Despite many factors that should be contributing to a hardeningmarket overall, competition in some coverage lines and geographicregions has heated up, while activity in many other areas remainstepid, keeping price hikes more modest than anticipated,reinsurance experts say.

Chris Klein, global head of business intelligence with GuyCarpenter in London, said in January buyers overall saw moderateincreases, which he said means expectations of higher prices lastfall were not met. The important theme now is that while prices atrenewal were up about 15 percent on average, that amount was belowthe anticipated hardening of about 20 percent.

He added that April 1 renewals, significant in Asia, producedmixed signals as well, with the market generally flat.

As July 1 renewals were being closed, he reported, the marketcould be described as “tepid, with hot spots.” Mr. Klein explainedthat retrocession remains reasonably tight, but is available.

Early reports show tightness inU.S. catastrophe programs. The Northeast U.S. coast overall, hesaid, is “tight” and a “hot spot.” The same goes forproperty-catastrophe and marine and energy risks in the Gulf ofMexico. Trade credit and surety, he added, has been hit hard by therecession, particularly in Europe.

What's tepid? He noted that the general casualty market remainsflat, and aviation looks “interesting,” although renewals inOctober will tell more. Mr. Klein added that the Air France crashoff the coast of Brazil appears to be the biggest aviation loss inseveral years.

He also said the U.S. primary insurance market remainscompetitive in almost all lines and classes of business.

However, there are several factors at play, he explained, whichought to be providing an underpinning of pricing, terms andconditions, while keeping at least “a floor under the market,” ifnot continuing to push prices up. Among them:

o Low investment returns. With interest rateshistorically low and with low yields, revenue coming in frominvestments is much smaller than in the past. This is an issue forcasualty business, Mr. Klein said, where reserves are held for longperiods of time and income from those reserves is substantial.

o Reserve releases. “If you look at recentresults, particularly in the first quarter, you'll see thatunderwriting results have been held up or boosted by reserves fromprior loss releases,” he said, adding that “these can be quitesubstantial in some cases, and many of them are post-Sept. 11,2001.” However, surplus reserves are a finite resource, one whichmay be drying up. As that happens, prices might have to go up tocompensate.

o Tight capital markets. “People were affectedby the financial catastrophe last year, which in turn weakensbalance sheets,” noted Mr. Klein. Although many reinsurers entered2009 with strong balance sheets, capital has been reduced, “whichin theory is the supply,” he explained.

“What underpins the supply of reinsurance ought to be drivingprices,” he said. “There has been uncertainty over the ability toreplenish balance sheets in the event of a major cat loss.”

He said that in theory, underwriters hold back their capitalbecause of fear there may be a big loss and they won't be able toeasily raise money from external sources. “So again, that tightensthe supply of capital, and you'd expect to see price pressure,” hesaid.

o Pressure by rating agencies, which want tosee better returns, higher rates, lower volatility, “and they wantto see companies stabilizing and rebuilding balance sheets,” henoted.

The paradox, he added, is that to rebuild a balance sheet, “youneed to earn profits, and to get a better return you need toincrease the profit against the balance sheet. But if you're havingto hold a bigger balance sheet, that puts pressure on trying to getthe return.”

He said that in Florida, renewals were “finely balanced,”because “most people were able to get what they wanted, [although]they had to pay some more for it.”

Evidence of that balance, he said, was the fact that the gapbetween the highest and the lowest quotes for reinsurers was onlysix percentage points, “which is a very narrow spread.” Mr. Kleinsaid the spread generally is wider when buyers are testing themarket.

The second factor was that prices, terms and conditions at whichthe reinsurance treaties were bound and agreed were at rates 95percent of the average quote–a narrow spread between what wasquoted and what was bound. In a softer, more competitive market, headded, that spread would be much wider.

What's bringing this about?“Volatility is reducing and confidence is coming back into theequity market,” he said. “So while you have these drivers on bothsides, the fact is that the reinsurance market began last year witha lot of capital.”

Brian Boornazian, president of both Aspen Re and Aspen ReAmerica, observed that in the property market, buyers tend to bemost interested in property-catastrophe coverage this time of year,in the midst of hurricane season.

Currently, the property-cat market is “relatively orderly,” henoted. “As an industry, we've seen pricing to be up–roughly 15percent. That's off of a higher base than previous soft markets, soI think we're in a relatively good place in theproperty-catastrophe market.”

The highest increases are primarily in peak-zone wind orearthquake-exposed business, he noted, with the location of theexposures determining how much of an increase will be seen. “Ifyou're a regional carrier without peak-zone exposure, you'llprobably pay single-digit rate increases,” Mr. Boornazian said.

He noted that capacity has remained relatively static for thepast year or so, because of the financial crisis.

Looking forward, however, “there are signs that possibly somenew capacity may enter the property-catastrophe market,” hereported. Nevertheless, while many buyers are trying to get theirrenewals done early, he said indications are that most peak-zonecapacity so far has been met.

OTHER TRENDS

In the general property risk reinsurance market, the industry isseeing “a bit more varied result, but we are showing some signs ofimprovement there as well–but not to the extent we're seeing in theproperty cat market,” according to Mr. Boornazian.

He also observed that while the U.S. facultative market is“fairly attractive right now,” some cedents are substituting theirtreaties for buying facultative coverage.

“So they're exposing their treaties more to some risks that theynormally would have purchased facultative to protect,” which hesaid gives the reinsurers more exposure to business they otherwiseweren't exposed to in previous years.

Mr. Boornazian said this happens when companies feel they needmore premium to fund their risk, but can't afford to pay theadditional amount for facultative. “So they then go and exposetheir treaty to the risk instead,” he explained.

In the U.S. casualty markets, he observed, rates are improvingoverall, “but by that I mean the rate decreases are smaller thanthey had been previously–so the rate of descent is slowing, inother words.” He said the rate decreases have been gradual, “almoston a monthly basis.”

Mr. Boornazian noted that the market is lagging because of somerecent entrants into the U.S. excess and surplus lines world overthe past year, “as well as some of the larger companies that mayhave had their balance sheets affected negatively, for otherreasons.” Those companies, he said, are struggling to “retain thebusiness they once had, and I think those all contribute to ratelevels not being what they need to be.”

An interesting line to look at, he said, is workers'compensation, where there is “a fair deal of uncertainty on excessworkers' comp.” This is mostly due to the uncertainty of medicalinflation. “If you look at the larger economic and politicalclimate, there's a lot of prognosis for an inflationary cycle, andthis is a business with a very long tail,” he noted.

In the casualty market overall, Mr. Boornazian said investmentincome is down because of the “macro-economic environment.” Withouta “healthy stream of investment income,” he added, “rates will haveto go up from current levels. Otherwise companies are not going tobe able to write this business to acceptable returns.”

When will this happen? Industry watchers “think it needs tohappen, starting in the second half of this year,” he said, “or youmay see some reinsurers pulling back capacity, you may see pressureon acquisition costs, but something will have to happen.”

Regarding the errors and omissions and directors and officersmarkets, “rate improvement needs to take place here,” he said. “Wedon't know if we've seen all the players admitting all their lossesfrom the credit crisis yet. Part of that is because they just don'tknow–it's still early.”

William Jewett, president and chief executive officer ofEndurance Worldwide Reinsurance, described the recent Floridamarket renewals as “orderly.” For property-cat coverage at June 1renewals, he said submissions were early, particularly compared tolast year. Transactions also were closed later, making the actualtimeline longer.

“Because of the complexities of the market and increased rates,companies looked at different alternatives to optimize theirprograms, which led to longer underwriting decisions,” he said.

Mr. Jewett said buyers facing a firming market with lesscapacity were creative and looking at options. As a result, hesaid, fewer programs were oversubscribed. In terms of actualpreparation, “it was more about companies realizing that in theproperty-catastrophe market–specifically the wind marketplace inFlorida and the Gulf–there would be some hardening.”

Because of the hardening market, he said even before thesubmission process began companies were considering alternatives.Those included increasing retentions for some, hiking retentionsand buying more at top layers for others, and for some keepingretentions flat and buying less.

“We observed companies looking at their premium spend,considering risk characteristics, evaluating their options andmaking informed decisions,” he noted.

Overall, he described the reinsurance market as “responsible,unlike in prior soft markets,” observing that “in prior cycles,reinsurers led the market,” while now, “it's not reinsurers drivingthe insurance cycle.”

Reinsurers' prudence can be attributed to a few things, he said,including better informed management, looking back at lessonslearned, capital constraints and the focus of ratings agencies onbalance sheets.

Another factor, he added, is a better quality of executivemanagement in some companies now versus prior cycles. Given thefinancial crisis and the fact that capital is “so dear,” he said,there is more care as to how that capital is deployed.

In general, he concluded, it's “a market in which you can makemoney and transact, but it's not hardening in the classic sense andit is certainly not a hard market. It's a stable market that'sstill very competitive, with some hardening signs.”

David Perez, president and chief underwriting officer of globalcasualty with Torus Insurance–which completed its first year ofbusiness on June 23–noted that in the casualty world, “we're seeinga tremendous amount of competition that still exists, especially inthe lead umbrella environment and to a great extent, for large,national global accounts.”

This competition, he said, “has an effect on pricing throughoutthe tower, but in the excess lines of business above that, thesoftening has appeared to level off.”

In reinsurance, he said, capacity is available, “but has beendifficult to come by. We're very fortunate that we had the abilityto fill out our placements.”

He added, however, that there has been much concern about thecasualty market expressed by the reinsurance community, “and reallyabout the continuing soft market, matched with the continuedadverse development of years–not only 2001 and prior, but now we'reseeing 2003 and prior years facing some adverse development.”

Mr. Perez, who is based in the Bermuda office of Torus, notedthat during the 2003-2006 period, “there also were a number ofreserve takedowns, or redundancies considered in prior years in theU.S. property and casualty market. If these years start to trendadversely, it's going to have a significant effect in themarketplace.”

He said this “has a lot of reinsurers concerned, in terms ofadding more capacity into the marketplace, or even continuingexisting lines.”

“We know there are certain sectors right now that are facingsignificant challenges in capacity, especially in certain energysectors,” according to Mr. Perez. “We think that's driven primarilybecause of some tremendous losses that sector had to absorb–notonly on the casualty side but also on the property side.”

While capacity most likely won't change much globally, theappetite for risk within those gross lines will change, hesaid.

In addition, “we know there was a dynamic shift in purchasing inthe casualty sector that took place over the past six months,” hesaid, noting that risk managers and buyers were being questionedinternally as to why a company would be “so leveraged into a fewselect markets, and what is the criteria for that.”

Even more important, he added, buyers are wondering when acertain amount of cover is “too much leverage into a carrier, andthere's really no response to that.”

Because some carriers have had significant challenges over thelast few months, he said buyers are thinking differently. Carriersthat generally had significant amounts of capacity have adopted amore de-leveraged approach, “in terms of scaling back large limitswith certain carriers, or a syndicated approach where capacity isshared by more carriers–that's a significant shift in how capacityis bought in certain venues.”

He said there also is more involvement on the part of theinsureds, which “isn't necessarily a bad thing.”

On the direct side, according to Mr. Perez, while competition ispart of the process, “we need to make sure the pricing is adequatefor the exposure we'll have, and that we're communicating thereasons why there may be a need for a price change or coveragechange. Communication is key.”

He also observed a “wonderful renaissance over the past fewquarters” in Bermuda, “where a tremendous amount of new capacityhas come into the marketplace.”

More so now than ever, he said, insureds coming to Bermuda havemore options, in terms of capacity. “It's a very exciting time andsomething that cannot be promoted enough in the U.S. marketplace,in terms of what the Bermuda markets can do for large buyers ofcapacity,” Mr. Perez said.

See Related Chart:

First-Quarter Reinsurer Results