A recent survey by the Reinsurance Association of America (RAA)showed negative movement across two critical indicators within thereinsurance marketplace. A compilation of statutory underwritingresults from 19 U.S. property and casualty reinsurers revealed thatthrough March 2010 total written net premium was $6.4 billionversus $7 billion for the first three months of 2009. Additionally,the combined loss ratio for the first quarter of 2010 was 102.2percent compared to 95.5 percent for the first quarter of 2009.

Although this combination of declining revenue and increasingloss ratios might portend upward pressure on rates, or at leastflat renewal pricing, that is not likely to happen soon (barringcatastrophe events), according to Bryon Ehrhart, chief strategyofficer with Aon Benfield. “Aon sees the market as softening,”Ehrhart reported. “Margins are still attractive so rates can stillmove (down).”

Market direction, however, is always a generalization, pepperedwith exceptions based on class of business, territory and otherfactors. What holds true for one line may not for another. Forexample, professional liability rates for Florida-based real estaterelated operations have increased, especially for title agents, andunderwriting has tightened considerably in the past 24-36months.

Ehrhart noted other instances of class-specific results.“Casualty has seen a pretty steady decline over the past two tothree years, and now the primary casualty market is starting toshow some mild and limited rate increases,” he said. “On the otherhand, D&O coverage has held a little more firm due to thefinancial crisis, but a decline is likely.”

The reinsurance market is one of multiple layers andcomplexities, and what ends up as the premium on an insurance quoteor policy likely has been impacted by various pricing components.For property insurance, after factoring in physical location, therisks of flood, earthquake, hurricane and other possiblecatastrophic losses have to be entered into the rate- makingequation along with the usual exposures of fire and theft. Add thethreat of terrorism, the impact on investment income and othervariables, and rate making becomes increasingly difficult.

Some reinsurers, as they assess their financial results, mayincrease their rates to what they see as more reasonable(profitable) levels. Those that do could find themselves losingmarket share. There is a tremendous amount of capital in themarketplace, with people actively seeking books of business. Someof these insurance and reinsurance entities with surplus capitalare fairly new. That means they frequently are working with a blankslate when it comes to loss history, and they are able to developrates without having to account for past loss history. That can beadvantageous when competing for an account or a book of businessagainst someone with legacy loss history issues.

Soft Market to Continue in Florida

For the past several years, the Florida marketplace hasexperienced declining rates and pricing across most lines. Barringany catastrophe events, that soft market will continue here. Thesupply side of the supply and demand equation is still ruling theday. “Reinsurers are, for the most part, not as much in control ofthe direction of pricing in the market as they'd like to be, asthere is still more capacity available than demand,” said DennisBurke, vice president of state relations at RAA. The same can besaid for insurance carriers on most classes of business.

Ehrhart said, “The expectation for the most recent reinsurancerenewals was a 5- to 10-percent decrease, but it turned out to bemore like 10- to 15-percent.” Ehrhart added that he is notdistinguishing between treaty renewals (typically provided whenreinsuring a program or book of business), and facultative renewals(usually terms provided on a per-account basis).

Those who are waiting and watching the market for indications ofwhat will happen next on property rates and pricing will have towait a little longer for anything definitive. “Most of the contractrenewals occur by July 1 — usually 60 to 65 percent — but theproperty renewal season doesn't really get serious until after thehurricane season is over,” said Ehrhart.

The Florida Factor

The state of Florida's property insurance market is asignificant factor in reinsurance discussions. To explain itspredominance, Aon's Ehrhart listed the world order for the top fivecatastrophe events based on reinsured exposure:

1. U.S. hurricanes

2. U.S. earthquake

3. European windstorm

4. Japanese earthquake

5. Japanese typhoon

Florida is a key component of the number one item on the list.Aon estimates that there are $2.5 trillion dollars of values atrisk in the state. What makes that number all the more significant,or potentially so, is the concentration of those values. Ehrhartnoted that the recent catastrophes in Chile and Haiti had no realeffect on Florida renewals, but a Florida catastrophe event couldaffect rates elsewhere.

As significant as the size of the market in Florida is toreinsurance companies and brokers, it is complicated by theunpredictable nature of the storm season, and further complicatedby the state's legal, regulatory, and political climate. Expertsnote that private reinsurance placement could be a much moreprominent and viable consideration if not for the state's currentcatastrophe fund structure.

Burke said what many others have stated, or are thinking. “Whilesome in the state of Florida may be concerned about monies going tothe private market, domestically or internationally, RAA sees thatas a good thing. The [currently structured] Florida HurricaneCatastrophe Fund will have to borrow money to pay catastrophelosses. Private market insurance carriers and reinsurers will payclaims from their funds.”