With the United States at the epicenter of a recession fueled by the mortgage and credit market crises, ripples are still being felt in the global reinsurance market. And while a stagnant economy may be keeping prices stable for many, the ever-present “elephant in the room”—the threat of another major hurricane—is forcing rate hikes for those exposed, industry players say.
Jeremy Brazil, president of Markel International Insurance Company Ltd. in London, noted that July 1 renewals were characterized by rates rising between 10- and 20 percent on U.S. catastrophe wind and earthquake coverages.
“There’s probably a little more appetite with reinsurers on quake than on wind,” he said, adding that with the Texas Windstorm Insurance Association, “we expect to see self-insuring and not reinsuring this year—that’s probably freed up some aggregate for people in Texas.”
While renewals were mostly as predicted, he said, “it may be a below-average year on the cat front—particularly hurricanes.” He added, “It’s wait and see until December—what happens at Jan. 1 [renewals] will very much be dependent on what happens between now and then.”
The only market that has been reduced in capacity since Jan. 1—and is still the case—he said, is the retrocessional sector. “A lot of people are very optimistic about the future,” Mr. Brazil said. “You’ve got the Validus-IPC scenario going on, you’ve got Partner Re just buying Paris Re, so I think insurance is being optimistic.”
In the casualty market, he observed that direct rates are “not really going the right direction yet.” At the end of 2008, prices were drifting down, turning flat in January. “Since then, we’re looking at modest increases,” he noted.
For financial institution risks, Mr. Brazil said rates can be up between 10- and 20 percent. “The toughest market at year-end was the financial institutions,” he said, noting that as a result, “a number of people decided either not to renew the reinsurance they offered or reduce their lines.” Since then, direct insurers “are either writing at net or buying less reinsurance. People are still concerned about [Ponzi schemer Bernard] Madoff and others,” he noted.
In terms of global markets, he said the United Kingdom, Western Europe and the United States make up a mature and overserved market, “so people are looking for new opportunities where there is a growing economy, a fairly high GDP with growth, and a fairly established population with a growing middle class.”
He cited interest in South America and the Far East—China and India, in particular. He added that while China’s revisited growth rate for 2009-2010 was cut from 12-to-8 percent, “I think half of the U.S. and Europe would gladly bite their hand off if they could get half of that.”
There is talk of a global recession, he noted, but “it’s not truly global in terms of impacting every single country.” Australia, for instance, is seeing a nice growth rate, while in other parts of the world, “it’s fairly dire. So it is a bit patchy.”
A trend that is continuing is self-insuring, he said, citing the Gulf of Mexico energy sector as an example.
“Obviously there were some losses to [Hurricanes] Gustav and Ike, but when the price of oil was $140 a barrel, it was a different environment to what it is today,” Mr. Brazil said.
One result is mergers and acquisitions of larger companies, creating companies that are “more than capable of taking a half-billion-dollar loss in stride. So insurance isn’t a must-have for them.”
Regarding the D&O market, he said if an exposure has “a U.S. flavor, people are pretty concerned. If it’s got a non-U.S. flavor—again if there’s a financial-bent about it—then prices are moving up. But generally it’s relatively flat.”
He also said there may be more demand for D&O because with all that’s gone on in the U.S. and in Europe, the role of the non-executive director is under scrutiny. Globally, the trend is that people are either declining to become a non-executive board member, or are demanding the company buy adequate D&O insurance for them.
“Gone are the days when [a board member would] turn up once a week and have a nice lunch and get paid $20,000 a year for the privilege,” he said. “It used to be a cheap, low-risk [way to] carry on meeting with your mates.”
In contrast, the duties now are “ever and increasingly more onerous,” he added. Organizations, as well, “are thinking twice about it and getting good quality non-execs that understand the business is difficult.”
Mr. Brazil noted that more mergers and acquisitions could be a trend going forward. “This depends on the perception of the market,” he said. “If you’re in a soft market and there’s a desire to grow, then the only way you can really grow it, other than organically, is by acquisition.”
John Bender, chief operating officer of U.S. reinsurance of Allied World Reinsurance Company, noted that from his perspective, reinsurers are doing their best to maintain discipline. He said certain reinsurance markets face challenges—either on their own, with their parents, or new ownership—and are unable to push terms and conditions that need to be done in the marketplace.
Mr. Bender added that the entire reinsurance marketplace is subject to the current economic turmoil.
On the insurance side, he observed, “there are several insurance companies that suffered due to the current economic environment, but unfortunately, when our government got involved, this arguably resulted in price undercutting.”
“An insurance company may deem the government’s involvement as added financial security, and thus believe it has a competitive advantage in potentially reducing price to retain business that otherwise would have gone to a competitor,” he explained. “In the long term, this isn’t positive for the buyer or the industry.”
Therefore, getting an adequate technical price for exposure, he added, is being somewhat overlooked.
An area that’s masking what’s going on in the market is the number of takedowns of prior reserves, which he said has “masked the need to get rate. I think as companies continue to closely evaluate their books of business, they will be reminded that rate and the current market cycle are still a challenge.”
Mr. Bender said reinsurers “remain disciplined with their capacity where possible. I think they have probably reserved capacity for their long-term relationship accounts.” He added that capacity has not been as easy to find for those newer players coming into the marketplace.
Looking ahead, Mr. Bender observed, “I think the price of capacity has to increase. Investment income is sparse. Long term, the only viable and sustainable way you can achieve the returns you want for shareholders and service your clients is to get rate.” He added his opinion that with redundant reserves diminishing over the next few quarters, companies will “either make it on their underwriting profit or they won’t.”
He said Allied World Re continues to be “disciplined with our underwriting approach. If it doesn’t meet our financial criteria, we won’t entertain the deal—that’s our marching orders here…I’d rather maintain a smaller, profitable book of business than a book that I’m going to pay for five- or 10 years from now.” Globally, he added, “we exercise the same constraint companywide.”
Regarding consolidations, Mr. Bender said, “I would imagine the industry will experience more potential consolidation over the next 18-to-24 months. I don’t have my crystal ball to tell you who it will be, but I think that much like in the late 90s—once it starts, the consolidation frenzy takes hold.” This move, he believes, also will restrict capacity.
Looking further into the future, he said, the U.S. government has been “overprinting dollars, and that ultimately will cause inflation.” Meanwhile, he added, “the losses that will arise from business written today will cost more than the losses cost today.”
He also cited the impact a new administration in Washington will have on loss costs, expecting more liberal judges.
“When you write long-tail business,” you really need to be aware of these challenges such as inflation, and know that if you don’t secure the right rate, you’ll pay for it down the line,” he said. “For example, umbrella business has a very long tail—if you write a deal today, you may not pay a claim for 15-to-20 years, and what’s it going to cost to pay that claim 15-to-20 years from now?”
Mr. Bender concluded that insurance is “the only [industry] that puts a price on our product but doesn’t know the ultimate cost of our product until the future.”
Lloyd’s believes that the world economy is so interconnected that it’s almost impossible to isolate any exposure on the global reinsurance market these days.
“While a few years back, individual countries and areas might stand out, today you have total integration from an economic perspective,” according to Rolf Tolle, director of franchise performance at Lloyd’s.
With the subprime crisis, for example, “the cancer developed in the U.S., but the effect is in Germany, the U.K., France and the Far East, because we’re all inter-linked,” he explained.
This is a different phenomenon from 25 years or so ago, he added, noting that information travels more quickly today, as does placement of business. “So in the past, when the Americas were bad, Europe was fine and the Far East was stable,” he said, but this would not be the case today, because the U.S. has global implications.
“The impact might be different in its effect, but it is still an impact across the world,” he said.
Still, international business in all lines has not shown the same signs of hardening as for some U.S. risks, Mr. Tolle explained.
Business that is catastrophe-exposed and/or had losses through 2008—particularly from hurricanes—has seen the most dramatic change. For example, he said, U.S. Midwestern business has not been hit as hard as Floridian and Gulf exposures.
In some cases, such as Gulf of Mexico energy business, there has been a dramatic change in 2009, in that the market has not just addressed price, but also coverage, deductibles, exclusions and sublimits, “so it’s really done quite an overhaul,” he said.
The reason is “awful losses,” he added, noting that “if you go back to 2004, we lost in 2004 and 2005 dramatically. It’s not a 100 percent loss ratio, but a couple-100 percent loss ratios,” he said.
While these losses were addressed with price hikes in 2006, there was “some slippage in the market in 2007,” and then “Hurricane Ike strikes and kills that book,” making it “quite natural to have come to a point of deciding whether to write that business at all, and if so, what do you have to do to make it acceptable?”
As a result, he said, some buyers haven’t bought as much coverage, citing price. “They run the risk. If the ‘big one’ comes, either they have the capital to pick up the losses, or you have a system in the U.S.—Chapter 11,” Mr. Tolle said.
Looking at different lines, he said, improvement is below expectations for 2008 and 2009.
In casualty, he said, financial institutions and professional indemnity business—E&O, D&O, which is driven by subprime, Bernie Madoff and others—is seeing hikes.
The recession is also playing a role, he pointed out. “I think people are acutely aware that we are in a recessional period, and in a recessional period claims frequency goes up. That, to a certain extent, will result in claims severity going up.”
Internationally, he said, the picture is somewhat “bleak,” in that it is more difficult to carry through changes in pricing, terms or conditions, “because, don’t forget, the economic crisis we have, was and is predominately a banking crisis.”
Part of the mix, Mr. Tolle explained, is that a few insurers have “overstretched their risk” on both sides of the balance sheet. “There is one in Switzerland and three in the U.S. that I can think of immediately,” he said, adding that the majority of insurers have not had “the same impact on the asset side as those organizations.”
Looking ahead, Mr. Tolle said, “first of all, I don’t think we are through the economic crisis—I think it will go on for quite some time. I personally believe we will get through it by the third or fourth quarter of 2010. If that assumption is correct, we will see stabilization, yet further increases in lines which have to be addressed.”
While that forecast may not be “very exciting, all that can change with one big earthquake or one major storm,” he warned.
Mr. Tolle, calling himself “cautiously optimistic,” said that if carriers stay disciplined and focused, “I think we will get through this phase in an okay fashion, but it is very challenging.”
While there is enough capacity available in most areas, he said the concern is competition, which can be “fierce” in some lines. “This would indicate it would be difficult to have robust results coming out for 2009 in to 2010,” he concluded.
In a report released Aug. 20 about European reinsurers, Moody’s noted that “despite a much-hyped firming of rates in late 2008—before the January renewal season—renewal season pricing has generally not lived up to these expectations, despite some evidence of rate hardening.”
The report continued that “mitigating this to some extent” is that catastrophe losses for first-half 2009 were “generally lower’ than the prior year, “notwithstanding Storm Klaus, which affected Southern France, Spain and Italy in early 2009.”
However, the report added, “man-made losses, like last year, have been significant with credit insurance and aviation claims to the fore.”
Underwriting profitability, as measured by combined ratio, has improved to an extent over the first half of 2008, Moody’s said, noting that in a “normal” year, reinsurer profitability is “skewed” toward the first half, with the U.S. windstorm season affecting second-half results.
Losses from Hurricane Ike and a general increasing demand for reinsurance have led to rate increases in certain lines—mainly for non-proportional U.S. cat-exposed business, although a large amount of European reinsurer business is “still proportional, and price increases have generally been limited in line with the primary market. Furthermore, there is the potential for the supply of reinsurance to increase as solvency positions recover and money re-enters the sector,” according to Moody’s.
The rating agency views insurer access to capital markets as being “relatively opportunistic,” noting that reinsurers have typically sought to replenish capital bases in the “aftermath of severe balance sheet-impacting catastrophe events. Consequently, we believe the industry could face potential capital raising issues in the event of a severe U.S. windstorm.”