Start-Ups Reinsurers To Face Stiff Competition: S&P
London Editor
The long-term picture for the new reinsurance startups in Bermuda, which have gotten backing from the capital markets in order to take advantage of the post-World Trade Center property-catastrophe capacity crisis, may not be as positive as some might think, according to Standards & Poors.
The problem for the new companies is that the rate increases being seen in the short-term are not likely to be sustained over a long period of time, said Donald Watson, director of S&P Insurance Ratings, during a teleconference last week on the impact of terrorism on the insurance industry.
He said that he would not be surprised to see new capital raised of $10-$15 billion for the insurance industry over the next six months.
"About half of those monies will probably go to existing insurers and the other half for startups," if the trend follows the pattern that has been seen in the first month after the World Trade Center disaster, he said.
"In some respects, this is not dissimilar from what happened between 1992 and 1994 when Hurricane Andrew and the Northridge Earthquake hit the insurance industry with the largest property losses pre-World Trade Center," he said.
However, there is a marked difference between todays market and that of the early 1990s, he said. "I think that in previous hard markets, there was more of a sustained withdrawal, which we havent seen to date, and the speed at which capital is flowing into new ventures already indicates that we will quickly replace the capital thats been lost," he said.
"For the buyers of reinsurance, the question will be what do the new companies bring to the table beyond just capacity," he said.
He explained after the teleconference that reinsurance buyers will look for continuity of capacity, which will typically be from highly-rated, long-standing reinsurers. "In addition, the personal relationships of buyers with underwriters will also be a factor in the placement of reinsurance."
Further, he noted during the teleconference that there isnt likely to be a long-term capacity crunch because the four largest reinsurers, which account for about 55 percent of the total reinsurance premiums written, wont be withdrawing capacity from the market.
Given the "extraordinary financial strength of these companies," they will continue to dominate the market, despite the fact that they will "pay a sizable chunk of the losses from the World Trade Center," Mr. Watson confirmed.
Another problem for the start-up reinsurers is that there are "far more alternatives today than there were in 1992 or the prior hard market for liability in 1986," he said.
"Catastrophe bonds could bring immediate and substantial capacity to the market today and we would expect to see a significant increase in cat bond issuance next year," he said.
During the teleconference, Mark Puccia, managing director at S&P in New York, said the rating agencys current tabulation of industry net losses is about $22 billion, but that he expects the number to escalate as the industry comes up against issues of coverage, insurability and reinsurance protection.
"If you take a look at the industrys net losses broken out by sector, youll see that approximately $2 billion of that $22 billion is being absorbed by the primary life carriers, although another $1 billion-$3 billion in life losses likely are being picked up by reinsurers," he said.
Of the remaining $20 billion in net losses, about one-third is residing in primary property-casualty carriers and two-thirds are with reinsurers (including the life reinsurers), he said.
It appears that primary insurers are going to be most exposed to growth in loss exposures for the World Trade Center attack, said Mr. Watson, noting that the greatest uncertainties are in the liability and business interruption coverages. "Its going to be five or more years before we know how much of these exposures will turn into loss."
For the aviation and building property losses, it is expected insurers and reinsurers will be in reasonable agreement that these are full-limit losses, he said.
"Of course, the exception is whether the courts determine the attacks to be a single or multiple event," he said, which is a question that will be determined by a recent suit filed by Swiss Re in New York. (See NU, Oct. 29, page 5 and page 46 of this edition)
"At this point, Im not aware of any reinsurer who has classified the attack on the World Trade Center as two events. So if the court agrees with Mr. Silverstein," the lease-owner who says there were two events, "then well see losses for many reinsurers rise," Mr. Watson said. "In some cases this could be a very significant increase," he said.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 5, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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