Sins Of Past Ignite Canada Re Shakeup

The company CEOs noted that a determined attitude toward further rate adjustments across all lines of business will be maintained in the pending 2003 treaty renewal negotiationsalthough adjustments are likely to reflect a more tempered 15-20 percent average increase (nearly 90 percent of Canadian treaty covers are renewed at the end of the calendar year).

The past year not only brought in rate hikes of about 50 percent on catastrophic covers, and approximately a 35 percent rise on non-cat business, but saw heightened attention toward restricted terms of cover, according to Patrick Lacourte, chief agent for Partner Re and current chair of the RRC, which is the Canadian equivalent of the Reinsurance Association of America.

Even "clean accounts" attracted rate adjustments and tighter terms in the past years renewal season, observed Andre Fredette, senior vice president of Caisse Centrale De Reassurance in Toronto. "As a reinsurance writer, the loss experience does count, but even clean accounts have attracted adjustments due to the change in the perception or risk [in the post-9/11 environment]," he added.

The "cost of the past" is also catching up with management of many companies, the CEOs noted. "The pressure on company management is high," confirmed Mr. Lacourte.

Even with the strong pricing that kicked in with 2002 treaty renewals, Mr. Lacourte pointed out, "were just getting back to sanity after years of under-pricing."

The upward pricing momentum initiated with this years covers will continue through into 2003 treaties, he predicted, with much of the attention focused on catastrophic and liability business. "This will be particularly the case with regard to proportional treaties."

And despite the strong pricing rebound that came with 2002 covers, several global companies are expected to withdraw from the Canadian market before the end of the year. The White Mountains group recently implemented senior management changes at its Canadian Folksamerica Re Co. in Toronto, sparking market speculation that the local operation will be closed shortly.

Munich Re is in the process of shifting the underwriting and marketing side of its Canadian American Re business to the United States. The Canadian operation ended the 2001 financial year with an underwriting loss of $2.7 million based on earned premiums of $21 million. A company source said that the operations primarily "specialty risks" business (which comprises about 70 percent of the total) remains profitable.

Although a senior source within the company has confirmed the pending closure, American Re CEO John Phelan said, "I dont comment on market rumors."

He added, however, that the Munich Re groups commitment to the Canadian market remains strong, although concern remains over the ongoing state of under-pricing relative to loss experience.

The recent announcement by Gerling-Konzern Versicherungs-Beteiligungs A.G. that it will cease to write new business through its U.S. subsidiary Gerling Global Reinsurance Corp. of America and focus on European activities caused broker concern that the Canadian operation will be folded.

Ranked eighth in the Canadian reinsurance market, Gerling Global Re Company wrote $46.5 million in net written premiums for 2001 and incurred a net underwriting loss of $4.75 million. John Kartechner, president of GGR in Toronto, said the U.S. announcement will not affect the Canadian subsidiary.

The company has subsequently distributed letters to clients and brokers assuring them of GGRs future presence in Canada. Mr. Kartechner hinted that a long-term solution to Gerlings reinsurance operation should be finalized by early September of this year.

In all three of the aforementioned companies, the bite of several years of underwriting losses is believed to have eaten away at reserves with unfavorable reserving developments now requiring parent companies to provide "top up capital," or simply get out of the market.

"The insurance and the reinsurance markets have turned in pretty awful results in Canada for 2001, without having been impacted by any catastrophic losses," said Roy Vincent, who heads up Canadian treaty decisions at Hannover Re. As such, he added, "we all know that right now there are reinsurers whose future [in Canada] is currently being decided."

With Canada being primarily a "branch office market," past years saw most underwriting actions driven by international trends. However, increased foreign-parent attention is now being turned to local underwriting experiences and management is being held accountable, Mr. Vincent said. "Recent [management] changes have shown that head-offices are prepared to act." As a result, many local reinsurance operations have lost autonomy on underwriting decisions.

Ken Irvin, president of Munich Reinsurance Canada Group in Toronto, noted that the management pressures currently coming into play in the Canadian market have already surfaced in the United States. The emphasis of parent companies is on the profit-line, he added, and the fate of local operations will depend on performance.

While this "profit drive" may result in some consolidation within the marketplace as several of the smaller players withdraw, Mr. Irvin does not expect a "merger and acquisition rush" as "theres currently no value in a reinsurer buying another reinsurer."

While 2002 has not yet produced any meaningful losses, particularly on the cat side, companies are contending with adverse developments from past accident years, said Patrick King, chief agent of Canadian business for Alea Europe Ltd.

He added that, "while the market is finally on its way back to sanity at both the primary and reinsurance levels," there is a need for further upward price correction. He expected that proportional treaties will attract the most attention in the upcoming annual treaty discussions.

Brian Gray, president of Swiss Reinsurance Co. Canada, expected mold and asbestos exposures will be under scrutiny in the 2003 treaties.

While the Canadian market has been fortunate to escape the bulk of the insured cost of these perils, unlike the U.S marketplace, he feared that a changing litigation attitude could leave reinsurers with significant cost exposures. As such, Swiss Re is following through with cedent insurers to determine what mitigation actions are being taken to reduce this risk.

The general price firming seen in the market will continue into 2003 renewals, said Gerald Wolfe, chief agent of Canadian operations at General Reinsurance Corp. "I most definitely dont see a return of the soft market, there wont be rate decreases" he added.

Certain lines of business will attract higher rate increases for 2003, he said, although, generally, rate adjustments for next year will be more moderate and based on "per company" experience. "I think that by 2004 we could see a more stable price market," Mr. Wolfe predicted.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 2, 2002. Copyright 2002 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.