There has been a modest improvement in the terms and, to some extent, the conditions of programs coming into the US reinsurance market over the past year. Property programs have stabilized to some degree. We are seeing a growing realization on the part of cedants that primary rates need to be increased for property business. But this will not really impact before 2001 or even 2002 - depending on whether you are talking about pro rata or excess of loss contracts. The reinsurance casualty market remains spotty. Some of the workers' compensation programs are coming under greater scrutiny than before; general liability rates have stabilized somewhat; and there is also some stabilization on professional liability business. But, overall, the extent of the change to date has hardly been dramatic.
There has certainly been some movement on the facultative side - in particular on property facultative business. This is significant, since changes in the pricing of facultative business are often the harbingers of impending changes in the treaty area. Rate increases on facultative business have been limited in scale so far but, significantly, what we are now seeing - across the market - is the ability for an underwriter to requote a program where he believes the risk is basically good, but where the cedant was initially unreceptive to the pricing of the original offer. That is something new and it is psychologically significant from reinsurance underwriters' point of view, giving them the confidence to go in with a quote first time that is a better reflection of where they believe the technical rate should be - without the fear of missing out altogether on a potentially good client's program.
The casualty facultative market has been slower to stabilize than the property side. One sign of future change, however, is that some primary companies are now indicating that they are facing pricing on their general liability programs that is starting to impact their net position on particular lines of business. Some primary companies have suggested they need to implement rate increases within the next year to stabilize the net effect on their portfolios.
Another factor that could influence the rating environment going forwards is a deteriorating investment market. In recent years insurers and reinsurers have benefited from a hugely profitable investment market. These have been boom years, during which insurance companies have been able to buy and sell stocks and bonds to realize a capital gain and reinvest with the prospect of similar success a few years down the line. I think it would be unrealistic to expect this situation to continue over the next few years.
With the investment market as healthy as it has been, carriers' focus can potentially shift a little towards ensuring the premium flow they need to invest in a highly benign investment market - with underwriting quality control maybe suffering a little as a consequence. As the market changes, this could leave any players whose underwriting focus has not been as sharp as it could have been - and who have not taken full advantage of the good years to build up strong reserves - uncomfortably exposed to an accumulation of long-term liabilities in the context of a deteriorating market. Awareness of this potential pitfall could encourage some additional tightening of rates, and on terms and conditions going forward.
While rates continue to show real signs of stabilizing or increasing slightly for most classes of business in the US reinsurance market, we need to keep a sense of perspective. Capacity remains adequate, if not more than adequate, on every line of insurance and reinsurance - so we will continue to see some degree of competition for the more attractive programs that come into the market. The only area where capacity is currently an issue is on retrocession business. This could be another indication of future change. Ten or 15 years ago, when there were more small and medium-sized reinsurers in the market, it would probably have had a very significant effect. But the fact that most of the major players in the market are now so much larger and better capitalized will tend to diminish the impact of any squeeze on retro capacity.
Some 40% of world insurance premiums currently emanate from the US. That makes this territory highly significant in the strategic thinking of the major players in the world reinsurance market, who all realize that a major part of their portfolio has to emanate from the US. Because of this, there is a competitive environment here that is probably unequalled anywhere else in the world. What happens in the US catastrophe market has always been a catalyst for rate changes in other markets around the world. The major global reinsurers have established a position for themselves in the US. What we are seeing now is a certain amount of positional adjustment and entrenchment - where the main players are looking to ensure they have the right balance in their writings and perhaps to grow their involvement in what they perceive to be the key lines.
I don't believe we will see another round of mergers and acquisitions on the same scale as in previous years, but there are a handful of companies that will want to adjust the balance of their portfolio and will be looking to acquisitions as a means of achieving this objective. After all the recent corporate changes, there is an increasing focus now on the need to secure the right individuals, the right teams to compete on the global stage and to deliver the skills and service clients require.
People are starting to question whether the market cycle is effectively a thing of the past. I believe we will always see a cycle - or cycles - of some kind. But it could be more product line cycles than anything else. For example, a major hurricane or other catastrophic event impacting the US property market could affect property catastrophe capacity worldwide. But I don't anticipate that we will see the same kind of dramatic fluctuations in cycles across the market that we have in previous years. I think the cycles will be flatter in future, and - in the absence of a very major catastrophic event - I would expect them to be longer as well. One of the current objectives of major reinsurance groups around the world is to provide some continuity with their clients through the cycles, and I think these efforts will contribute to a flattening, a stabilizing, and a lengthening of the cycle.
One salient feature of the market today is an increased blurring of the demarcation line between what is perceived as insurance and what is reinsurance. The AXA Group has explicitly recognized this by bringing AXA Re and AXA Global Risks together - along with the group's outward reinsurance activities - as a single entity, a single profit center. But most of the major players also recognize the convergence of these two disciplines. Major corporations around the world are clearly looking for a single point of entry to handle their non-assimilable risk exposures. And from the provider's point of view, we are obviously keen to maximize our exposure and to maximize our ability to participate in the overall programs of attractive business partners on a global scale. All the major global reinsurance market players are looking to broaden the range of services they can bring to the table, and it is less and less significant whether a client enters via an insurance or a reinsurance portal - provided they can gain access to the services and the capacity they need.
Having truly global capabilities - being able to satisfy clients' exposures and service necessities internationally - is a key component in achieving this model. To be a serious contender in the market at this level, you need to be able to put a product or a service together as easily in Singapore as you can in Montreal. This is the issue that will test the mettle of all those companies which seek to play a significant role in the global market going forward. Is there an alternative to going global? It is still possible to be a highly successful reinsurer within a specific territorial niche - provided your capital providers are prepared to accept that you will be more profitable in some years than others. But it is increasingly difficult to do this now without attracting the attentions - welcome or otherwise - of other organizations which will be keen to assimilate your activities within their own global portfolios.
One of the secrets of success for the major reinsurance players of the future will be the ability to put a network in place that can mobilize the right people to provide whatever solution a client requires wherever in the world their operations may be. If those resources cannot be sourced in-house, then that network has to extend to partner organizations that can seamlessly supply the necessary products, services or capacity. And that has to include not only traditional lines of insurance and reinsurance but also ART, securitization, capitalization, financial guarantee - in short, whatever combination will achieve the client's objectives. Above all, the companies that succeed will be those that are consistently able to understand and take account of the way their clients' businesses - and the market in which those clients operate - are evolving, so that the solutions they offer will always be an optimal response to any given set of circumstances.
Robert Lippincott is chairman and chief executive officer of AXA America Corporate Solutions.