Benfield: Re Rates Hold Firm In Soft Market

Benfield: Re Rates Hold Firm In Soft Market

Benfield Group Ltd. said in a report released today that the reinsurance sector has managed to maintain its underwriting discipline during the 2003-2004 renewal season.

The London-based independent insurance intermediary noted that while property catastrophe prices weakened, "the process was orderly, with no sign of the unbridled competition" which normally characterizes the start of a soft market. Meanwhile, casualty rates rose further, albeit at a slower rate, Benfield found.

"The question for 2004 is: Will underwriters continue to hold the line?" said Grahame Chilton, group chief executive at Benfield.

Mr. Chilton observed that there is substantial new capacity and that a few players seem willing to pursue growth aggressively. "Except for a few difficult casualty lines, there is no shortfall for capacity. And catastrophe losses have been low," he said.

Such a set of circumstances would suggest a rapid softening of the market, but the pricing could generally remain stable throughout 2004 and possibly longer, thanks to a number of unique factors in the current marketplace, according to Benfield.

"Given mainly adverse fundamentals and continued pricing discipline, the only factor likely to cause a major change in market conditions during 2004 appears to be a major catastrophe loss," Mr. Chilton predicted. "In this case the incipient weakness of the market is likely to be sharply reversed."

Reasons cited in the report for continued pricing stability include:

Increasing use of modeling and actuarial analysis underpins a more disciplined approach to pricing. Reinsurers also continue to sell off unattractive business and decline underpriced renewals.

Stockholder expectations: Reinsurer results improved in 2003, but many still failed to meet investor expectations. While rising interest rates may help in 2004, meeting investor demand for attractive returns will require continued underwriting discipline.

Credit issues: Cedants are more focused on credit quality. This is reflected in wider application of minimum rating requirements. Meanwhile, the ratings agencies have become more stringent in their analysis. Cedants are also looking for a spread of reinsurers which optimizes their security.

Demand: Thanks to benign loss experience and profitable underlying accounts, demand for reinsurance in some lines including aviation has fallen. However, there has been a rise in demand for property catastrophe cover. A shift from traditional unlimited quota share to excess of loss is also creating new demand for non-proportional capacity.