Silver Lining Shines Through.
Optimism prevails in London's insurance and reinsurance markets after the 2000 renewals. Underwriters, brokers and buyers report a halt to four years of declining prices; tentative rate hikes in many lines, especially where there have been losses; and the hope of more good news as multiyear reinsurance treaties expire.
Rates have fallen again in some lines, and most players believe prices aren't adequate yet, but there is consensus that the bottom of the cycle has passed.
"People think that this is the year that rates will turn," said Marie-Louise Rossi, chief executive of the International Underwriting Association of London. Losses in late December exerted pressure, but she also reported few of the market withdrawals that usually accompany a turn in the rating cycle. "Nobody is leaving the market. In fact, there are new entrants." Rossi said there are fewer individual transactions, but the trend reflects larger reinsurers taking greater participations in shared programs.
Rather than whole companies collapsing, London is experiencing a controlled withdrawal or reduction of capacity in many lines, as some underwriters begin the struggle to reverse prices.
Jason Harris, manager of the engineered and special property division at Chubb, is one underwriter who is exercising a selective approach. "We are pushing for substantial rate increases, and in certain cases getting them. At other times we are letting business go, saying enough is enough." The trend in rates is upward, particularly in capacity-starved specialty areas such as mining and power generation, he said.
The Retro Squeeze
The shrinking of primary facultative and retrocessional capacity was a recurring theme over the past six months, beginning when American International Group Inc. ceased underwriting international property in London through its subsidiaries AIG Europe (UK) Ltd., Lexington Insurance Co. and AIU Re. The collapse of Australia's New Cap Re and GIO Re, as well as other withdrawals, continued to remove capacity. While many primary rates languished, marine and non-marine property retrocession prices jumped. Reinsurers that rely heavily on retrocession are being squeezed: They can't yet obtain substantial rate hikes on the business they write but face hefty increases in their own reinsurance costs.
"The retrocession market, across the board in all classes, was a lot more difficult, with quite significant hardening in terms," said Robert Johnston, managing director of Copenhagen Re UK. "Anything with any loss activity was much more difficult to place and had price increases."
Stephen Riley, the newly appointed managing director of CNA Re in London, quantified the retro squeeze. "The cost of retrocession has moved up markedly, between 15 and 30 points, and its availability has reduced;' he said.
Aviation Not Taking Off
In the London-dominated aviation market, rate hardening is less obvious. Graham Townsend, chairman of the aerospace group at brokerage Lambert Fenchurch, said capacity remained plentiful for airline business when most renewals occurred in October and November and should stay in place until next January. "Many direct underwriters took two-year programs, so we won't see a reaction from the reinsurers until those treaties expire," he said.
The direct aviation market has hardened somewhat, Townsend said, but airline hull and liability premiums still are believed to be lower than claims. As with other lines, airline accounts with bad loss experience saw rate increases, but those with clean records received reductions. "Underwriters are desperately trying to stabilize the market and obviously feel that premiums are inadequate," Townsend said.
Rates changed more dramatically in London's aviation reinsurance market than in most other reinsurance lines, partly reflecting the retrocession squeeze, but aviation probably had more ground to recover. As a result, higher retentions may be forced on direct writers because of lack of capacity for low-level aviation reinsurance.
Marine reinsurance is showing early signs of recovery Most catastrophe programs were written for two years, but lower-end and retrocession covers weren't, and they renewed at year end. "1998 and 1999 were horrid years for marine losses, so an awful lot of marine reinsurers lost a lot of money in 1999," said Chris Clark, a marine treaty reinsurance broker with Willis Faber Re. "Retrocession probably saw a 15% to 25% increase for clean business. A lot of the bottom-end reinsurance capacity disappeared, so many accounts with attritional losses or claims activity were not renewed. For those that were, direct writers faced either very significant rises in reinsurance premium expenditure, increased excess points, or both."
Marine liability renewals have been mixed, said Oliver Crabtree, an underwriter with Hiscox Syndicate 33. Most of the business can renew at unchanged terms, but an increasing amount of business is being shopped around, he said. "We are seeing business go out with one broker, then come back from another broker as the client tries to get a better price." Crabtree said it was relatively easy to tighten rates or terms for any cover with even a hint of distress, but prestige or core business still receives reductions.
Despite the negatives, "there are enough signs to say that rates will be rising later in the year," Crabtree said. "There is a tacit acknowledgment in the market that something has to give." Rates have fallen to the point that brokers no longer feel sure to get a reduction from another carrier at renewal," he explained. "There is more support out there--we are not seeing the same level of predatory poaching that there was six months ago." However, he forecast no substantial change in the marine market until late 2000 and warned that "there are still too many people looking for too little business."
Prices in the energy market have fallen below sensible levels, and underwriters are trying now to make up ground. "The oil, gas, and petrochemicals sector has had some very huge bangs recently, and they haven't stopped," one energy underwriter said. "The losses have led to the unavailability of primary, low-level reinsurance coverage, so arbitrage at that level is not as conveniently available as it once was."
Property Cat Leveling Off
Clean property catastrophe reinsurance programs were renewed without changes, whereas for the past few years, clean programs received substantial rating reductions, according to an underwriter for Lloyd's reinsurer Wellington plc's Syndicate 2020. "In previous renewals we witnessed as before rates, or even rate decreases, after a claim to a contract. No longer. Contracts with substantial loss activity in 1999 saw rate increases at renewal." Terms changed little from 1999, so catastrophe pricing for 2000 improved only slightly, but the underwriter was cautiously optimistic.
CNA Re's Riley said excess business for U.S. risks is moving, but not markedly. "There was a particularly bad experience in large-risk books. We have seen the disappearance of the facultative reinsurance facilities provided by a number of reinsurers, and particularly the disappearance of the Australians. That means that people don't have access to the cheap shoot for that kind of business." Despite the improvement, he said, "there is still quite a long way to go."
The usually important U.K. treaty renewal season was almost a non-event. "A lot of U.K. treaties are wrapped up in multiyear protection, so there wasn't much business to renew," said Mark Homer, a treaty broker with Benfield Greig. Many U.K. insurers bought two-or three-year contracts at the January 1999 renewals, and others took slightly extended programs to avoid potential millennium bug problems. Some new business came to the market, and Homer reported a "notable shift in attitude, particularly towards multiyear coverage," on the part of underwriters. Nevertheless, two U.K. programs placed in October were written on a three-year basis, and one company renewed part of a [pounds] 200 million (about $320 million) program for January on a three-year contract. Where exposures were unchanged, flat pricing was the norm.
While some underwriters anticipate rate increases this year, buyers approaching the end of multiyear and extended contracts don't seem ready to pay more. Nicholas Michaelides, director of group reinsurance at U.K. giant CGU plc, will renew his program April 1. "There seems to be a consensus that, where there have been losses, there should be a price movement," he said, but he wasn't anticipating an increase on his account. "There is no reason why U.K. rates need to move. The alternative sources of capacity that have now been developed should help to stabilize the market."
Mark Simpson, risk finance manager at the U.K. brewing group Bass plc, buys reinsurance for the Bass captive, White Shield Insurance in Gibraltar. White Shield renewed the final year of a three-year program on Sept. 30, 1999. Simpson saw insignificant rating changes on the program then, but he anticipated a hardening market ahead. However, like Michaelides, he wasn't receptive to major increases. "If we see a punitive increase in rates against programs that have not delivered losses, our long-term relationships will have to be reassessed in a very cold way." He said Bass entered the three-year program, led by Zurich, Chubb and Ace, intending to retain [pounds] 25 million (about $40 million), but rates were so attractive that Bass and the captive retained just [pounds] 2.5 million (about $4 million).
One area of good news in the U.K. market is in primary automobile insurance, where Copenhagen Re's Johnston saw marginal but insufficient increases on auto treaties. "We did not see reductions at renewal, and in some areas we began to see improvements."
Johnston said the storms that ravaged France after Christmas will likely wound many French insurers, some mortally, and might add momentum to rate increases. But he said they came too late for January renewals. CNA's Riley agreed. "In continental Europe, there is still a definite lack of attention to the need to increase primary rates," he said. The Wellington underwriter said pricing of French catastrophe treaties actually fell as much as 15% for renewals completed before the December storms.
In Scandinavia, early December windstorms affecting Denmark and Sweden are said to have exhausted most Danish insurers' reinsurance. Long-term covers mask any obvious renewal trend, but underwriters reported that new, higher layers were purchased after the loss and hinted at rate increases of several hundred percent when long-term contracts reach renewal. A treaty broker noted that the German and Swiss giants, which write most continental European reinsurance, were hit particularly hard by the events in France and Denmark. The Turkey earthquake also impacted the big players. "They will have to make up ground, so more European cat business could be pushed into London," he said.
Riley said he was confident that 1999 results would show carriers how much work remains to restore profitability after four years of falling and stagnating rates. Some reinsureds with multiyear programs will require reinstatements, which could shift prices sooner. "I think we are definitely seeing the market improve. It will be a long, hard struggle, but we have to get back to a basis of profitability."
Reinsurance rates also are rising in Latin America, a major market for London. Colombia, Venezuela, Ecuador and Central America generally renew Jan. 1, and most other countries renew June 1 or July 1. The Jan. 1 renewals saw rates rise amid consolidation of the market; the withdrawal of several reinsurers that had competed fiercely in Latin America; and losses including the Colombian earthquake and Venezuelan floods. Underwriters reported that treaty prices generally rose at least 25%, but from a position that even brokers agreed was technically unsound.
Lloyd's, an important market for South American catastrophe treaties, has reduced capacity for the business, and according to one broker, has worked to push rates up. "They priced themselves out of a lot of programs," said John Kulenicz, executive director of nonmarine reinsurance with Aon Re Worldwide. Retrocession costs were a major factor, he said, adding that less reliance on retrocession helped some large U.S. and continental European reinsurers to offer lower rates, taking some business from London.
After a renewal season that was later than ever-one that CNA's Riley described as "undoubtedly the most difficult for everybody since the early 1990s"-optimism abounds. Underwriters can only wait now for the next big event, Japanese catastrophe renewals on April 1. "Everything that needs to happen has now happened," Copenhagen Re's Johnston said. "1999 was a bad year even before the French storms, and generally inadequate rating levels all around mean companies' and syndicates' results for 1999 will make for pretty awful reading. I don't think we need more events to correct market conditions-I am pretty confident the market will harden, and the process has already started."
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|Date:||Mar 1, 2000|
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