The renewal rollercoaster: though new Bermuda players are helping ease prices, casualty, D&O and malpractice rates keep the industry holding its breath - Reinsurance Focus

Insurance company executives are generally finding ample capacity in the global reinsurance marketplace as they get ready to seal their July renewal contracts with their reinsurers. The entrance of new players in the Bermuda market during the past 18 months has helped stbilize property reinsurance rates while premiums for most casualty lines still head upward by low double-digit percentages. But rates for volatile areas like directors and officers and medical malpractice cover still can easily skyrocket by 50 percent to 100 percent as reinsurers remain wary of accepting these risks and capacity is scarce.

And as always, reinsurance buyers are finding that the exact premium increases being levied by their reinsurers frequently hinge on the buyer's loss experience, the exact risk being passed on and the type of industry being covered. "The ceded experience is important," says Jay P. Woods III, president of John P. Woods & Co. Inc. Based in Jersey City, N.J., John P. Woods & Co. is the treaty reinsurance brokerage subsidiary of Arthur J. Gallagher & Co. in Chicago. "If the reinsurance experience is profitable over the short and intermediate term then these clients are receiving better terms and conditions."

Another factor affecting the July renewals and creating the need for price hikes is the poor financial results of the reinsurance companies themselves. Reinsurers' bottom lines have been hit by poor returns from their stock and bond investments, continued losses from long-tail lines like asbestos and environmental claims, and the inadequate pricing levels of the mid- and late-1990s. Higher pricing is simply one vehicle the industry is using to correct its deteriorating loss ratios.

And at least one broker thinks the volatility in the Middle East and the fallout from the war in Iraq. also could affect rates. "The impact of the war in Iraq and terrorism risks and other exposures is embedded in the portfolio of the business. Things could change overnight," says Chuck Hewitt, an executive vice president in the Boston office of the Benfield Group PLC, a reinsurance brokerage based in London. "Reinsurers have to figure out how deal with that."

Brokers estimate that 25 percent to 40 percent of the industry's reinsurance contracts are signed in the summer renewal season. The bulk of the deals in which primary insurers lay off their risks to reinsurers around the globe are closed in the January renewal period. A small portion--many of them contracts for risks in Japan--are sealed in April.

Industry experts expect to see the same trend that began with the January renewal season--a slowdown in the huge rate increases of the last two years, especially on the property side of the business.

"There's a continuation of January, with essentially the same targets and goals. Property rates have flattened out to adequate levels," says Marc Lescault, a member of the management board and head of the divisional underwriting office, Americas division, at reinsurance giant Swiss Re.

Beginning in 2000, both insurers and reinsurers finally began making up for the inadequate premium levels of the mid- and late- 1990s with double-digit increases. The September 2001 terrorist attack on the World Trade Center in New York City only exacerbated the trend as losses kept accumulating through 2002 and ended up tallying $45 billion. Rates for property insurance and reinsurance after Sept. 11, especially for risks located in cities considered terrorist targets, frequently spiked upward by triple-digit percentages.

Since then, the absence of any significant natural catastrophes--such as hurricane in the Southeast or a big earthquake in California--meant reinsurance premiums for general property risks remained fairly flat in January and should continue to do so in July. Another reason behind the downward trend in property premiums is that many of the new reinsurance players that entered the market after the Sept. 11 terrorist attack went after property risks and expanded capacity in this area.

Softening Property Rates

Richard Di Clemente, president of THB Intermediaries in New York City, even believes he has seen the seeds of a new soft market beginning in the property sector. "I think the property market has already peaked ... since Jan. 1 there has been a downward pressure on rates. Casualty is stronger in terms of pricing," says Di Clemente, whose reinsurance brokerage firm is a subsidiary of insurance broker Near North National Group in Chicago.

Another factor behind the downward trend in property rates, says Di Clemente, is that many corporations have decided not to buy cover against terrorism--a risk that reinsurers began excluding from their policies after the World Trade Center was destroyed by terrorists. "Only about 20 percent to 40 percent of insureds are opting to purchase the cover," he adds. "They're deciding to assume the risk."

The federal government stepped in to ease the gap in insurance coverage with the Terrorism Risk Insurance Act (commonly known as TRIA) of 2002. The law, which became effective in November of last year and ends in December 2005, removed terrorism exclusions on existing insurance policies and gave policyholders the ability to secure coverage for terrorism risks.

Liability Hikes Continue

Meanwhile, reinsurance deals for liability risks will carry premium hikes, with some of the largest increases coming in professional liability cover like D&O and medical malpractice. Increasing medical costs are also behind the continued increases in reinsurance contracts for some workers' compensation risks.

"Liability rates have not been fully corrected from the soft market inadequacy it's still appropriate to tighten the terms," says Lescault of Swiss Re. Adds Hewitt from Benfield: "General casualty reinsurance will continue to move up. Reinsurers are not at the point where they have the casualty business at profitability ... reinsurers are still trying to catch up."

Experts agree that liability rates will generally head upward by 10 percent to 25 percent, depending upon the loss experience of the insurance company, the risk being laid off on the reinsurer and the line of business of the insured.

Capacity in some specialty lines like D&O is still limited and rates are climbing by 50 percent to 100 percent as the industry makes up for the generous policy terms of the late 1990s and losses stemming from an increase in lawsuits against corporate executives and board members. The corporate scandals of the past 18 months have sparked a slew of shareholder lawsuits.

Reinsurance Purchases Drop

To deal with the price increases, many insurers--as well as corporate insurance buyers--are choosing to buy less reinsurance to keep their budgets out of the red. "Overall, many insurance companies will buy less reinsurance and retain more risk," says reinsurance broker Woods.

Industry observers warn that the poor financial condition of reinsurers is also a factor driving today's rate hikes. The industry has faced deteriorating results as underwriting losses have mounted and the decline in stock prices and plunging interest rates have sharply reduced its revenue from investment income. As a result, reinsurers have had to dip into their capital and boost their reserves--leading to today's premium increases.

"The recent increases to loss reserves are causing reinsurers to reassess their overall pricing and severity of loss size models," says Woods.

Adds Hewitt: "The industry is facing a loss development from prior years ... so reinsurers are trying to catch up ... they need to get ahead of the game."

Roderick P. Thaler, executive vice president and national director at Willis Re Inc. in New York City, warned that the ceding companies have to be wary when laying off theirs risks in today's reinsurance marketplace. "If could be a hollow victory if you (insurer) receive a reduction and then the market isn't around to pay the claims," says Thaler. "There's the issue of security and buyers want to place their renewals with markets that are secure."

COPYRIGHT 2003 Axon Group
COPYRIGHT 2003 Gale Group