LOS ANGELES-Casualty reinsurance rates have a lot more catching up to do than property rates to reach adequate levels during the coming January renewals, say reinsurance executives.

As a result, insurers are likely to face higher rates for their casualty reinsurance coverage than for their property reinsurance business.

There is also unlikely to be any easing of terms and conditions, including terrorism exclusions. Meanwhile, the reinsurance industry is mulling the likely impact of the proposed federal terrorism coverage.

These were among the comments made by reinsurers and intermediaries attending the ' annual meeting in Los Angeles last month.

Reinsurers claim "underwriting profit" as their mantra these days, as they struggle to recover from the long soft market in the midst of a weak economy and a down stock market.

"A lot of underwriters are getting used to writing to a profit," said Peter B. Scanlan, chairman and chief executive officer of reinsurance intermediary Carvill America Inc. "Everyone must make an underwriting profit, and everyone realizes that."

"There's plenty of business out there, but it's got to be properly priced or it's not going to get done," said Stephen G. Tirney, president of Philadelphia-based reinsurer PMA Capital Corp.

Quality as an asset

But strong reinsurers will do well, these observers predict.

"I think, for the first time in a long time, this flight to quality really means something," said John Berger, president and CEO of Chubb Re in Bernardsville, N.J. "There's just a lot of companies looking for stability and security."

Andreas Beerli, CEO of Armonk, N.Y.-based Swiss Re America Corp., also said that, with less capacity in the market, the quality of capital will be an asset. "The flight to quality will be more important than it has been in the past," he said.

Meanwhile, the market continues to firm.

"It's still a hard market," said Steven Bolland, senior vp at reinsurance intermediary Gill & Roeser in New York. No one is seeing prices going down, and "certainly, casualty lines are still viewed as underpriced," he said.

Rate hikes will be more moderate than they were a year ago, though, said Mr. Bolland. Last year, there were hikes in the range of 50% to 100%, and while this year some casualty rates may increase 20%, "it's going to be a lot more reasonable," he said.

Paul Karon, president of Benfield Blanch Inc. in Minneapolis, said, "The property cat market will likely be flat during renewals. Surety, D&O and other casualty lines are the real problems," he said.

"Underwriting and investment returns stink," Mr. Karon said.

"The property rates have had a couple of years now of strengthening," said Mr. Tirney. But casualty rates, he said, "still have a little ways to go." Mr. Tirney said he anticipates property rates will increase about 10% to 15%, while casualty lines will increase 15% to 20% and workers comp business 20% to 30%.

Terms and conditions will be less of a sore spot in negotiations between reinsurers and insurers this year, because those issues were generally settled a year ago, say observers. It will be "less of a debating point, less of a long, drawn-out discussion vs. a year ago," said Kenneth W. Brandt, president and CEO of Americas P&C Treaty and Global P&C Re at Employers Reinsurance Corp. in San Francisco. Although terms and conditions are tighter, "the discussions on the issue are a lot more crisp," with more clarity between reinsurers and insurers, said Mr. Brandt.

Mr. Bolland said reinsurers basically got most of the terms and conditions changes they needed last year, including terrorism and mold exclusions. "There aren't any hot buttons this year," he said.

Cost of capacity

Most observers say there is more than adequate capacity, conditional on price. The current market differs from previous hard markets in that there is not the same shortage of reinsurance capacity, said Mr. Karon. "Unlike 1985, treaties are still being done now. People who want reinsurance can get it," he said, noting that the obstacle in the current market is the cost.

"I think there's a lot of capacity for reinsurance," said Mr. Berger. "It's a question of price."

Some of the European reinsurers that have been hard hit by the downturn in the equity markets may have capacity issues, but that is not a big issue for American or Bermuda reinsurers, which are largely invested in bonds, said Mr. Bolland.

Reinsurers are still studying the proposed federal terrorism legislation.

Mr. Tirney said, "If a law gets passed, we'll have to see what it means to our contracts at Jan. 1." He noted that insurers are likely to want some reinsurance coverage for the risk they are required to retain under the program. Under the most recent proposal, insurers will retain 7% of direct earned premiums in 2003, rising to 10% and 15% over the next two years.

But the legislation does not cover reinsurers, and PMA Re cannot obtain terrorism coverage from its own retrocessionaires. "We'll just have to see how that goes," he said.

Meanwhile, few reinsurers are writing stand-alone terrorism coverage. Stand-alone coverage is "very, very expensive and very limited, and it's likely to remain that way," said Mr. Bolland. He said he has not heard of any new entrants putting a "vast amount of capital" into that line.

Albert J. Beer, president-strategic business units at Princeton, N.J.-based American Re-Insurance Co., said that one of the intentions of the federal legislation is to permit a "true market" for stand-alone coverage to develop. But the appropriate frequency and severity parameters for terrorism risks are still questionable, said Mr. Beer, whose company does not write the coverage.

Matthias Weber, senior vp at Swiss Reinsurance America in Armonk, N.Y., said, though, that "we believe there's a definite market, and Swiss Re is part of this market."

"We are prepared to offer terrorism coverage at the right price and with the right limitations and terms and conditions, and we are not the only ones," Mr. Weber said. He added that "it's a necessity that reinsurers offer terrorism coverage."

"It's maybe not the cheapest cover that is available," Mr. Weber acknowledged, though he noted that "terrorism covers are very capital intensive due to the correlation of risk" across multiple lines.

Meanwhile, the emphasis on risk aggregation is here to stay, say most reinsurance officials.

"It's not going to be an overnight issue for our company," said ERC's Mr. Brandt. And if it is for the industry, ERC will become a "a very small player in the future," he said. "It cannot be an issue that fades into the night when the market turns."

Risk aggregation was probably a hotter topic last year, though, immediately after the World Trade Center attacks, than it is today, said Mr. Bolland. While people are still assessing the issue and asking questions about it, once terrorism was excluded from policies, "a lot of the point of doing this was taken away," he said.

Mr. Beer also questioned how long the emphasis on risk aggregation is likely to last. "Our industry is famous for instituting disciplined metrics when we get the price," he said. "When prices soften, it's amazing how quickly we lose those."

Market will stay hard

Although reinsurance officials generally agree the hard market will last at least through next year, there is no consensus about its longevity beyond then.

Mr. Beerli said the hard market will last at least five years. He pointed to the long soft market and other market changes as factors. In addition, this hard market has affected lines of business more broadly than have previous hard markets, he said.

But others are more conservative. The hard market will definitely last through 2003, said Edmund R. Megna, president of reinsurance intermediary Guy Carpenter & Co. Inc. in Stamford, Conn. "The big question is 2004."

"I really do think it has to last at least a couple more years," particularly on the casualty side, said Mr. Brandt. "The industry still has to face a fair amount of pain" arising out of business written in the late 1990s and in 2000, he said. When this is considered, along with the state of the economy and the investment environment, "I can't imagine anyone making a case not to sustain the casualty side of our business at least a couple of years," he said.

"The hard market will last certainly through 2003, and almost certainly through 2004," PMA Re's Mr. Tirney said as well. "People can't make up for 10 to 15 years of a soft market with 18 months of hard pricing."

In addition, observers generally expect little merger and acquisition activity in the coming months.

William L. Munson, president and CEO of Morristown, N.J.-based Toa Reinsurance Co. of America, said business is "pretty easy to grow right now," while companies have a great deal of hesitation about buying underperforming companies because of concern about reserves. Companies with problems are finding it is "not as easy to get acquired as was it was a couple of years ago."

Chubb Re's Mr. Berger said if he had to decide between the likelihood of acquisitions and the creation of new companies, he would choose the latter because of the danger of assuming another company's problems. "I don't see anybody buying a company with loss reserves these days," he said.

While there may be new reinsurers formed, the entry level of capital required is much greater now, though, said Mr. Megna. "Clients are demanding much more in the way of capital," he said.

Any new company started within the next six to nine months, though, will probably have missed most of the correction, said Mr. Beer.