Reinsurance Rates Flat-To-Down Despite Record Catastrophe Losses

One issue that crept up in some discussions, however, was terrorism reinsurance. Mr. Bolland observed that while the vast number of negotiated catastrophe covers spanned a one-year period starting Jan. 1, a number of reinsurance treaties do provide runoff coverage beyond this year so there is some concern on the property side as to what would happen if the Terrorism Risk Insurance Act doesn't renew.

Overall, U.S. property-catastrophe renewals for accounts without hurricane losses saw prices flat to down as much as 10 percent, while those affected by Florida storm losses saw rates go up by as much as 20 percent, according to London-headquartered reinsurance intermediary Benfield Group. There was ample capacity in most classes, the broker said, and while pricing softened in many lines, terms and conditions showed little or no change.

"While 2004-2005 renewals were orderly, there were signs that competitive pressures are increasing in some sectors," said Benfield CEO Grahame Chilton, who also noted that more and more reinsurers were willing to undercut pricing to secure attractive business.

Guy Carpenter & Company, a reinsurance brokerage unit of New York-based Marsh & McLennan Companies, noted in its own renewal report last month that the pricing was generally flat to slightly down. The report also observed that for property-catastrophe, carriers that write nationally saw flat renewal pricing on Jan. 1, while regional insurers without significant exposures in Florida saw rates fall by an average of 3 percent.

Casualty rates remained more stable, with some exceptions most notably directors and officers reinsurance, which saw rate cuts, according to Benfield's head of research, Julienne Jessup.

"D&O rates seem to be softening more than some other areas," she said. "D&O was a class of business where rates went up substantially following the Enron Corp. debacle. It may be a readjustment of those steep increases."

Medical malpractice reinsurance rates remained stable, she also observed. Indeed, Guy Carpenter said reinsurance price hikes for medical professional liability were the "exception rather than the rule," with a large number of reinsurance programs receiving "as is" renewals.

Reinsurance pricing on workers' compensation was mixed, with some declines, but prices mainly flat on working layers and excess-of-loss, according to Benfield. Guy Carpenter also found that on workers' comp catastrophe layers, most clients had flat to slightly falling rates on line and prices remaining firm on lower layers with clients who are actively managing portfolios and providing best exposure data getting the best deals.

Guy Carpenter also noted that for no additional program cost, clients found that many workers' comp reinsurers are now routinely including coverage for non-certified acts of terrorism in catastrophe contracts excluding nuclear, biological and chemical (NBC) perils. And more reinsurers were seen as willing to offer capacity and alternative solutions for certified acts of terrorism, both including and excluding NBC perils. Prices and capacity for these options continue to improve steadily, Guy Carpenter observed.

In the U.S. ocean marine reinsurance market, the renewal season was also largely stable, with "renewal as expired," Guy Carpenter also found.

Ms. Jessup from Benfield observed that in both property and casualty lines, there appear to be more softening in the primary market than in the supporting reinsurance, which is unusual since the conventional wisdom says that normally it would be the other way around.

Among the reinsurance buyers, Christian Milton, responsible for purchasing reinsurance for the New York-based insurance giant American International Group, described the renewal season as steady, with rates staying flat in general.

"It was a pretty ho-hum, steady-as-she-goes sort of renewal season. Prices were pretty flat. If you are a large buyer, you will be close to flat. If you are a smaller buyer, where you have the opportunity to move around the marketplace, you could probably get a 5-to-10 percent discount," Mr. Milton said.

Principally a buyer of proportional reinsurance, AIG has up to four different catastrophe covers that cross property, casualty, personal-lines, commercial, foreign, domestic and life. On commercial lines, AIG purchased about $725 million worth of reinsurance, including an extra couple of hundred million dollars of catastrophe protection this year.

"It turned out to be an as-is renewal for all intents and purposes. It was pretty boring. We had 96 percent of our covers done by the renewal date. Everyone was expecting a renewal as-is, with adjustments for exposures," AIG's Mr. Milton said.

Mike Stone, president and chief operations officer at Peoria, Ill.-based RLI Corp., which renewed property treaties and casualty products on Jan. 1, observed that his company saw 5-to-10 percent reinsurance rate declines.

"The primary market is giving up more rates than reinsurers are giving up right now," commented Mr. Stone. On the property-catastrophe side, RLI got a slight reduction, while prices on the casualty side were mostly flat.

"We were down a little bit in our larger products. So all in all, we got a little bit of reduction, but it was nominal. I thought the market would be a little softer, but we saw less rate reduction than anticipated. The reinsurance market is still pretty rational," Mr. Stone said.

Patrick Tures, vice president of actuarial and strategic information at Sheboygan, Wis.-based super-regional insurer Acuity, also said his company saw a slight rate cut"on the neighborhood of 5 percent" for renewing its property-catastrophe reinsurance. Acuity had renewed all its treaty reinsurance on Jan. 1, which consists of property-catastrophe treaties$97 million excess of $3 million as well as multi-line excess of loss.

"The 5 percent reduction in property-cat was just about what we were expecting. We had heard that the reinsurance market might soften, but we found it to be still very stable," Mr. Tures noted. "The casualty lines, multi-line rates were about the same. Overall, we saw more reductions on the property side." All in all, he said, there weren't any surprises in the renewal process: "It felt like reinsurers were real stable; everything went well."

In analyzing the Jan. 1 renewal season, Benfield's Ms. Jessup argued that reinsurance rates are continuing to soften this year because reinsurers generally have enjoyed a couple of years of good returns. "Reinsurers feel their balance sheets are quite robust, so there is an element of a feel-good factor in the market, which is prompting some reinsurers to feel they can afford to continue to cut rates in order to protect their market share," she said.

Ms. Jessup also explained that last year's U.S. hurricane losses didn't have a significant impact on property-catastrophe reinsurance rates because these losses were retained more in the primary market than in the reinsurance market. In the United States, she noted, areas hit by hurricanes last year saw reinsurance rates go up, but there was further softening in non-loss affected areas.

Gill and Roeser's Mr. Bolland said he saw "just a slight reduction on everythingEverything eased slightly unless you really got clocked the year before and the experience was poor. If you had hurricane losses, it was an issue. But still, I thought it was very measured. Overall, the market was trying to maintain the status quo, and we just saw a slight slippage."

This renewal season, Mr. Bolland added, all the reinsurers were talking about maintaining pricing, saying they want stability and that they will hold the line on rates. "But obviously, if you try to hold the line, you will ease a little bit. But on a historical basis, we are still talking about a high pricing. I still believe reinsurers will have an excellent year in 2005," he said.

He also noted that the interesting point from last year's catastrophes is that there was no reduction of capital in the market. "There was actually a net increase in capital in the reinsurance market last year. And you won't see people maintaining complete discipline in those sorts of circumstances," he said.

Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 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.