London Market Maintains Price Discipline

Amlin, a Lloyds insurer with 1 billion in capacity ($1.9 billion at current exchange rates), was one of the first to comment on the January renewals, which provide a good indicator for global rating trends in the year ahead.

Amlin found that competition had strengthened, but its renewal ratesparticularly for property and property reinsurance businesswere "satisfactory, with only modest reductions in rating levels from those prevailing in 2003." In a number of marine, non-airline aviation and liability classes the company said rates continued to rise going into 2004.

Wellington Underwriting plc, another Lloyds-based insurer, agreed that rates and conditions had generally held firm. "Certain classes, including all liability lines, marine hull and cargo, have continued to show rate increases," Wellington said. "Other classes, including property, airlines and energy properties, are beginning to show reductions from the very high levels seen last year."

That was the view of brokers as well. Reinsurance broker Benfield summed up the feeling in its commentary: "A late but disciplined renewal season belied some expectations of a return to soft market conditions. With challenging fundamentals and competition still muted, there seems to be little to test underwriters resolve to hold the line."

Russell Merrett, a non-marine treaty underwriter at Lloyds-based insurer Hiscox specializing in short-tail property business, commented that the relatively stable market, especially in the United States, reflected the fact that "supply and demand were in happy balance, and both parties were pretty content with the pricing." He noted some slight weakening in catastrophe excess-of-loss rates but added that pricing was otherwise mostly level relative to exposure.

On a geographical basis, Germany was an exception to the overall picture of stable pricing. Rates there increased by around 30-to-40 percent, but Mr. Merrett said this was to be expected as Germany had lagged behind the global hard market by about a year.

In contrast, some Asian markets, outside Japan, experienced rate cuts of up to 40 percent as local reinsurers returned to the fray after recovering from losses in previous years. In the face of falling rates in Taiwan, for example, Hiscox had decided to exit that market. Although not a major source of business for the company, the decision demonstrates the commitment to profitable underwriting.

However, Asia apart, London brokers and underwriters saw no evidence at the January renewals of wholesale softening. Even in property, where many prices have come off their peak, no one is yet talking of a free-fall. As the brokerage Jardine Lloyd Thompson explained in its outlook for 2004, "Many of the industry fundamentals remain a barrier to loss-leading underwriting, nor is there a bountiful supply of cheap reinsurance."

Benfield attributes this rating discipline to a number of factors, including pressure from investors, regulators and rating agencies on insurers and reinsurers to maintain profitability. Following the downgrading of many reinsurers by rating agencies last year, Benfield argues that credit quality was more important to many cedants than the actual price of reinsurance.

The broker added that falling investment returns mean that "underwriting discipline is no longer an optional luxury for reinsurers looking to prosper." On top of that, for many reinsurers, fixing their balance sheets is still a high priority. Consequently, much of the $27 billion in new capital raised in 2003 went toward plugging balance sheets rather than backing reinsurance start-ups.

As insurers and reinsurers set aside funds to deal with old problems such as asbestos and pollution, these balance sheet pressures should recede. However, the greater regulatory scrutiny and stricter internal controls and compliance measures are here to stay, and they are having an effect on many insurers approach to business, according to Paul Burton, U.K. director of outwards reinsurance at Royal & SunAlliance.

Within RSA itself, he said, technical pricing has almost become a mantra. For London as a whole, he believes that "the environment were in and the future environment were going into has introduced a higher level of discipline and checks against poorly based decisions in terms of original rating." Nonetheless, Mr. Burton acknowledged that, given the nature of the marketplace, prices will continue to ebb and flow in the longer term.

Just how long this newly discovered rating discipline will last is hard to say, but no one is yet talking of a return to soft pricing. On the contrary, as far as the casualty market is concerned, JLT shares the view that rates will continue rising. It cites record losses, the lack of appetite for long-tail risk, and challenging conditions in industries such as conglomerates, pharmaceuticals and railways as drivers for further price increases in this market.

Even in the property market, where downward pressures are seeping through, Mr. Merrett, the Hiscox underwriter, is confident about the year ahead. "Even if we are fortunate to enjoy a benign loss year in terms of catastrophes, then our industry wont make enough money for people to relax their prices. I still think that the current sensible market conditions have a way to run," he said.

Wellington, too, is optimistic. Although it expects rates to come down during 2004 on a weighted basis, the insurer believes they will still be above the exceptionally strong levels of 1993. It underlines its own commitment to pricing discipline with the assertion that "all classes are currently being written at levels which aim to exceed the groups 15 percent post-tax target return on a risk-adjusted basis."

Benfield is more cautious, describing the current situation as finely balanced. However, given the factors underlying the disciplined approach witnessed during the London renewals, it, too, expects the market to remain stable throughout 2004.

The one event most likely to upset that forecast, Benfield cautions, is a major catastrophe loss. And that, of course, would send rates up, not down.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 20, 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.