Back to Basics.

Reinsurers at the 45th Rendez-Vous de Septembre will focus on ways to make an underwriting profit, now that investment profits are scarce.

Like students returning to classes after summer break, reinsurers are likely to discuss getting back to the basics at this year's annual Rendez-Vous de Septembre conference.

The 45th annual conference, held in Monte Carlo, Monaco, is a time for the stars of the reinsurance industry to discuss the state of the industry.

This year, as the industry continues to rebound from 1999, the worst year for reinsurers in 15 years, reinsurers are primed to discuss how they've "hit the books"--their books of business, that is. Sound underwriting and improved pricing are necessary to return to profitability, as the market hardens and insurers can no longer rely on easy investment gains to make up for underwriting losses, said Hoyt Wood, global underwriter for GE Employers Reinsurance Corp.

"Two years ago, we were trying to convey this message and no one would listen," Wood said. "We were struggling at that time, and we were telling our customers and intermediators and anyone who could sit down for the proverbial half-for in Monte Carlo.

But last year was completely different, and we expect a continuation of that."

Clay Bassett, senior vice president of Swiss Re's Americas division, agreed. "We're seeing greater discipline on the part of our competitors and our customers. They're executing; it's not just an obligatory conversation," Bassett said. Swiss Re also is scrutinizing its business, Bassett said. "We've looked at every single one of our contracts, without exception. The whole theme is, 'Why would we ever want to write a piece of business that doesn't meet our targets?"'

Improved Numbers

While net premiums written for the property/casualty reinsurance industry rose 12% to $21.99 billion in 2000, net income rose 24% to $1.97 billion, according to A.M. Best Co. data. But 2000 net income was still 67% lower than the $5.90 billion the industry posted in 1998.

And while 2000 was a more profitable year for reinsurers than 1999, the industry still was writing business at an underwriting loss. The industry's combined ratio rose to 116.4 in 2000 from 114.8 in 1999, and policyholders' surplus fell 4.6% to $56.20 billion.

Volatility in the stock market continued to hurt the bottom line, as unrealized gains fell $800 million in 2000, which followed the 1999 decline of $930 million in capital gains, according to A.M. Best Co. data.

With interest rates down, "the industry has already reaped all the capital gains it can. We're back to basics as an industry in a fundamental way," Wood said. "The only way to make money these days is through true underwriting operations. We're headed in the right direction, but we still have a long way to go."

Reinsurers talked about stiffer terms last year at the Rendez-Vous but ended up softening their stances during negotiations throughout the fall, said Rodman Fox, chief executive officer of Benfield Blanch.

"This year, particularly with the programs that have had poor experiences, I would expect a stricter approach," Fox said. Reinsurers "are looking for a certain return, and if they don't get it, they won't write the business. I don't see anyone jumping for volume at the moment.

"Today, if people reach the hurdle rate, whatever rate that is, there's ample capacity," Fox said. "The critical question for the fall and January renewals is, 'Is the capacity there?' And at the moment, it seems to be."

Catastrophe Factor

It will be interesting to see how natural catastrophe claims add up by this fall, Fox said. Hurricane season is far from over, but Tropical Storm Allison and a string of storms that swept through 16 states in April already have total cat losses for the first half of 2001 pushing $4 billion, according to the Insurance Services Office Inc.

The reinsurance industry was hit hard in the fourth quarter of 1999, when it posted a combined ratio of 125.8 after several major storms in Europe. A combined ratio of more than 100 represents an underwriting loss.

Because the storms Lothar and Martin struck Europe in late December 1999, companies didn't have time to adjust their rates for the January 2000 renewals. They didn't get a chance to seek dramatic increases until January 2001.

For the first quarter of this year, primary insurers increased their rates about 10%, the first double-digit increase since 1987, Wood said.

"For this to be the first quarter of a 10% increase in 14 years tells you how far behind we are," Wood said. "But we're headed in the right direction"

ERG has been averaging increases of 10% to 20% but also is focused more on tighter underwriting, Wood said. Other reinsurers also seem to be seeking substantial price increases and tightening their underwriting, he said.

"I think everybody is singing the same songs. Whether they have a great voice or not remains to be seen," Wood said.

Swiss Re also has seen strong pricing increases, said Mark Lescault, head of the divisional underwriting office for the Swiss Re Americas division. For instance, Swiss Re has renewed facultative contracts for workers' compensation with increases in the 20% range, with hikes as high as 30% to 50% for California workers' comp business. Liability has been running in the 10% to 20% range, while natural catastrophe coverage has increased by 25% to 30%.

"It's a great first step. But it's not enough to recover from prices being down 30% to 50% over the last five years," Lescault said.

For Employers Re, this year's underwriting goal "is to have the right price for the exposure and risks. Sort of getting back to basics, which is what we think the industry needs to do to get a price relative to some exposures vs. a market price or some price driven up and down by competition," Wood said.

Alternative Risk Transfer

Rendez-Vous attendees also are likely to discuss alternative risk transfer. Products such as securitization and catastrophe bonds may become more attractive as the market hardens and reinsurance prices rise, Wood said.

Swiss Re's sigma study found catastrophe bonds accounted for nearly half of the insurance risk securitization transactions since 1996, and about $12.6 billion of capital-markets insurance products had been launched over that time period. While about $1 billion in cat bonds are issued annually, that number is expected to grow to $10 billion by 2010.

Other issues, such as asbestos and environmental claims and the new threat of toxic mold claims, also may be discussed, Wood and Bassett said.

Claims associated with individuals exposed to asbestos in the United States will ultimately top $200 billion, consulting firm Tilinghast-Towers Perrin estimates, with the U.S. insurance industry likely to be saddled with about 30% of that total. Overseas insurers, including those based in London, continental Europe, Asia, Australia and South America, will bear another 31%. Asbestos defendants, including manufacturers, distributors and premises owners, will retain the remaining 39% of the costs, according to the study.

Tillinghast's estimates dovetail with a recent A.M. Best special report, which pegged the U.S. property/casualty industry's asbestos claims exposure at as much as $65 billion.

Toxic mold claims aren't likely to affect reinsurers as much as primary homeowners writers, because most large personal lines writers don't buy reinsurance on their homeowners business, Bassett said. However, mold could impact the reinsurance industry through liability coverage, he said.