With an eye out for potential windstorms and concerns over fallout from the subprime market meltdown, an earthquake in China and the recent tragic plane crash in Spain, global reinsurers are balancing multiple catastrophic exposures while striving to maintain underwriting discipline in a softening market, industry observers say.

"I think the reinsurance community at the moment is reasonably healthy and aligned, and that isn't always the case," said W. Marston Becker, chairman and chief executive officer of Max Capital Group Ltd., in Hamilton, Bermuda. "I think that is good news for the industry in the aggregate, and hopefully it maintains itself for awhile."

Mr. Becker observed that the reinsurance markets globally have stayed more disciplined from a pricing perspective than have the underlying primary insurance markets. "Part of this is the tremendous focus that the rating agencies, the investor world and the reinsurers have today on [return on equity], so they're much more return-oriented in their pricing of these transactions," he explained.

He added that reinsurance transactions are "a little easier to monitor [compared to the primary market], in that your transactions are fewer but larger."

Most reinsurers, he said, were "pleasantly surprised at the June, July renewals--that they held their pricing as well as they did. Most people had speculated it would notch down more than it did."

But will the pricing discipline last? "Time will tell," Mr. Becker said. "But thus far, the reinsurers have had remarkable pricing discipline."

This discipline is probably best illustrated, he noted, "when a counterparty tries to place a piece of business below what the market has been viewing as acceptable pricing. They're having trouble filling their capacity, but once they adjust their pricing, there is obviously plenty of capacity there, because it fills quickly."

On market softening, "it's still somewhat the early days," he observed. "While it's been trending down, we were trending down off historically robust pricing levels. Most reinsurers this year, absent hurricanes, would expect to report combined ratios below 100--and in historical terms those are pretty attractive."

Bryan Joseph, global head of the actuarial group at PricewaterhouseCoopers in London, observed that "underwriters I've been speaking to are saying things like, 'This time, it will be different.'"

"I approach these comments with a pinch of salt," he conceded. "That said, if you look at the figures of some of the big players, they have actually been cutting back on volume."

He added, however, that while "some would argue [the market's] been selective in terms of not underwriting major risks that are wrongly priced, others are saying volumes are falling because rates themselves are falling."

"Unlike the last shipwreck we had in the insurance industry, I haven't heard many comments yet about changes in terms and conditions," according to Mr. Joseph. "But [the] Monte Carlo [Reinsurance Rendezvous] will tell, once people start talking about what's going on in the market."

Mr. Becker of Max Capital Group agreed. "I think Monte Carlo this year will be very interesting, as people gain their own perspective as to how much the marketplace is expected to change going into the first of the year, and whether people, as the cycle continues to mature, maintain their discipline or start to become more revenue-focused," he said.

"The corollary to that is what's happening on the investment side of everybody's balance sheets," he added. "Because fixed-income returns have come down, any asset classes beyond fixed income have increased their volatility. So not only do you have softening pricing, you have less predictability in what you think your investment returns are going to be. That makes it more challenging to plan and predict."

In terms of specific classes of business, according to Mr. Joseph of PricewaterhouseCoopers, "we haven't had any major losses for awhile, but we just lost an MD-83 in Spain in the aviation sector--the first major loss in quite some time in that sector." He noted that the aviation market has been one area that has become reasonably soft.

The Aug. 20 airline disaster, however, could "prompt a revision," he said, adding that until the black box from the plane is analyzed and a determination made about causes of the accident, "you don't know who is up for this."

As for major catastrophes, he said, "the wind hasn't really blown in any way that has caused any damage--a few scares, but still, nothing has come in." The earthquake in China earlier this year did produce some insured losses, "but they weren't huge," he noted.

Observing global trends, Mr. Joseph said that his home base of Bermuda "obviously continues to be a successful market."

He cautioned, however, that question marks remain about whether Bermuda is running out of space and personnel, and how many more companies the island can physically accommodate. "Are companies looking to move there, or are they selecting other places for their headquarters?" he asked, noting that "Bermuda is a small place--20 square miles."

Some of the issues faced by Bermuda-based companies are the expenses of accommodating staff, and also that there are no guarantees on how long a staff member can remain because jobs on the island are regularly reviewed. For some positions, he said, there is "a steady chain of staff through Bermuda." He added that "this is something to watch. It's a trickle, rather than a flood."

The London market, he noted, continues to be strong, but that cost and taxation are becoming a problem, like they have in Bermuda. This has not led to a flight of capital from London, he added, but rather a "flight of headquarters and ownerships out of the market--so there are very few London-based, or London-owned companies anymore."

In fact, he said, "I could probably enumerate those that are London-based on just two hands, because most of the companies are headquartered overseas--we're shuffling the decks of where people are being headquartered."

Another issue confronting the reinsurance market is the credit crunch as a result of the implosion of the subprime mortgage market, and the bad securities spun off from that sector. At this time, he said, nobody can forecast the impact this debacle will have on the reinsurance and primary insurance markets.

While there have been a number of notifications tied to the subprime fallout, "as far as I can detect, very few people have made any actual claims yet," he said. "You'd expect things to be coming through in directors and officers policies, errors and omissions policies and real estate agents." But because there has been no backlash of claims thus far, "we don't know how painful it's going to be," he said. "It's not a quantifiable event at the moment."

The one "silver lining" in the situation, he observed, is that the "laddering claims" related to the stock market mania at the end of the 1990s has caused people to reduce their exposures to the investment banking sector. This is "certainly the case for the larger players," he said.

"That's the one silver lining," he said. "Otherwise, the [credit crunch] failures would have been generating huge losses for the industry. We wouldn't be discussing whether you could quantify things now. We would have had a failure, which would have triggered losses."

Mark MacGougan, vice president for strategic products at The Hartford Steam Boiler Inspection and Insurance Company, said his company has taken a new approach to help insurers add coverages they might not otherwise take on.

"The world is changing," he said. "There are new exposures companies would like to be able to respond to, but the research that would be necessary, and devoting head count to some new area that would be started up from scratch, that's a difficult thing for most companies to pull off."

For these reasons and others, he said, some primary companies are interested in having a reinsurance business partner "who can say, 'Here's a coverage you could offer,' and many of these are typically done as endorsements to the policies the company is already writing."

To help primary insurers stay competitive, Mr. MacGougan said the company helps set up specialty lines they might not be able to offer otherwise.

Rather than simply providing capacity, "we work with primary companies to do everything on a turn-key basis--from developing the forms and getting the filings put through, through doing the underwriting of the business and helping with marketing support and adjusting the claims."

He added, "The idea is to make it as easy as possible for the primary company to offer these additional coverages."

Special Reports /

Global Reinsurers Do Balancing Act With Market Anything But Predictable

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