Jardine: Hard Pricing Climate In 2004

"As we draw toward the end of the year, it is likely that many of the international equity markets will close higher than they opened at the beginning of the year, "said Steve McGill, chief executive officer for Jardine, in a statement. "Nevertheless, the capital destroyed from the industry will take years to rebuild. The affected [insurers and reinsurers] can ill afford to allow prices to plummet."

He continued that despite reductions for some rates in 2003 and the emergence of fresh capacity, "we believe that, overall, the hard market will continue to sustain itself in 2004. Therefore, many of the signs of the hard market will continue to exist, albeit with pressures to diminish."

With longer-tail casualty rates climbing and capacity squeezed in some lines, more insurers will make liability "an increasingly attractive area for insurers to expand into," he concluded.

Jardine noted that Bermuda is emerging as a strong competitor in the international insurance market and anticipates competition will "become fiercer" in 2004.

While more new money has come into the European and U.S. insurance markets than Bermuda, new capital in the U.S. and Europe went to rebuilding balance sheets. The Bermuda capital went toward underwriting and also has the advantage of not dealing with legacy reserve issues. A combined ratio below 100 percent for Bermuda carriers also means this money earns more than its competitors, according to the brokerage.

Despite the price increases insurers have experienced, the future remains uncertain, Jardine said. It called the slow return toward stability "a fragile balance." Insurers' and reinsurers' reserves are still depleted because of poor returns on equities in 2002. Loss reserves still remain uncertain, especially related to long-tail exposures such as asbestos and other lines. It warned that a series of catastrophe losses, either man-made or natural, "would cause some carriers, especially reinsurers, significant difficulties."

Jardine also said it does not see much merger and acquisition activity for carriers. However, there may be pressure on brokers in the United Kingdom to seek mergers due to regulatory pressure, client demands for stability and financial strength, and continued focus on corporate governance.

With the Financial Services Authority taking over regulation of brokers in 2005, brokers will have to be more disciplined, which will increase their cost of regulatory compliance, Jardine said.