Reinsurers Likely To Feel Rate Pressure For 2 To 3 Years

   Of DOW JONES NEWSWIRES

NEW YORK -- Reinsurers will likely feel pressure to increase rates or at least keep them stable for the next two to three years, XL Capital Ltd.'s (XL) chief executive said Tuesday.

At the International Insurance Society's annual seminar in New York, Brian O'Hara said high loss ratios, in part due to an explosion in litigation in the late 1990s, have weakened reinsurer balance sheets and forced some companies to exit the business.

As a result, the industry's capacity, or ability to take on new business, has shrunk, O'Hara said. A large capital infusion, which would increase capacity, isn't likely, he said.

"What you see is what you're going to get for the next two or three years," O'Hara said.

That said, rates have moderated in some lines and capacity is opening up in a few more-profitable short-tail lines, he said.

O'Hara was part of a panel of insurance executives who addressed reporters at a press briefing on Tuesday.

Other executives on the panel included Klaus Dorfi, chairman and chief executive of Atlantic Mutual; Ewald Kist, chairman of the executive board of ING Groep NV (ING); and Donald Stewart, chairman and chief executive of Sun Life Financial Inc. (SLF).

More robust investment income conditions would likely affect the industry's underwriting practices, but that doesn't appear to be on the horizon, O'Hara said.

As investment returns have weakened in recent years, the insurance industry has had to place greater focus on profitable underwriting. In the past, some insurers have been willing to lose money on underwriting - meaning it costs them more to pay claims than they earn in premiums - because they still made a tidy profit due to investment returns.

O'Hara said most insurers need a combined ratio in the low 90s to post appropriate shareholder returns on equity. Combined ratio is a measure of underwriting losses and expenses per premium dollar earned.

Meanwhile, Dorfi said a number of insurers continue to strengthen their balance sheets - about $24 billion of $37 billion in increased premiums last year went to bolster reserves.

The industry would like to see that balance-sheet strengthening turn into income sooner rather than later, Dorfi said.

"It's taking longer than some would like," he said.

-By Chad Bray, Dow Jones Newswires; 201-938-5293; chad.bray@dowjones.com

Updated July 15, 2003 3:08 p.m.