Reinsurers are increasingly questioning the sustainability of a good casualty claims environment, and their dimmer views of future profit margins on primary business are putting them at odds with potential cedents, market participants said recently.

“The expectations are different by meaningful enough amounts that you’re struggling over treaty terms, or whether you’re actually going to come to an agreement at the end of the day,” said Michael Sapnar, chief underwriting officer of domestic operations for Transatlantic Holdings in New York.

Mr. Sapnar, speaking during a panel on cycle management at the 2010 Standard & Poor’s insurance conference last month, explained that the go-forward loss picks selected by his firm typically differ with those selected by ceding insurers.

“Different [primary insurance] companies have different expectations [and] assumptions, but that is pretty consistent with almost any company–that we’re a little more pessimistic than the insurers in terms of loss cost trends, and maybe even frequency trends,” he said.

“The issue is how much credence do you want to give to negative frequency trends, or less-than-expected severity trends? Is it going to continue?”

Other questions, he said, concern risk management on the original business that has helped to improve results in medical malpractice, automobile and workers’ compensation lines. “Is that here to stay, or is it going to shift? Is it a fundamental shift, or is it of a cyclical nature?” he asked.

Differing viewpoints are driving a lot of divergence, Mr. Sapnar said.

“Business is priced to a pretty fine cusp where a five-point difference in loss ratio pick, with no investment income to speak of, could be a big difference as to whether we write a deal or not,” he explained.

In early May, a representative of the reinsurance brokerage community–George Venuto, executive vice president of Willis Re in Philadelphia–also highlighted reinsurers’ growing apprehension for U.S. primary casualty business. Speaking to a group of reinsurance actuaries at the opening session of the Casualty Actuaries in Reinsurance Seminar in New York, he distinguished their appetites for primary and excess insurance books of casualty business.

“Primary is probably the one that’s more difficult from my vantage point. It’s like trying to get your five-year-old kid to eat peas. You’re just not going to do it,” he said.

“Trying to place primary casualty reinsurance right now is probably the most difficult aspect of the market,” Mr. Venuto added, cautioning that “the losses emerge much quicker. You see it quicker, and to some extent, I think, there’s a little misplaced comfort in some of the excess casualty and umbrella plays that are out there.”

Mr. Venuto did make it clear that reinsurance capacity is ample across the board for property and casualty business. That means a broker can get any particular casualty program placed in the reinsurance market without much difficulty, provided it hits the market-clearing price, he said.

In terms of pricing, he said casualty reinsurers are “pressing very, very hard to keep renewals at expiring [rates],” while a casualty insurance book with clean loss experience will generally see “a flattish-type renewal.”

“For something with some hair on it, the answer [from reinsurers] is generally we’re going to walk, or we’re going to put punitive terms out there, which effectively ends up being a constructive denial,” Mr. Venuto noted.

Commenting on property business, he reported that downward rate pressure has continued in 2010, with additional downward pressure coming about as a result of changes in the science underlying property-catastrophe models.

More recently, in early June, four reinsurance company executives speaking at the Oppenheimer Insurance CEO Summit in New York reported that property reinsurance rates eroded at the June 1 renewals–an important property reinsurance renewal date for Florida-specific insurers and others.

The executives reported 10-to-20 percent rate declines for peak zones, saying that with this year’s June 1 prices, U.S. property reinsurers basically gave back rate increases they saw last year at the same renewal date.

For more on property rates, see (“Florida Reinsurance Renewal Rates Down, But Concerns Longer”) and (“Reinsurer Discipline Overrated).


At both conferences, the topic of the day was cycle management, and session moderators queried reinsurance market participants about cycle drivers and where the market is headed.

At the S&P conference, David Cash, chief executive officer of Bermuda-based Endurance Specialty Holdings, said while his company writes both primary and reinsurance business, he believes “the place to approach cycle management is from the reinsurance side.”

“Reinsurers don’t control up-front pricing, but in many ways they’re disproportionately affected by the results of the cycle, and at heart, I view the underwriting cycle as being a casualty phenomenon,” he said.

“Short-tail events can change the way companies think about the amount of capital they need to hold,” as can events on Wall Street, such as the meltdown in the financial markets in 2008, Mr. Cash noted. “But it is the lags in the casualty business that create the long and at times very damaging cycle.”

Given that reality, he said his reinsurance operation, and many others, have made changes in their underwriting postures since the end of the 1990s–taking on more short-tail business and less casualty as a proportion of their overall books.

At the actuarial seminar, Michael Angelina, Endurance’s chief risk officer and chief actuary, asked his panelists to contrast the current soft market with the last one in the 1990s in another way. “Where are we?” he asked, coaxing them to use a year in the 1990s to predict when damaging results might be coming. “I have heard people say, this is like 1995. You know it’s getting bad, but it’s still okay,” Mr. Angelina said.

“The fear is that we think we’re in 1995, but we’re really in 1997,” he said.

Historical data for the industry reveals that property and casualty insurers turned in relatively good calendar-year combined ratios in 1997, with the overall industry result coming in at 101.6 for that year, compared to 106.5 in 1995, 105.9 in 1996 and 105.6 in 1998, according to industry aggregate figures reported by Highline Data (, an affiliate of National Underwriter.

Mr. Angelina noted, however, that 1997, on an accident-year basis, was the first of four in the 1990s cycle that turned out to be woefully deficient from a loss reserving standpoint. Referring to 1997-2001 as the “soft market years,” he reported that casualty insurers had to put up $60 billion in reserves during calendar years 2001-2005 for accident-years 1997-2001, citing an S&P report from a few years back.

Damian Magarelli, a director with Standard & Poor’s in New York, said he believes the current market is indeed closer to 1997 than 1995, and that favorable claims trends that have been evident in recent years are now waning.

Claims frequency in casualty lines, such as primary auto, workers’ comp and medical malpractice, “absolutely was declining for many years,” the S&P analyst said. “That has propelled and supported earnings to a great degree,” he added.

“While insurers are still pricing and reserving to that [level of frequency], the problem now is that we see frequency turning flat,” according to Mr. Magarelli. “You could argue that depending on how the economy shifts, it may change buying habits and may end up increasing frequency to a greater degree.”

Agreeing with that assessment of loss trends, Mr. Venuto pointed to the greater involvement of actuaries in reinsurance pricing as one of several “fail-safes out there to prevent us from getting to the late-’90s” environment.

“How many submissions did you see in the late ’90s where customers gave you a price monitor?” he asked, noting that now everybody provides one, highlighting changes in ceding company behavior as well. Throughout the industry, he also said that enterprise risk management now figures into the mix, in contrast to the 1990s.

“Simple monitoring of aggregates is happening on the casualty side now, which was pretty rare before,” he added.

For primary carriers and reinsurers, “there is far more attention to detail as to how exposed they are,” Mr. Venuto said, reporting it takes all of 20 seconds after a Fox or CNN news alert “before we get an e-mail from every one of your reinsurers, asking, ‘Are we on this risk?’”


Mr. Sapnar said his company’s cycle management strategies start with underwriting audits–”getting under the bonnets of ceding companies.”

“It’s tough to capture policy form [and] deductible changes,” he said. “You really have to go in and look at what’s going on from policy to policy as best you can.”

Referring to some of the same tools that Mr. Venuto and Mr. Magarelli had highlighted at the actuarial meeting, Mr. Sapnar suggested he wasn’t entirely sold on their usefulness. “We get these nice reports on price changes and monitors. We look at [them] with a healthy amount of skepticism, because I think there are certain biases people have” on the ceding company side, he said, describing them as “maybe being overly optimistic.”

Both Mr. Sapnar and Mr. Cash pointed to diversification strategies in place at their organizations–by product line and geography–as ways to stay ahead of the cycle, since all segments theoretically are not soft at the same time.

In addition, Mr. Cash described how his firm tailors reinsurance program structures to the different areas of the market–using proportional covers for casualty business, and nonproportional, or excess-of-loss coverage, for property.

Suggesting that Endurance is not alone in this regard, he said reinsurers “work very hard to ensure that their views of the economics align with the views that their clients have of the economics.”

“It’s incredibly hard to do when you’re writing nonproportional covers,” he said, suggesting that nonproportional covers are more appropriate for short-tail property business, which “tends to self-correct,” and where exposure-based models and pricing tools work well.

“Where you feel you can understand underlying trends well, [and] you have influence over pricing, it’s reasonable to be an excess-of-loss player,” he said, giving the catastrophe market as an example. In contrast, in areas such as casualty he believes it makes more sense to “proportionally participate with your clients” in a way that’s meaningful.

Mr. Sapnar said Transatlantic takes a different view, moving away from quota-shares for contracts reinsuring primary casualty layers, where he said loss ratios should be more predictable than on excess casualty or umbrella business.

Returning to his earlier point about the differing loss picks of ceding insurers and reinsurers on primary casualty business, he gave the example of a pro-rata deal with a 25 percent ceding commission.

Assume the loss ratio pick by the ceding insurer is 60, and by the reinsurer is 65. Then add five points for overhead expenses of the reinsurer, and 2.5 points for the broker, he said, noting that the cedent’s total is 92.5 versus 97.5 using the reinsurer’s loss pick.

“The cedent is looking at it and saying this is a good margin for you. We’re looking at it and saying it’s a marginal margin,” Mr. Sapnar said. “That’s a deal we’re probably not going to write,” he concluded.

“You can try to get some economics in the deal to align the interests, like a sliding-scale commission or loss corridor, but those are harder to sell given the capital bases of many cedents today,” he said.


In total, U.S. reinsurers as a group reported much more than a “marginal margin” in 2009, with the overall combined ratio falling to 92 from just over 100 in 2008.

Likewise, the top-25 reinsurers (ranked by premiums assumed from non-affiliates) reported nearly nine points of underwriting profit, compared to just 0.3 points one year earlier, according to NU’s annual review of financial results, available through its affiliate, Cambridge, Mass.-based Highline Data. (See the accompanying chart on page 13 for individual reinsurer results.)

While the overall combined ratio of 91.3 was eight points better than the 99.3 figure reported by the Insurance Services Office and the Property Casualty Insurers Association of America for the U.S. p&c industry overall (including reinsurers, but excluding mortgage and financial guaranty companies), reinsurers fared worse in first-quarter 2010.

For NUs top-25 U.S. reinsurers, the aggregate first-quarter combined ratio was 99.8, with property-catastrophe losses driving much of the 6.8-point increase from first-quarter 2009. While the overall U.S. p&c industry combined ratio (for companies other than guarantors) also increased–to 99.0, according to ISO–the result was only 1.5 points worse than the comparable figure for first-quarter 2009.

None of these calendar-period combined results–which include the impact of loss reserve takedowns for prior accident years–came in worse than breakeven, but experts such as Mr. Angelina and Mr. Magarelli believe accident-year combined ratios on casualty business are at 100 or above already.

“In my mind, there’s really no doubt that underwriting profits are not there on long-tail lines,” Mr. Magarelli said. “The industry is really being supported to a great degree by reserve releases still from [accident years] 2003, 2004 and 2005 in some areas, and 2009 was a relatively light property year,” he said, explaining the good overall results.

“We really are close to 1997″ as a comparable point in the cycle, he reiterated. “We definitely think the accident year [2010] is flat–sort of at the tipping point of where it wants to go” in terms of the loss trend. “But we’re not seeing anything that has really pushed the industry–either on the casualty side or the property side–to take a dramatically different view” in terms of pricing, he said.

“There’s nothing that’s an impetus to say we need rate increases that are meaningful,” Mr. Magarelli concluded.


Underwriting Results For Top 25 Reinsurers

First-Quarter Reinsurer Results