Reinsurers Weather Financial Storm, But Recession Flattens Market Pricing

"We believe moderate price increases would put the trend in the right direction," according to Mr. Ozendo. "Obviously by the same token, it's my personal view that our industry has always played the highest value at these difficult times. If there's one time when businesses and individuals need to protect assets, it is now."

Mr. Ozendo said he believes the reinsurance market will, "in this next year and the years beyond, play a significant role in helping insurers transition through this difficult period and manage their volatility."

The challenge for all right now, however, is to deal with the problems of underpricing. With unemployment up and payrolls down, he noted, it is understandable that raising rates is a "sensitive issue."

What he is seeing, he noted, is continuing demand for natural catastrophe coverage–particularly with so much volatility in the markets. Boards of companies, he said, need to be assured that exposures are fully covered and that there is no shortfall possible, which explains why demand is staying strong.

So while the economic situation remains volatile, he said, "I firmly feel that the capital position of the industry will allow it to return to a more stable level, so long as price competition doesn't become a spoiler."

As prices increase, he said, "hopefully they will coincide with a slow and gradual return to normalcy in the economy, and insurance will continue to play an even more important role in that state of well being."

Bryon Ehrhart, CEO of Aon Benfield Analytics in Chicago, observed that "after a 15 percent dip in capital headed into January renewals last year, reinsurers still were able to renew every core reinsurance program, including those in the U.S., where most global reinsurers have their peak exposures. The reinsurance market has been resilient."

In the first half of 2009, he added, reinsurer capital bases have improved by an average of 9 percent. Further investment portfolio appreciation in the third quarter "means that reinsurer capital bases are likely near all-time peak levels headed into Jan. 1, 2010 renewals. Increasing capital for reinsurers means an increase in capacity or supply."

He noted that increasing insurer capital means a relative decrease in demand, and that without significant insured and reinsured global catastrophes for the remainder of the year, "the market is set for a mild softening for property-catastrophe reinsurance."

Property-per-risk and standard casualty reinsurance, he said, will continue to be "highly influenced by program experience."

While reinsurers for specialty lines such as directors and officers and errors and omissions continue to have "significant capacity," he said carriers remain "skeptical of trends in original insurance pricing. This skepticism has caused them to miss a portion of the substantial profitability insurers have booked in these lines in recent years, despite the headlines."

He added, however, that reinsurers remain disciplined as "insurers struggle to get rates that are compelling enough to allow growth."

John Ehinger, chief operating officer of Willis Re in Philadelphia, noted that in looking toward renewals, "like anything in the business, it will vary from sector to sector, and the property marketplace is certainly different from the casualty marketplace."

For the past nine months, from a major catastrophe standpoint, "it's obviously been quiet," Mr. Ehinger noted. "So I think that's given a good deal of relief to insurers, particularly if you looked at the beginning of the year at their balance sheets–they're in a different position now than they were then."

This, he believes, will spur more competition than anticipated at the outset of 2010. "I think we've already started to see some of that manifest itself, particularly after the June and July renewals," he said, adding that this is a function of "people buying differently and within constrained budgets. Reinsurers didn't deploy as much capital as they thought they might have, and it's spurred them to come back to the well and try to sell third-event reinstatement premium-type protections following the last renewals in June and July."

Looking at the end of 2009, he said, competition won't go away, barring a significant catastrophe. Rather than an upward pricing trend on the property side, "I think we're looking at a flat to declining trend," he predicted.

Additionally, Mr. Ehinger said, some of the trends being seen in the primary market are going to start "coming home to roost" in the reinsurance market–particularly the lower volumes being seen through reduced payrolls and exposure bases. To the extent that policies are driven off of sales, to date "the reinsurance market has been largely insulated from a lot of that, so I think that will start coming to bear."

On the casualty side, he said, "it's a bit of a mixed bag, frankly," noting that primary rates in the U.S. casualty sector have continued to trend downward, which has had an impact on the reinsurance side.

"There's probably more business that's done on a proportional basis on the casualty side of the house, so reinsurers are a little bit more in lock-step with the primary results, and that's made for a challenging underwriting environment, which will vary from sector to sector."

Duncan Aitken, a director at BMS Intermediaries Ltd. in London, observed a degree of uncertainty in the market, "caused by the fact that the market appears to be moving, neither extremely in one direction or the other, mostly due to the lack of cat activity in the United States."

From the primary company perspective, he said a big question is why primary rates haven't hardened. "I think logic would dictate that given what's happened in the financial crisis, and generally the underwriting results of most insurance companies, one would conclude that rates should have moved strongly upward."

This hasn't happened, however, for a few reasons–one being that a number of major U.S. insurers are "under pressure to hold onto their business, which probably makes them more aggressive in terms of rate setting than their peer group."

A second factor, he added, is that losses seen by the larger stock companies over the last few years have reduced "coastal exposure to hurricane risks in the Gulf states and the Southeast substantially–one of the reasons the residual markets have grown so significantly."

As a result, he said, large companies are competing more aggressively for business in the interior United States. "Size seems to be a bit of a determining factor in the primary market," he concluded.

He said premiums are generally down because of other economic factors as well. One is the difficulty of raising rates within existing regulatory regimes, and also competition that exists.

Primary insurers, he added, are keeping higher retentions than in the past to save reinsurance costs, while U.S. catastrophe activity–such as winter storm, tornado and hail–has mostly been retained by the primary insurers.

Another factor he noted is that "the distance between management and underwriting in large companies, in order to get the message across to raise rates in response to poor underwriting performance and low investment income, takes longer to occur" than in smaller companies.

And because some of the larger companies are competing for volume, "that still has a little ways to go before we see any change in the primary industry dynamics"–adding that "I'm not sure people are betting that's going to occur in 2010, either."

Also at play is the continuingly challenging performance in personal lines, particularly homeowners, that has led to marginal underwriting results, according to Mr. Aitken.

He noted that on the liability side there have been a number of reserve takedowns. "The redundancy is pretty much exhausted," he said. "There is nowhere else to go to make up on both premium volume and loss of investment income."

Reinsurers, however, "have seen a very strong performance in 2009, due to the lack of severe cat activity–and hopefully nothing will happen before the end of the year."

Their strong performance, he said, goes "a long way to offset the investment losses and the losses generally in 2008 from the hurricanes."