U.S. Re Market Easing Up, But No Crash Seen

"It's been a pretty boring renewal," said Steven Bolland, president of Gill and Roeser, a New York-based reinsurance brokerage, referring to 2003 mid-year renewals. "Everybody" in the reinsurance community was willing to "give a little back, but it's controlled. There's competition now, but nothing stupid. It's just a further easing back."

In general, he said, everybody was focused on what the proper price should be "and working within the framework of 'let's not do anything dumb.' But there was room to maneuver. [Reinsurers] were willing to talk," he said.

While most market participants gave the same general assessment, pointing to property-catastrophe business as the main area where declines continue to be evident, some pointed to notable mid-year changes in workers' compensation contracts and terrorism coverage.

On workers' comp catastrophe business, "we've seen some reasonably significant rate reductions this mid-year," said John Gilbert, chairman of Holborn Corp. in New York. While rates have remained steady for individual life workers' comp coverage, generally there is more capacity for workers' comp reinsurance than existed a year ago, he said.

Prodded further for the magnitude of rate changes on catastrophe comp coverage, he said they were "not mammoth" and there weren't wholesale reductions, but that in some instances they were more than single-digit drops.

Are rates still adequate in this area? "I don't really know," he said, noting that modeling workers' comp catastrophe exposures in this line is extremely difficult, as the only real loss experience to date relates to a handful of insurers that had 9/11 losses. He did say, however, that after 9/11 rates went up "by multiple multiplesand they have held pretty firm."

The combination of good pricing and a lack of losses together with workers' comp reforms in some states have "emboldened a number of markets to get into the business," he concluded.

Similar loss and pricing circumstances have emboldened some additional reinsurance markets to offer terrorism coverage, Mr. Gilbert said. "On the terror front, there's more capacity available than previouslyand pockets of coverage are available for NBC," he said, referring to nuclear, biological and chemical events. Although he said he wouldn't characterize the capacity increase as significant, he saw prospects for capacity increasing further unless there's a material event.

Chris O'Kane, chairman and CEO of Aspen Insurance Holdings, also highlighted terrorism coverage trends as "worth commenting on" in his discussion of mid-year renewals.

After 9/11, terrorism was "pretty much excluded in all cases on reinsurance contracts. There was no terrorism cover left," he said. After Congress passed the Terrorism Risk Insurance Act, some limited coverage came back in a few cases, he reported, "and that's now, I think, less limited."

Turning to Aspen, Mr. O'Kane said that when buyers ask to have terrorism included, "we look at that and we assess the risk," granting coverage for rural accounts without any obvious terror targets. If there are landmark buildings, "we will allow a small limit for terrorism," he added.

But he stressed a clear difference from pre-9/11 conditions when the full limit of the policy was available for terrorism. "Now it's just a little piece of it. I can't give you too much guidance on what the little piece is. It varies so much," he said.

Unlike Mr. Gilbert, Mr. O'Kane said that nuclear, biological, chemical and radiological events are just about universally excluded. "I don't see much appetite among reinsurers or primary carriers to write coverage for that."

Getting specific about the magnitude of reinsurance pricing changes in 2004, Mr. O'Kane said that while he went into the year expecting rate reductions on property reinsurance and flat casualty pricing, Aspen's property rate adequacy actually increased by about 2 percent and casualty went up by about 14 percent on Jan. 1. "April saw a little more competition on property," he said, noting that rates fell on the order of 3 percent. April casualty pricing continued to increase"but not by as much at 14 percent," he noted, putting the increases in the single digits.

While the company was still working through July numbers when Mr. O'Kane spoke to NU, he believed that property rates continued to fall at a modest pacemore than the 3 percent of April, but still in the single-digit region.

"As always, averages tell you something and then they disguise an awful lot," he said, pointing to "huge variations around the mean." In particular, he said that while property-catastrophe business performed reasonably well, some "big-ticket risk excess covers" saw bigger reductions. "They were into the double-digits in two or three instances."

"We also saw one or two buyers retaining a lot more of their own risk," he said, noting that increased retentions and bigger co-participations were worth noting, but not a major theme.

Mr. O'Kane said that no reinsurer was "out of line" in its quoting, or "doing something radically different than everyone else is." With a couple of years of very favorable experience under their belts, there's "a little bit of a reflection of that's coming around in the rates being charged, but nothing you could point your finger at and say that's kind of stupid or heralding a soft market."

Looking ahead, Mr. Bolland said he could envision "two completely different scenarios" playing out for Jan. 1, 2005, depending on the level of catastrophe activity.

Property rates are coming down "and they can't come down too much further before people start worrying about uneconomic pricing. And if nothing happens, that could be an issue," he said, referring to the scenario where there's no significant catastrophe. "To be blunt, if nothing happens, people are going to make an awful lot of money this year," he said, noting that more money means more capital and more capacity.

"It's tough to get capital out of the industry," he said. The excess "will find something to do. And historically, it's never found good things to do."

On the other hand, an event that removes a lot of the excess capital "would probably lead to a complete halt in the slide in rates and maybe, in certain instances, increases."

Mr. Gilbert said that absent any major terrorism or natural catastrophe events, further rate declines are expected. "But we think it's a good market out therea strong market," he said, adding that "there don't seem to be any loose cannons."

Predicting an orderly Jan. 1, 2005 renewal period, he said, "There will be some good, hearty debate between reinsurance brokers and reinsurers about final terms [as to] how much consideration should be given because there's more capacity available."

Reproduced from National Underwriter Edition, July 16, 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.