As the Monte Carlo Rendez-Vous de September looms, reinsurers thoughts turn to the upcoming renewal season. In recent years, there has been much talk of an anticipated upturn in the languishing market, but little activity has followed. During this year, however, reinsurance premiums are seeing a 23% increase relative to last year, according to figures recently issued by Morgan Stanley Dean Witter (MSDW). In fact, MSDW's analysts are confident that the market has started significant upswing, one that will be sustained for several years. It is the heady combination of low investment income, low premium income and increased claims experience which is fuelling this surge, coupled with an increased wariness of exposures on the part of the primary insurers, several of which are already feeling the pain of tropical storm Allison, the first windstorm of the Atlantic hurricane season which is already notching up $2.5bn in claims.
More general economic uncertainties, as the ‘will it, won't it' questions of the stumble towards possible recession continue, are also pushing primary insurers towards minimising their retentions. And adverse developments in long-tail liabilities, in particular the problems associated with asbestos-related exposures, are meaning widescale reserve strengthening. At the other end of the scale, the lack of retrocession availability is impacting reinsurers no longer able to cede exposures further along the chain, and capital in general is now being squeezed. As these forces meet in the middle, reinsurers are now in a position not experienced for several years, one in which demand appears to be outstripping supply. That invariably leads to tighter conditions and higher prices, though it could also provide the impetus for a blossoming of the capital markets insurance solutions sector.
Although alternative forms of risk capital have been on the agenda for several years, growth slowed towards the end of the 1990s as a result of the soft reinsurance sector. There was no point investing in new products which were unusual, complicated and had associated ‘novelty' costs when the tried and tested traditional market was handing out capacity on a plate. Now, however, the tide has turned and buyers may find the capital markets an increasingly attractive place to turn. Indeed, Swiss Re's economic unit, sigma, forecasts a tenfold increase in insurance securitisations over the next decade. According to sigma, catastrophe bonds have accounted for almost half the insurance risk securitisation transactions that have taken place so far, and it anticipates the annual issuance of catastrophe bonds will reach $10bn by 2010. In addition, capital market insurance solutions linked to non-catastrophic risk have an even greater potential, says the report, citing both life and auto insurance as particularly promising areas.
In the meantime, probably the greatest area of uncertainty for the industry is the threat of long-tail liability. In recent months several re/insurers have substantially added to their liability reserves, as asbestos-related litigation has gathered pace and new defendants have been identified and targeted by plaintiff attorneys. Around 500,000 claims are thought to have been brought against multiple defendants in the US, and recent studies suggest that more than 1,000,000 people may eventually take up litigation. Expected changes in the tort system in the US have accelerated filings, particularly from individuals who have been exposed to asbestos in the past, but currently are not displaying any symptoms. Equitas, the reinsurer of Lloyd's pre-1993 exposures, has decided to take a tough line with claimants, requiring medical evidence of adverse health effects as well as proof of exposure. Nevertheless, the awards are ultimately in the lap of the US courts, the same courts which recently awarded $3bn in damages to a smoker and against tobacco company Philip Morris. That sum was reduced to $100m on appeal – though that award too is being appealed by the tobacco manufacturer. Even so, telephone number awards (including international dialling codes at this level) are likely to become increasingly normal. Claims inflation is a persistent problem which is not going to go away, and instead will need managing and accommodating in increased reserves. For those re/insurers that fail to take these factors into account, this current upswing in the cycle could prove to be their last.
It is at times like these that the importance of knowing the market and understanding its future direction comes to the fore. Global Reinsurance is delighted to be announcing the winner of this year's inaugural Lumina Awards during the Rendez-Vous. Undertaken in association with the Geneva Association and the Committee of the Rendez-Vous de September, these awards recognise the pioneering research undertaken both within the re/insurance industry and the academic world. Knowledge is power, particularly in these changing times.