bonds and private placements.

“It almost resembles a patchwork quilt,” Mr. Garnder said. “They need to maximize capacity in syndicated markets and have conversations with alternative sources of capacity to meet their needs.”

Turning to property per-risk and pro-rata contracts, brokers said those are simply being priced on underlying experience and exposures, and that reinsurers continue to limit the catastrophe protection in such contracts–an activity that began in 2006.

Mr. Kelley, who said Lexington buys “a fair amount” of pro-rata uncapped reinsurance, said the supply is shrinking.

Reinsurers prefer to put a cap on recoveries, he said. “We don't think that's fair. If you're getting a pro-rata share of the premiums, you should pay the pro-rata share of the loss,” Mr. Kelley said, noting that Lexington has had “to be more creative and smarter in trying to get [needed] capacity.”

For example, last August, Lexington entered into a sidecar agreement with Bermuda-based Concord Re Ltd., which agreed to accept a quota-share participation in commercial property insurance business written by Lexington.

“It was a way for us to utilize alternative capital” to deal with the fact that pro-rata property protection on catastrophe-exposed business was becoming more limited, Mr. Kelley said.

“Creating a one-to-one relationship with a special purpose vehicle…has allowed us to write more business than we otherwise would have, as well as to continue to control our net wind and earthquake aggregate positions,” he said.

Special Reports /

New Year's Property-Catastrophe Re Renewals Disappoint Buyers, Sellers

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