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Prolonged Hard Re Market Unlikely

By Lisa S. Howard
Reinsurance Editor

The renewal market is being described as resembling a cr?me bruleehard on the top but soft underneath, according to observers in the London market and a report issued by Benfield Group Ltd.

“[E]xpectations of a prolonged hard market are already looking unrealistic,” said the report issued by Benfield in London, called “The Big Squeeze: Reinsurance Market Review 2002-2003.”

“The pricing cycle is alive and well and already beginning to reassert itself, reflecting the uneven distribution of capital,” the report said.

Nevertheless, Benfield said, cedents and rating agencies are increasingly focused on capital adequacy, while shareholders are demanding dramatically improved returns.

“To generate such returns in the current adverse investment climate means that most reinsurers will have to achieve combined ratios well below historic levels,” it said. “However, rates are already showing signs of weakening in market sectors where there is a concentration of capacity, such as property catastrophe.”

The report said a key theme of 2002 is the increasingly uneven spread of capacity. “At one end of the scale, property catastrophe is over-supplied with consequent evidence of weakening rates,” the report said. “Given that only in 2002 did global catastrophe rates reach a level in excess of adequate, evidence of softening in property catastrophe pricing is cause for concern.”

Other areas that appear to be over-supplied with capacity include aviation where rates are softening, the report said.

Benfield said that the use of modeling techniques for pricing and structuring property-cat coverage appears to have affected pricing where competition has resurged, “particularly where cedents exploited known modeling parameters to bring rates down,” the report said.

“Trigger pricing became a common feature, with capacity often swinging from famine to feast when the designated trigger price was reached,” Benfield continued.

“By contrast, capacity remains limited in many other specialist areas, particularly casualty classes,” such as directors and officers liability, the report said.

Industry practitioners also discussed some of the principal trends in the various market segments:

Aviation. Charles Cantlay, deputy director of Aon Limiteds U.K. reinsurance group in London, said this particular insurance market had a quicker and faster kneejerk reaction after 9/11 than perhaps any other industry segment.

“I think it was probably inevitable that the correction downwards [on the insurance side] was going to occur there first rather than anywhere else,” because prices had initially risen so sharply in this segment, he said.

“Some of the airlines which renewed in Dec. 2002, most certainly did go at a reduced spend [lower prices] than in 2003,” he said, noting, however, that theyre still at “profitable” levels, even after the reductions in the primary premium rates.

Henry Keeling, CEO of XL Re in London, said, “The overall reinsurance excess market in aviation has held up very well, despite the fact that were seeing softening in the primary market.”

Mr. Cantlay added that the normal threshold for which you can buy retrocessional coverage for aviation moved up to the $500-$750 million range as a result of withdrawals in the marketplace.

Casualty. Mark Lescault, chief underwriting officer for Swiss Re Americas Division in Armonk, N.Y., said U.S. liability business continued to see significant corrective rate action during the January renewals. “On average, we probably saw increases between 25 and 50 percent, especially for the tough problem linesmedical malpractice, D&O, umbrella and excess, workers compensation,” he added.

The reserve deficiencies coming out of the soft market became a lot more apparent as long-tail claims started to mature, Mr. Lescault said.

“The other thing that led to strong increases this year” was the fact that “corrective actions in the prior two years just hadnt been strong enough,” he went on to say. Although adequate rate levels were achieved for property, not as much had been accomplished on the liability side, he said, noting that “liability needed to catch up and it took some good steps during the 1/1 renewals.”

Despite the improvements, Mr. Lescault said he is still concerned about this sector. “We really have to keep our eye on the ball because loss costs are definitely continuing to escalate,” he said.

Rick Smith, president and CEO of global property and casualty reinsurance for GE Employers Re Corp. in Overland Park, Kan, said casualty will continue its upward trajectory for a number of years, “as a result of the enormous hole that we, as an industry, dug for ourselves during the late 1990s, combined with the unbelievably low investment environment were in.”

“Reinsurers have got to improve their balance sheets, their ROEs,” said William Eyre, managing director and CEO for Towers Perrin Re in Philadelphia, referring to returns-on-equity. As a result, he said, casualty pricing is going to continue its upward climb, especially in the specialty lines, such as errors and omissions, D&O, medical malpractice and umbrella pricing, he added.

According to Dirk Lohmann, group chief executive officer for Converium Ltd, the Zurich-based reinsurer, in the workers comp area, there has been some stabilization of rates after the enormous increases seen last year. “Some people who bought at panic prices were able to get more reasonable prices in 2003. But generally it was still an issue given the terrorist exposure.”

Marine. “On the marine excess of loss side, the market is still seeing rate increases, although theyre not as big as they were,” said Mr. Keeling at XL Re. He said the 10 percent increases seen on the marine side “are still pretty solid and, most importantly, the fundamental terms and conditions that were imposed during 2002 remained in place, so the books are still pretty pure marine books.”

Mr. Cantlay said average rate increases in marine excess have been around 15-20 percent. “The top-end prices have probably gone up slightly more than that, to about 25-30 percent. But that was starting from quite a thin base,” he said.

The ability to do “composite reinsurance,” remains extremely constrained, he said, describing composite reinsurance as reinsurance covering both marine risks and non-marine risks in a single package.

“This means that people have to buy pillars of cover for their own particular class of business, rather than lumping it together into one composite whole account cover, covering everything,” Mr. Cantlay said. “So they have to buy separate towers for marine, separate towers for non-marine, separate towers for aviation, rather than throwing it into a single whole account program.”

He said this has introduced a significant additional cost to the buyer. “If you can throw everything into a single program, its obviously going to be cheaper than having to buy six or seven different specific pillars of cover,” he said.

Property. James Vickers, managing director with Willis Re in London, said the property pro-rata sector has been tough because results have been poor. “But there are signs of a growing interest in some markets because the original commercial industrial rates are picking up,” he said. “Some reinsurers are beginning to hope that the business will produce reasonable or acceptable margins for them.”

Converiums Mr. Lohmann said, U.S. pro-rata property treaties, particularly in heavily exposed natural catastrophe areas were “challenging for many cedents.”

Commission reductions were common, as was the introduction of either a cap or a cessions limit, he said, noting that the rate would depend on the past experience of the account, how distressed it is. “Some accounts probably renewed at expiring because theyve already gone through a couple of rounds of tightening up as far as terms and conditions are concerned.”

Mr. Lohmann said there has been more pronounced movement in rate in the property risk excess area, which came from a “much deeper hole.” “Much of the business still is priced at levels, which just barely make the return hurdles that reinsurers are targeting,” he said. “Property risk excess in the United States, is still an area, which we find to be marginal as far as attractiveness is concerned,” he said.

Despite the concerns of industry observers that the property-catastrophe sector is softening, Mr. Lohmann maintained that “pricing discipline is good.” In the North American market, “where nothing material happened in 2002, [we] saw reinsurance rating on cat level off,” he said, noting, however, that total dollars paid to reinsurers increased, “because the underlying adjustment, the premium base, has gone up because primary rate increases.”

Mr. Lescault agreed that property saw flat to modest increases. “The good thing is were generally at an adequate level,” he said, due to strong rate increases seen over the past two years. “I think there was also some impact in the United States where theres been lower than average [natural] cat losses, so it doesnt put as much pressure on the property side,” he said.

“International property treaty reinsurance is tighter than the United States, by and large, because the international arena has traditionally been dominated by Munich Re and Swiss Re, [companies that] are being very conservative at the moment,” said David Shipley, active underwriter for MAP, a Lloyds managing agency. “The effect of them tightening their underwriting is much greater outside the United States,” he said.

Mr. Vickers said the property cat market is responding to supply and demand. “Theres a lot of supply for property-cat business,” he said, noting that the market is being described in London as “a cr?me brulee market.” “Its quite difficult arguing and negotiating with the leaders and coming to terms, but once the terms are set, [risks] are placed very, very quickly,” he said.

In a number of territories, people have achieved flat rates or slight rate reductions. In others, they may have seen rate hikes if they suffered losses, he said.

Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 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.