Will Reinsurers Gain From Top of Cycle?

"If you cant make good money now, when are you going to do it?" he questioned, noting that this is a major consideration for S&P rating actions.

Many multiline reinsurers are struggling to get combined ratios below 100, he explained, which are not adequate in this interest rate environment. "Whats adequate? Think mid-90s," he said.

In fact, he added, the best players, the "double-A" companies, should be reporting combined ratios in the low-90s.

"Im not confident the discipline exists in this industry and that well be seeing four, five or six strong, hard years of underwriting," Mr. Puccia said.

Mr. Puccia said the time for companies to clean up their balance sheets was immediately after the World Trade Center disaster, which is why the fourth quarter of 2001 was called the "kitchen sink" quarter for reserving. "If ever there was a time when you were going to get the honeymoon, the forgiveness, to clean up your balance sheet, that would have been it," he said.

However, he said, theres been "Kitchen Sink Two" in 2002 and "Kitchen Sink Three" in 2003, with more bad news on the horizon.

On top of the old-year asbestos reserving issues, Mr. Puccia blamed Kitchen Sinks One, Two and Three on the underpricing common in the industry between 1996 and 2001 in areas like motor liability, workers compensation, medical malpractice, professional liability and umbrella liability.

The fact is that 14 of the 20 largest reinsurers have been downgraded, post- Sept. 11, he said. "There was an awful lot of miserable business that was written between 1996, 1997 and 2001. Thats all coming home to roost."

He noted that 2002, and even 2003, were good years for cats, so the combined ratios are artificially depressed.

Between 2000 and 2002, the combined investment and underwriting losses of four of the five largest reinsurance groups decreased shareholder funds by almost $16 billion in aggregate, he said.

While he said he doesnt think insurers are going to get back to the capital levels of the 1990s, Mr. Puccia emphasized they will have to begin adding capital the right way–through underwriting profits.

Indeed, he blamed much of the reinsurance industrys ills on lack of underwriting discipline, in combination with low barriers to entry and a bias toward "long-term relationship underwriting."

The old, relationship-based modelwhen an underwriter values the relationship over good sound underwriting pricing principles and risk selection principlesis not a model for a successful company, Mr. Puccia indicated.

Those companies that focus on proportional, relationship-type business tend to carry higher combined ratios, he explained. "These are structural issues that have to get fixed for those who want to succeed."

The old model for success in the reinsurance industry valued global diversity and financial muscle, he said, noting, however, that Munich Re, Swiss Re, Employers Re and General Re had an average combined ratio of 127 during 2000-2002 and an average rate of return of a negative 5.5 percent.

What are the skill sets that are successful now? he questioned. "Youve got to be nimble. If youre going to be a successful reinsurer these days, youve got to be market responsive" and stay away from markets where underwriting discipline does not exist.

Reinsurers have to be able to step in and out, be more nimble and focused on risk adjusted rates of return, he continued. "If the pricing guys are telling me the market is appropriate at this price and not at that price, and you follow that rigorously, that is a formula for success."

This is an industry that has for years said, "Were old, were beautiful, weve been around forever, do business with us."

"Now the mantra is, we dont have a track record, do business with us," he said, referring to the new Bermudians.

The real concern is what does that do in terms of the established players, he questioned. "Does that force them at some point to start competing more aggressively?"

He emphasized that "the sun, the moon and the stars" have aligned properly for the industry, as long as it maintains underwriting discipline.

Pricing is strong, as are terms and conditions, he said. So, if the industry behaves "in a substantially more responsible way than previously, were going to have a fairly bright outlook for the industry," he said.

He cited old advertisements placed by the "old Cigna." "It was a picture of a globe and little puffs of smoke coming out. The caption under it said: Theres always something happening in the world. What they meant to convey was, There is always something happening in the world and we can insure it. As analysts we looked at it and said, Yes there was always something happening in the world and they did insure it."

He said there is always something happening in the world, but "which things do you want to insure?"

"Claims will be paid. Thats the nature of the beast. But will you have the underwriting discipline to recognize when markets are turning? Will your underwriters be reined in?"

A real competitive advantage will go to those organizations "that have flexible models, tools to identify trends and, most importantly, the wherewithal, the discipline, to cut back on capacity when you need to," Mr. Puccia emphasized.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 7, 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.