Brokers See Mixed Bag On Re Renewals

For example, while Mr. Kneuer saw evidence that reinsurance underwriters were dragging down the process of negotiating renewals with overly burdensome information requests in many cases, Steven Bolland, president of Gill and Roeser in New York, saw little more than minor tweaking of some contract clauses.

"As always, some reinsurers have hot buttonslittle things they want to add into the treaties. So the completion of documentation took a little longer this year, just to marry up everybodys conditions," Mr. Bolland said. "But the coverage was there. Its almost like youre arguing over details."

Indeed, if you were to rank this renewal season using a blood pressure scale instead of a hard market barometer, as one broker representative jokingly suggested, the reading could fall anywhere from aggravating to delightful, depending on the category of business being placed.

"I wouldnt say stress levels are that high," said Paul Karon, president of Benfield Group in Minneapolis. "People arent running around like chickens with their heads cut off. I think all our stuff is done," he stated in a late January interview, noting that only "distressed" professional liability classes ran late this year.

Several reinsurance brokers greeted questions about this years Jan. 1 renewals with a yawn. If anyone tells you anything exciting to report, then theyre inventing it, one source said, as others agreed that the most noteworthy market changes took place on Jan. 1, 2002.

"Generally, steady as she goes" sums up the Jan. 1, 2004, renewal period, Mr. Bolland said. "Im not seeing any dramatic movement in any direction really."

"On the property side, theres a mild softening. And for casualty, pricing is flat on Main Street business, to slightly up on classes where theres still some shortage of capacitysome directors and officers and professional liability classes," he said.

Although everyone interviewed agreed that the most evidence of a softer, gentler market is in the property-catastrophe area, theres one property reinsurance sector where capacity is tighter than it may need to be, according to Roderick Thaler, executive vice president and national director for Willis Re in New York. On large property risks in specialty areas, like energy and industrial risk business, he said, pro-rata reinsurance capacity has stayed relatively static, if not declining.

In this area, he said reinsurers are reacting to a belief that primary rates are going to fall precipitously, although large fourth-quarter 2003 losses have acted "to stiffen [primary] underwriters resolve not to loosen up on original primary pricing too quickly." In addition, primary deductibles are holding firm, and ceded results on pro-rata treaties on industrial risks and energy business have very low ceded loss ratios.

This is the "big exception" in the property market, where everyone talks about abundant property reinsurance capacity being available for catastrophe excess and regional per-risk excess contracts, he said.

On the casualty side, beyond some areas of professional liability that all brokers agreed were difficult, Mr. Kneuer said he found reinsurance market conditions harder than necessary for umbrella business, and he highlighted reinsurance carrier exits as a source of market difficulty for working business.

The classical definition of "working" is reinsurance business that produces one claim per year, he explained. In dollars, a few years ago "working" would have referred to the first $1 million of reinsurance, but more recently it is probably anywhere in the $1 million-to-$10 million level, depending on the client.

"For casualty working business, its been a dysfunctional market," he said, noting that late in the day on Dec. 31, some reinsurers who had been working on submissions for eight weeks still hadnt figured out what they wanted to do. Prices were generally increasing and there was a movement toward tighter coverages, he added.

Summing up the reasons for the dysfunction, he noted, first, that while there are "a lot of well-capitalized and focused companies organized in Bermuda that are capable of writing catastrophe business,theyre not terribly capable yet of writing lots of working business with a fair amount of client interaction" and audit requirements.

"Back onshore, theres been beyond decimation in the working reinsurance market," he continued, pointing to the exits of PMA, CNA, Hartford and Trenwick, among others.

Painting a more dramatic picture, he noted that among the reinsurers making up the roster of the Reinsurance Association of America, there are none that have the same ownership, management, rating or business plan that they had three years ago.

That means that while there were enough companies that wanted to write working business in 2004, "in virtually every case, you either had new capital with new underwriting requirements or new ownership or new individuals. So literally every piece of business in the U.S. casualty market had an underwriter looking at it for the first time," he said, clarifying that even where the same individual at the same reinsurer was seeing the same business, that person had a new boss giving new rules about how to write it.

As a result, he said, "underwriters were very, very slow; they were very busy; and they picked their spots. They tended to write the things they knew they could make the most money [at] with the least work."

In contrast, Mr. Karon said he saw no real market impact from carrier exits. When those companies left, "we got calls from all the others saying, Were interested in the renewals. Send them to us. Some of [the business] might have gotten dumped, but I wouldnt say it had a material impact," he said.

Mr. Bolland viewed carrier exits positively, noting that they reduced the pressure to lower rates. "It didnt push them up, but it reduced pressure to push them down," he said.

Mr. Kneuer, however, saw evidence of increased ratesand many examples of extensive data requests. The requirements, he felt, were used in some cases by reinsurers "to triage the workload," forcing brokers to go elsewhere.

"This is a hard market," he said, not referring to the usual definition. "Its a difficult-to-work-with market."

At Guy Carpenter in New York, Peter Zaffino, managing director and leader of casualty specialties, described slightly different markets for catastrophe layers and risk (lower) layers of workers compensation business.

Overall, he said, workers comp saw pricing pressure during the January renewal cycle. In particular, insurers that had single-state exposures or regional companies that were not in peak states (not California or New York) saw some meaningful price decreases, surpassing last years rate decreases, he said, citing average rate-on-line drops of 10 percent for 2004. (Rate-on-line is the ratio of reinsurance premium to limit.)

"Theres ample capacity in workers comp for catastrophe"more than last year, he said, with European, domestic, London and Bermuda reinsurers maximizing their capacity for the segment.

Turning to the workers comp risk layers, Mr. Zaffino said that while more capacity has begun moving in the past six months, "theres still a disconnect between perception on ultimate lossesand trying to understand whether the [primary] price increases have been enough."

"There still is a slight void in the first $5 million of workers compensation reinsurance," he said, noting that on middle market and Fortune 2000 risks, potential downward pricing pressure during 2004 on primary business has reinsurers carefully assessing how theyll price the reinsurance for working-layer workers comp.

In the umbrella market, Mr. Kneuer said there is a "reduced and specialist appetite" for the business. "The pricing were seeing is difficult to justify based on the models that were running," he said.

"Almost regardless of how benign or mundane the original [primary] exposures are, the reinsurance market is looking for increased original pricing, increased factors to rate an umbrella off of that, increased minimum premiums for the umbrella policies, and increased reinsurance rates on the umbrella premium. So its a quadruple whammy," he said, adding that clients, in many cases, have been forced to retain business he believes could be profitably reinsured.

Moving to even more specialized areas of casualty business, Mr. Karon said D&O and surety are the areas with the least amount of capacity. He noted, however, that some unexpected new players are entering the market, like Renaissance Re in Bermuda, which up until now was a property-catastrophe writer.

As for price changes in these areas, he said, "Theyre all over the map. But were not talking 5 or 10 percent. Were talking 50 [percent] or more."

Adding E&O and medical malpractice business to the discussion, Mr. Thaler characterized rate hikes as significant15-to-25 percent, on top of significant increases last year.

Andrew Marcell, managing director and North American leader of Guy Carpenters specialty professional liability practice, broke these specialty categories into two parts, discussing reinsurance for start-up companies and existing D&O, E&O and med mal facilities separately.

In the E&O world, he said, "there is a dearth of capacity" for start-ups and large-risk businesseslarge law firms, architect and engineers project business, technology E&O or large accountants. "Well get treaties done, but mostly theyll be on swing-rated excess plans [where commissions vary with loss ratios], theyll have loss ratio caps or low ceding commissions."

On the other hand, theres a lot of reinsurance capacity for existing or smaller risk facilities, he said. "The terms are not anywhere near as soft as three years agoceding commissions have come down five points since those timesbut generally terms this year have been flat," he added, noting that some reinsurers are writing this to offset the D&O side of their books.

Noting that a big part of the E&O market consists of program business, he reported that most programs are not reinsured at this point. He explained that the ceding commissions available in the reinsurance market are not adequate to offset the acquisition costs of cedents.

For D&O, the separation in the market for start-ups versus existing facilities persists, Mr. Marcell said. In addition, capacity is limited for international D&O and Fortune 1000 company writers, but plentiful for middle-market writers.

Noting that more than 75 percent of the reinsured med mal market consists of alternative risk-transfer business, he said that these are typically start-ups and as such are subject to very restrictive terms.

Turning from the segment with the least capacity to the one with the most, brokers agreed that property pricing was flat or down. But even where there were rate declines (of five or 10 percent), in many instances premiums were flat as cedents moved to retain more business at the bottom end of their programs and used the retained premium to buy more limit at the top, said Kevin Stokes, a managing director and property specialist for Guy Carpenter.

"That was a general trend we saw," he said, noting that a change in the RMS catastrophe model produced some big increases in probable maximum losses for insurers, particularly in the Northeast, prompting them to buy more catastrophe limits.

Mr. Stokes also noted that property reinsurers continued to individually underwrite each ceding company in 2004. As a result, he said, significant changes in primary property portfolios or bad loss experience did result in some price hikes.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 13, 2004. Copyright 2004 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.