Reinsurers liked what they saw in the casualty insurance market for Jan. 1, but they may find the segment less appealing if insurance prices drift lower, experts predict.

According to Linda Johnson, executive vice president for casualty in the Minneapolis office of Benfield Group, casualty reinsurance conditions “are sitting at a comfortable equilibrium right now. There is certainly adequate capacity across all lines of business. Pricing is down slightly, but not overwhelmingly. Programs are being concluded at very strong security or at a slight decrease–nothing dramatic.”

Kevin Kelley, chairman and chief executive officer of Boston-based Lexington Insurance, noted that casualty business was easier to renew than property for Jan. 1. “The [reinsurance] market is much more robust and much more interested in writing casualty,” he said.

Despite writing a very wide range of exposures, “by and large, we find that the casualty [reinsurance] market has got a pretty good appetite for what we do,” Mr. Kelley said. “We meet frequently with the markets and have a chance to educate markets on what we do. We do it not just at renewal time, but throughout the year.”

Besides education, brokers pointed to favorable loss frequency trends as the main factor increasing reinsurer comfort levels.

“Frequency is down–that has taken pressure off the system,” Ms. Johnson said, noting that the trends persist across the all liability lines. “That's not something I anticipated a year ago,” she added, highlighting an unpredicted plunge in securities fraud class-actions that has impacted the directors and officers liability line, as well as declining accident frequencies in private passenger auto.

Still, Andrew Marcell, managing director for New York-based Guy Carpenter, said the casualty insurance market is stable. “Depending on what class you're talking about, rates can be down 10 percent or up 5 percent. All-in-all, they're pretty flat,” he said–noting, however, that downward rate pressure is likely to accelerate with more entrants to the casualty insurance market.

“There are more companies looking for reinsurance, and those that are in the liability market are looking more to alternative forms of distribution,” he said, explaining that many are actively seeking program business opportunities. “Before, they had fallen out of vogue. Now, they have come really back into the mainstream.”

Mr. Kelley said the reinsurance market is competitive for casualty business. “To the extent that upfront gross rates are down–and they are down on casualty in general–reinsurers are accepting the price decreases.”

But the reinsurance market “is still very well disciplined,” he stressed. “I sense based upon what we're seeing currently that 2007 will be a very interesting year, because I think reinsurers are willing to accept some amount of rate decrease–not a significant amount–and [they] will watch rate decreases very, very carefully on the front-end business.”

Although Ms. Johnson said reinsurers are accepting primary rate decreases and then some, agreeing to “give a little bit more” in some situations, she agreed that reinsurers are acting responsibly, and that they are generally concerned about the softness of the insurance market. “To the extent that rates continue to deteriorate, I think reinsurers will be cautious–and they are going to be less inclined to follow,” she said.

Mr. Marcell noted that a lot of casualty reinsurance is still done on a proportional basis, making the trend in original rates the “biggest influencer on reinsurance appetite.”

Mr. Kelley said a quickening pace of primary rate decreases is already noticeable at the start of 2007. Primary casualty rates were down 5-to-10 percent throughout 2006, “and we're seeing a pick-up in rate decreases to where they're probably off now closer to the 10-to-15 percent range. That is a potentially troubling number,” he said, noting that insurers normally anticipate loss costs rising in the 5-to-6 percent range.

“If the [primary] market were to heat up and rate decreases were to become more significant than that 10-to-15 percent, and/or loss costs were beginning to jump north of 5-to-6 percent, I think the [reinsurance] market would pull back,” he said.

Mr. Marcell said the reinsurance market continues to distinguish between insurers as they set prices on excess contracts and ceding commissions on pro-rata business. “If you can demonstrate a decent history of results and a consistent buying pattern, you'll get some improved terms. If you've had a poor loss history or reinsurers are concerned about your strategy, then it's unlikely,” he said.

Going forward, he said, “I don't see reinsurers continually reducing prices as they have in the past soft markets,” pointing to the increasing use of capital-adequacy models as a driver of financial discipline. “There will be a point at which they're just going to say, 'I have to get certain return on my capital and this is not going to meet it.'”

Stopping short of saying that reinsurers are exhibiting more discipline than their primary carrier customers, he said, “It's a different discipline”–by necessity. He explained that while there are thousands of primary companies, there may be less than 20 reinsurers for a casualty segment, thereby creating risk aggregation issues. “They have to be much more careful about how they're monitoring their accumulations and measuring their downsides,” he said.

Paul Kneuer, senior vice president for New York-based Holborn Corp., said for Jan. 1, the psychology of the reinsurance market was to have “very little patience” for casualty books–even essentially good ones–that experienced some bad losses.

“There's been some frequency of medium-sized events. We're not seeing tons of $20 million events,” but a number of insurers had losses get into their reinsurance, he said, recalling a scenario of a commercial vehicle hit by a private passenger car and prompting payouts under several covers.

“Reinsurers' actions are very much addressing individual circumstances,” he said. “Hope is not a business plan” in the minds of reinsurers, who will ask, “'What are you doing differently?' And if you're not doing anything differently, the reinsurers are going to.”

Longer term, as enterprise risk management efforts pick up steam, Mr. Marcell expects primary insurers to start asking more questions. While ERM-type issues have been most talked about on the property side, the majority of U.S. companies that have gone out of business have not done so because of catastrophe losses, but because of inadequate casualty reserves, he said.

Insurers will ask, “What is my reinsurance really doing for me? How is it actually helping with capital management and managing my risk of ruin?” he said.

The answers will be completely different for large national writers and small regionals, he noted. “But I think, generally, the impact will be that casualty reinsurance will be bought to deal more effectively with the catastrophe element in liability business,” he added.

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Softer Prices, ERM Issues Might Alter Behavior By Casualty Reinsurers, Cedents

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