Signs of Over-Capacity, Competition In Some Re Areas
By Lisa S. Howard
Reinsurance Editor
Although there are signs during the recent renewal season that competition has returned to parts of the reinsurance marketplace, industry officials are not concerned—yet—that reinsurers are returning to the slippery slope towards a soft market.
"We’ve had any number of our reinsurance markets on the phone, post 1/1, saying that they’re short of income, [asking if] we [had] additional business that we could show them," said Charles Cantlay, deputy chairman of Aon Limited’s U.K. reinsurance group in London. "Reinsurers are extremely concerned about their allocated market share post 1/1.
"Clearly that’s not a very healthy sign. That seriously suggests over-capacity," he said, noting that this is true in aviation, marine and non-marine. "On the good quality business, the vanilla, transparent business, there is unquestionably over-capacity worldwide," he added.
Mr. Cantlay noted that the more difficult to place programs are retrocessional business, or programs which are multi-line or multi-year, or particular areas of the business where there is still a capacity crunch such as North American casualty, or D&O and E&O, he affirmed.
Most classes are still seeing rate increases, although competition from Bermuda "has now spread from property cat into per-risk and workers’ comp catastrophe, producing pressure on both rates and signings," said David Shipley, active underwriter with MAP, a managing agency at Lloyd’s.
"Bermuda has been a big source of new capacity out there, particularly on the property market, although less so on marine and aviation," Mr. Cantlay said. "They have some very aggressive targets for growth in 2003. Sometimes there just isn’t enough business around to fill those targets," he said.
Nevertheless, most officials interviewed believe that the competition that is beginning to creep back into certain sectors is being done with thought, rather than a consideration of market share.
"It’s a marketplace that will continue to show responsibility," said William Eyre, managing director and CEO with Towers Perrin Reinsurance, a Philadelphia broker. "Whether it’s the new players or the existing players, I think most people are moving in the same direction."
Although some people say that the new Bermuda companies are cheapening the deals, Mr. Eyre didn’t think that was true.
Henry Keeling, CEO of XL Re Limited in London, was not concerned about property cat rates peaking in some areas. "As long as people are using the models in an appropriate manner, they’re all going to have a similar view of what the right price for the business should be," he said. "So there tends to be a point up to which there is very limited capacity available, and then once you start getting into people’s price range—obviously there’s a variation—a lot of capacity becomes available."
All officials interviewed agreed that just because some leveling off of property cat rates may have occurred, it represents only a small portion of the industry’s global premiums.
Mr. Cantlay attributed some of the increased competition to the consolidation of the client base over the last few years. "There are fewer, larger, more sophisticated clients, which have different buying patterns," he said.
Mr. Cantlay said clients last year examined every possible way of saving "on the spending that they incurred in 2002. That has manifested itself in quite aggressive stances by the clients towards the renewal terms that they were being offered in 2003," he added.
"A lot of them have looked very closely at the original business—the attractiveness, the rating and the excess points of the original business, and come to the conclusion that they can retain a great deal more, buy less reinsurance and run co-reinsurance," he continued. "Therefore, the amount of dollars being purchased in certain of the reinsurance segments is actually quite significantly down," he said.
At least for U.S. companies, the large increases that ceding companies saw between 2001 and 2002 did not repeat themselves in the Jan. 2003 renewals, affirmed David Robb, executive vice president for the Hartford in Hartford, Conn. Mr. Robb is involved in reinsurance buying for his company.
Indeed, he said, on the property side, the Hartford during the recent January renewals saw a leveling or a slight reduction in rates, particularly U.S. catastrophe business, he said. "For property risk business, it really is more of an individual company experience kind of issue, but again my expectation would be that rates would, in the absence of some adverse loss experience, be flat to down a bit, for property risk."
"Looking forward, property cat business will continue to be fairly straightforward during 2003, and will continue to weaken unless there are some big losses," said James Vickers, managing director with Willis Re in London. "The question is what classes of business will the reinsurers turn to next to fill up any short falls in their premium, and probably the answer is property risk and then, ultimately, property proportional, if they can convince themselves that the original rates are at a sufficiently attractive level."
However, Mr. Vickers thought that casualty was probably the last on the list of areas reinsurers would look. "D&O and other professional liability areas have become so difficult," he said. "There is an enormous opportunity if you wish to write these classes, but people are very nervous in engaging in those classes at the moment."
Mr. Vickers said there are a lot of issues in the liability area, globally, both in terms of original premiums and the money that the reinsurers’ want, but also problems over coverage and terms.
For example, a lot of the major reinsurers have been pushing very hard to limit exposures or exclude exposures from pharmaceutical companies, he added.
They also want to limit and/or exclude exposures from the Fortune 500 or Fortune 1000 companies who have disproportionately big third party liability exposures, he noted.
"For some insurers that specialize in that business, it’s been problematical and they’ve had to negotiate their way around that," he said. "But the people who it’s probably the most awkward for are the companies that write just one or two of those big accounts."
They’ve had to do some hard soul searching about whether it is worth trying to continue including a handful of accounts which are imbalancing their entire portfolio and making the renewal of their treaties very difficult and expensive, Mr. Vickers said.
Commenting on the effects of the new Bermuda capacity, Mr. Robb said they were much more active during the January renewals. "They’re much closer to fully staffed. They’ve been expanding their operations to other than property-cat, which was their original reason for being created," he said.
"As they expand that capacity and bring people on board with the underwriting skills, I think it will continue to help things improve from a buyer’s perspective over the next couple of years," he added.
"You’ll have an increasing number of qualified underwriters with quality balance sheets and good capacity available, so I think that will be a helpful thing for reinsurance buyers," Mr. Robb said.
Mr. Cantlay didn’t think a soft market was around the corner because "the shareholder discipline and the management discipline" following the World Trade Center loss is still extremely firm.
Mr. Cantlay predicted that firm market rates would last between one and four years, with 2002 being year one. "I think that shareholder discipline and management discipline is still very strong, and I think we’re going to see a hard market going through 2003, and who knows what might be out there in terms of a cat loss."
If there are no losses in the latter part of 2003, then inevitably the market again will see some softening, he contended. "However, there’s a lot going on out there in terms of depleted reserves, which is a pretty strong barrier, because people need money badly to pay for the sins of the past," he said.
Reproduced from National Underwriter Edition, February 3, 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.
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