PWC: London RE Market Solid Despite Softening

The survey revealed that about 40 percent of respondents have implemented capital models and that most of the rest are in the process of doing so. PwC said respondents reported that using these models led to tighter underwriting discipline, but that they were divided on whether these capabilities are bringing recognizable benefits.

Paul Dellbridge, a partner at PwC in London, told National Underwriter that buyers of reinsurance are increasingly better equipped. "Ever since Sept. 11, 2001, buyers of reinsurance have become much more sophisticated, particularly in understanding their exposures," he said.

He noted that with casualty exposures, however, "I still don't think they really understand how risk can aggregate. So I think there is some way to go, but I think that people go in with a much more robust, analytical attitude."

Mr. Dellbridge said that primary insurers have also become much better at merging and utilizing skills within their organization. "So it's not the case of one underwriter, it is a centrally taken decision. If you deviate from what the model says, you go in with your eyes open as to why you deviated and what risks you might additionally run."

Andrew Kail, a partner with PwC in London, told NU that buyers, relying more and more on modeling and risk assessment, are going into the trade with a lot more data "and sometimes ?the answer,' because the model says it's the answer."

Underwriters may be challenged "when the price of the coverage they buy differs from what the model told them they should pay," he said.

Mr. Kail warned that buyers "shouldn't get too hung up on the sophistication" of modeling. Using modeling as a base is "a smart way of buying reinsurance" because it makes people more accountable when they must justify what they have done by reference to a framework, "but buyers shouldn't use the model as an excuse for poor judgment."

At the end of the day, he said, "who knows what [Hurricane] Ivan [for example] is going to do? No model can really tell you that and therefore I don't think it would be fair for underwriters to try to avoid any future criticism on the back of ?I only did what the model said.' I think there does need to be personal responsibility there."

The survey also found that careful underwriting and capital allocation decisions will play a key role in managing a softening market, competition for capital, and pressure from regulators, rating agencies and capital providers.

Claims service and cost management have finally become a priority with leading insurers seeking to strengthen their in-house claims teams, the survey found.

Cost control has become more important as margins are squeezed in the cycle's downturn, the survey found. Respondents expressed concern over costs of brokers and staff?accounting for more than 80 percent of total operating costs in 2004.

Few respondents, however, felt they could do anything to reduce commission charges, believing them to be the price of doing business in a subscription market, PwC said.

Respondents said reinsurance expenditures represent more than 20 percent of their gross written premium. Many, however, question whether they are receiving adequate value for their money from existing reinsurance arrangements.

PwC said high costs stem from supply constraints within the market. Concerns about costs, PwC said, appear to have been exacerbated by what some respondents see as growing problems with recovery and the withdrawal of cover to longstanding clients.

Mr. Dellbridge said in a statement that reinsurance buyers are taking on tougher approaches, including dropping long-standing partners if credit ratings are called into question. He added that reinsurance is likely to become "a more technical price-driven market than ever before."