“More of the same” and “not very exciting” are phrases that industry experts are using to describe the outlook for Jan. 1 reinsurance renewals.

Losses to date are still absorbable and the capital position of the reinsurance industry is even stronger than last year, they said.

Bryan Joseph, global actuarial insurance leader of PwC in London, reported that the renewal season continues to progress “as expected in terms of the rates themselves not going up, as far as we can detect from the market,” although there are some small pockets of rate increases.

As a result, he said, reinsurers are feeling pressure because of a combination of low investment returns and rates, which are either holding steady or declining.

Looking at the Jan. 1, 2011 renewal season, he predicted “more of the same,” adding that the absence of any major losses to date has contributed to the situation. “Although this year, on the record, there will be a number of losses, they are perfectly absorbable sizes,” Mr. Joseph said.

“It's literally not a very exciting market. There hasn't been a lot of aggressive rate cutting by people, but on the other hand there hasn't been a lot of movement by the primary market and everybody's still waiting on the next big loss.”

“If we're going to sit and wait on the next big loss to try and restore profitability, then we probably are approaching some of the behaviors of the late 1990s,” he said, adding, however, that he has yet to see the multiyear policies, “which normally are the sign of a real trough in the market.”

In the late 90s, he explained, a number of three- and four-year policies were being written. “So far we haven't seen that. So there still is some underwriting discipline left out there,” he said.

Pierre Ozendo, chief executive officer of Swiss Re Americas in Armonk, N.Y., said that “not much has changed since last year,” describing market conditions as “still indicative of a fairly slow economy.”

“Things are not moving as quickly back as we would like,” he said.

He noted, however, that there's been “a considerable strengthening of capital positions,” adding that “a real resurgence of the equity market…has helped to build back a lot of the net worth of companies.”

“If anything, the capital position of the insurance industry is even stronger this year than last, and I think we've just completed a year where we have had the highest surplus in the industry's history,” he observed.

From a security position, he said, this is good news, proving that the insurance industry “has weathered the storm for the financial crisis extremely well–much better than banks.”

At the same time, he said this points to the fact that there is excess capital, “and that usually does somewhat depress the pricing side. So we see that pricing in certain areas of the business is under some pressure.”

Profitability has been maintained by significant reserve releases in recent years, he said, but the redundancies have been used up to a large degree–adding pressure to underwriting profitability and a need to increase pricing.

CAT COVER DEMAND FORESEEN

Mr. Ozendo said he expects that Jan. 1 renewals will see significant demand for appropriate natural catastrophe cover.

By appropriate, he said, “I mean making sure that no company underinsures their exposures. [This] is vital today–particularly in this delicate period with more propensities for natural catastrophes because of the global warming situation.”

Companies need to make sure they properly insure natural catastrophe exposures “to the limit they have at a time when models are in continuous evolution,” he said. Companies that do modeling, “Swiss Re included, continue to refine and hone their models to take new experience into account.”

He described, as an example, the Chile earthquake. “I think the last time there was an earthquake that was even equal to an 8.8 in Chile, the insurance market wasn't around,” he said. The Chile quake “really redefined what a significant effect like that could be, and we learned from it. Every time we learn from it, we can better tune our models to represent it,” Mr. Ozendo said.

On the other hand, demand for reinsurance generally is depressed by a buildup of capital that has fueled increased retentions by primary insurers.

This is to be expected, Mr. Ozendo said. “If your capital is there, you've got to put it to work.”

The depressing part, however, is that “as interest rates stay very low, as you can imagine, it's hard to make money on the money. Underwriting is key,” he said.

Insurers have to make sure that the underwriting return is a much larger part of the total return equation, Mr. Ozendo said. However, “the market is not doing that and it's not doing it in certain areas that we see, like casualty.”

As for underwriting discipline, while the market is competitive, “at least we've not seen real 'cowboy behavior' by the market,” he said. While there is competition from both insurers and reinsurers, “you don't see runaway foolishness,” he said.

This, he said, is an indication of the fact that “anyone who does that now will pay heavily for it, because you can't make any money on the money.” While abnormally low interest rates have a dampening effect on the market, they also dampen “exuberant optimism,” he said.

While it does not help that prices are not strong, interest rates are low and loss costs are becoming more volatile. “This is a time of introspection for the industry, to think about its retention structures and whether [insurers] are doing the right thing and what is right in this marketplace,” he said.

Two other factors also will affect the market–the economy and regulatory reform.

Mr. Ozendo described the impact of the economy on automobile insurance to illustrate the first factor. “Automobile [loss] experience has been better because of the economic slowdown,” he said. “People have been driving less, taking fewer vacations, so the incidents of accidents and losses went down and the results actually improved–which is a good thing.”

The problem, however, is that with the economy now seeing a slow recovery, the “automobile experience will revert to the mean. So anyone who has been relying upon this better experience, which is a by-product of an economic condition that we are moving away from, has to now factor in the average loss cost as we get back to normal.”

Turning to regulatory reform, Mr. Ozendo said: “We've seen the Dodd-Frank Act and, depending on to whom you speak, there are 300-500 rules to be written.

“It seems obvious to us that all of these regulatory reforms, which are well intended, will put on more strict rules and will require more, rather than less capital. So capital costs are going to go up for everybody.”

All in all, he summarized, “It is a moving environment. The industry is in good shape, it's very healthy, very financially strong–some would say even too strong. And there's talk about and push for stock buy-backs being bandied about, but there is no foolishness that we can see taking place.”

PwC STUDY RESULTS

PwC said in a report released this fall that while the reinsurance market can report that all claims have been met and no reinsurers stopped trading as a result of the global market turbulence, the industry is split on the question of whether the worst financial crisis since the Depression significantly impacted the way it does business.

In the report titled “The Way Forward: Innovation And Differentiation In The Reinsurance Industry–The CEO Perspective,” PwC found that half of the executives surveyed reported changes in the way they operated, while the other half said their business model had not been affected.

One CEO described the global financial crisis was “a non-event,” PwC said. On the other hand, half of the reinsurance community represented in the global survey reported changes in the way they do business, affecting:

Underwriting and risk controls
Return on equity and asset management
Focus on capital management
Redefining risk appetite
Centralization of core functions
Leveraging and expanding an already strong franchise
Helping clients change from within
Assessing emerging risk

The focus on underwriting, PwC said, is closely linked to the broader financial markets challenge. As companies no longer see the investment returns of a few years ago, managing both sides of the balance sheet has become even more important.

PwC noted a focus on strong operating cash-flow production, combining growth and profitability.

While returns on equity have always been important, PwC said that shareholders are now pushing for tighter controls on both underwriting and asset management and noted that most CEOs reported a clearer focus on assets and mitigation of specific asset risk scenarios, including a focus on diversification across the portfolio.

While most claimed that underwriting discipline was always a priority, the CEOs cited a renewed focus on improved underwriting controls due to the financial markets.

The changing role of reinsurers is also seen as helping market participants to adapt and change from within, the study found.

Special Reports /

Capital Positions Strong, But Reinsurers Feeling Profit Pressure

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