Reinsurance rates in some lines were on the rise during the just completed Jan. 1 renewal season, fueled by a variety of factors–from higher catastrophe losses to the impact of the financial meltdown on investment income. But the hikes were by no means unreasonable or seen as unexpectedly high, leading players in the field report.

One twist is that primary insurers, typically leading the way in pricing trends, have found that with balance sheets and pricing of primary business depressed, reinsurance is taking the point in this market turnaround, experts observed.

“What should have happened is that the primaries would be affected and that would filter up to reinsurers,” explained John Daum, executive director for Lockton International, in its newly opened U.S. reinsurance office, based in New York.

Umbrella business is filtering up, and prices on “anything related to financial institutions,” such as directors and officers and errors and omissions coverage, “is being increased dramatically, so that's working its way though,” he said.

Mr. Daum noted that among the exceptions is workers' compensation coverage, which is so regulated, it “doesn't filter its way up.”

Pricing on commercial auto has flattened, and so far there haven't been wholesale rate increases on that line, he reported. Mr. Daum added, however, that “we think that's going to start to happen in first-quarter 2009, for those who write trucking liability and commercial auto.”

Willis Re, the reinsurance broking arm of Willis Group Holdings, said the global reinsurance industry has remained “substantially unscathed” by the “unprecedented turmoil in the global capital markets, with a capital base still largely intact and liquid.”

However, Willis anticipates that access to new capital in 2009 will become more difficult and expensive in the current economic climate.

In addition, Willis maintained that primary insurance companies, facing new capital pressures, are increasing their demand for reinsurance as they explore buy-downs and other reinsurance mechanisms to protect and enhance their capital positions, which is likely to drive up prices.

Reinsurance broker Guy Carpenter said in a report this month that the economic turmoil is having some positive impact on reinsurance industry prices for sellers, with modest rate increases being seen and demand for products growing. The broker said that its World Rate on Line, or ROL Index, showed an 8 percent increase, calling the reinsurance rate increases “moderate on average” for Jan. 1 renewals.

The upward climb was in reaction to the dual pressures of a financial catastrophe and the second most expensive property-catastrophe year on record, the report said. Those increases, however, were “tempered by large capital positions” at the start of last year, which allowed carriers to absorb losses.

The generalities, Guy Carpenter continued in its report, end there because the combination of loss history, geography and line of business “led to wide differences in pricing.”

The Aon Benfield insurance brokerage, a unit of Chicago-based Aon Corp., said in its “Reinsurance Market Outlook” that global reinsurance prices firmed for Jan. 1 renewals and are expected to remain firm for the April through July renewals.

Aon Benfield said that, assuming there is only limited additional turbulence in the financial markets and no significant reinsured catastrophe losses occur, it expects that the April through July reinsurance renewal market will be similar to the Jan. 1 experience for buyers.

U.S. hurricane and earthquake reinsurance pricing rose modestly for January renewals, and pricing of other global natural perils held firm, the firm said.

However, U.S. hurricane-dominated programs, especially those exposed in the state of Florida, would likely experience more significant price increases than others due to the potential inability of the Florida Hurricane Catastrophe Fund to fully finance its projected 2009 capacity in the uncertain municipal bond market, the report said.

Lockton's Mr. Daum told National Underwriter that what has happened to the economy over the past six months is more than a trend, “it's a game-changing event in the reinsurance industry.”

He said that hedge funds, principally responsible for providing retrocessional capacity to the marketplace, mostly have “stopped providing any retrocessional protection at all for reinsurers.” This began around September, with pressure from losses of Hurricane Ike and “prior to the bad news in the third and fourth quarters.”

Adam Sayers, executive director of Lockton International in London, added that while there has been a fairly measured hardening in the market, “it hasn't been an across-the-board swipe at everybody.”

Regional companies that haven't had a loss have fared pretty well and haven't seen major rate increases, he noted. “They've also all been able to get their programs finished. There isn't such a capacity crunch that they can't get the capacity to fill out their programs.”

The only programs left unfinished, he added, are “the absolutely huge global programs from the really big players–which is often the case [as] they have such huge programs that there are often gaps left in them this time of year.”

Mr. Daum added that those programs had rate increases up to 25 percent. “Most of them probably would have had Ike losses,” he observed, noting that insured losses from Hurricane Ike have grown from $8 billion to up to $20 billion by current estimates. “So that's working its way through the market fairly deeply”–especially with the very large insurers, he said.

Mr. Daum also pointed out that because of concerns about their capital base primary insurers are purchasing “a lot more reinsurance…both on the top end of a program–on the cat side–and also on the lower end.”

Primary insurers are being “much more conservative on their purchases today–even the smaller companies,” many of which were “heavily invested in equities,” he noted. With equity losses to their portfolio, these insurers have no way of raising capital, “so they go to the alternative form of capital–reinsurance–and buy more reinsurance to protect their asset base,” he explained.

Last year, primary insurers were buying less insurance and taking more retentions. “It's counter-intuitive, especially as rates go up,” Mr. Daum observed. “People typically had been retaining more business when rates went up, as we all knew they were going to on Jan. 1. But because of their desire to protect their balance sheet, they're buying more cat reinsurance. The capital markets have forced them to take a step back and use reinsurance.”

Steve Skowronski, managing director-advisory services, with SMART Business Advisory and Consulting in Devon, Pa., said several factors are likely to influence market conditions in 2009.

One of these is underwriting results. The combined ratio for the first nine months of 2008 was 104.9, compared to 94.6 percent a year ago, he said. Faced with a 10-point deterioration in their combined ratio, this will “hopefully lead to a beginning of a hardening” for reinsurers, he added.

The deterioration, he said, was driven by large, single losses. One example was a large sugar refinery loss in Georgia, where highly flammable dust in a factory combusted. “So, it's not always global cats, but it can be very large single property losses like this–causing a ripple effect,” he explained. There also was an unprecedented collection of small catastrophes–thunderstorms, hail and firestorms, he said.

Mr. Skowronski pointed to a number of large catastrophes, including Hurricanes Gustav and Ike. He projected that Hurricane Gustav losses will come in at around $7 billion and Ike will total about $15 billion.

“This is a year where the collective cats combined mean serious deterioration–and could contribute to hardening this year,” he said, adding that forecasters are predicting an active 2009 hurricane season, with 14 named storms expected.

“All of that on top of poor investment results–putting all this together makes this a challenging market,” he concluded.

Mr. Skowronski also warned that the U.S. regulatory environment will impact the marketplace.

“There's been a significant regulatory change,” he said. “At its December 2008 meeting, the [National Association of Insurance Commissioners] adopted a new reinsurance regulatory scheme that softens the [collateral] requirements on non-U.S. reinsurers doing business in the U.S.”

Historically, he explained that non-U.S. reinsurers had to post 100 percent collateral for their U.S. liabilities, “but now they will undergo a financial review by the NAIC to determine where they fall in a sliding scale of required collateral.”

As a result, a company that is highly rated may have to post minimal or no collateral for their U.S. liabilities, he added. The NAIC also is establishing a reinsurance supervision review department and will draft implementation plans.

Once implemented, the plan will create a single port of entry–a single qualified state will be the sole regulator of a reinsurer, which will cut costs on the regulatory side. “This will put non-U.S. reinsurers writing business in the U.S. on a more level playing field with U.S. reinsurers,” he added.

Hugo Crawley, chairman of BMS Group, an independent reinsurance brokerage in London, observed that what's going on in the U.S. property-catastrophe arena has been affected by storm activity in the Southeast and Midwest losses, with the results being pressure toward higher pricing for lead reinsurers.

This is not a broad brush, he said, but rather is driven by individual clients, “and their story and their relationship with the markets.” Some that don't have losses, he said, are not seeing the “wholesale increase others are predicting.”

Those with catastrophic experience against their programs are seeing increases, he said. “It isn't a broad-brush approach, such as 10 percent increases, but there is definitely a push from markets in London and Bermuda to push pricing up–but more on a client-by-client basis.”

In the professional liability arena, he said that D&O, “for the tougher classes, like the big ticket, publicly traded companies,” will see capacity issues. Professional liability carriers, however, “haven't seen significant change,” Mr. Crawley said. “If anything it remains quite soft.”

As for the impact of the financial markets, he predicted that failing companies and other aspects of the upcoming recession will cause increased claim activity. So far, he noted, “we have seen $8 billion in losses in the D&O market as a result of the subprime market disaster. That will have an impact in terms of capacity and pricing.”

He added that “if you then look at what's going on with AIG and Lexington, they have been successfully hanging on to business. So far, we haven't seen anyone moving away from AIG.”

The effect of the financial crisis on primary insurers has brought on some “very difficult times for the clients we're involved with,” Mr. Crawley said. “There is an issue around companies that have lost significant investment through the equity market and that will take time to come through in terms of how companies wake up to what they've got to do.”

In the direct and facultative market, he said, “as a London wholesaler, we're placing major schedules of excess property capacity, and we've seen some underwriters stop writing any new business.” He added that others are “beginning to get some traction to push prices up.”

“There have been terrific cat losses, so they've put the brakes on writing new business, which is a precursor to them thinking the market is going to get harder in the second quarter of '09. We're just beginning to see rate increases,” he said.

Mr. Crowley observed, however, that “it's amazing that we can have such significant cats in 2008 and they've been overshadowed by two other issues–what's going on in the recession and investment portfolios being hit so hard.”

Special Reports /

Reinsurers Expect Hardening Market, But Don't Foresee Skyrocketing Prices

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