Stephen Vivian reviews recent developments in the marine reinsurance sector

The hardening in the marine reinsurance market, which began in 2000 and continued through the July 2003 renewals, showed clear signs of levelling at January 2004. Prices in some marine lines had flattened and, as the year progressed, there were more instances of renewals with modest reductions in rates, particularly for clients with profitable reinsurance experience.

In those instances where clients can also demonstrate reductions in exposure, some reinsurers have offered more significant rate reductions. In the US, the majority of our clients are still experiencing some income growth, linked to both original rate increases and new business. 'As expiry' reinsurance renewals have therefore resulted in rate reductions, given the enhanced premium income projections.

With the 1 July renewals recently concluded, the 2004 underwriting year is nearly complete for the majority of reinsurers - that is, there are limited new and only a few renewal business opportunities between now and 1 January 2005. Reinsurers in general may fall short of premium targets as rate increases have subsided and the ability to achieve increased signings has been tempered by relatively abundant capacity. This may put further pressure on reinsurance rating levels for 2005, especially if there are no major marine catastrophes in the second half of 2004.

The market continues to place great emphasis on security. The rating agencies have been reviewing many markets and have revised several ratings accordingly. Increasingly, clients are extremely concerned about security and this is arguably resulting in a contraction of capacity as some refuse to accept certain reinsurance companies' paper. Nevertheless, there still appears to be adequate capacity in the market to meet clients' needs, particularly if cover is being purchased on a 'losses occurring' basis.

We estimate that there is between $100m to $150m of capacity available on a 'risks attaching' basis, depending on the particular client's portfolio and experience.

Marine reinsurers have become much more conservative regarding exposures to unforeseen events like terrorism, which traditionally has been covered by marine insurers and reinsurers. Following the record-setting catastrophe claims arising from the 9/11 tragedy, marine reinsurers insisted on adding terrorism exclusion clauses to virtually all reinsurance contracts, with buy-back provisions for marine exposures. Furthermore, reinsurers have added exclusions for terrorism losses arising from biological, chemical, biochemical or electromagnetic weapons. This has necessitated close review with clients.

In addition, large claims continue to hit the marine market with casualties such as the 'Pride of America', 'Rocknes', 'Kaminesan' and 'Chevron Nigeria' losses proving significant.

Against this background, reinsurance market leaders on both sides of the Atlantic are understandably trying to 'hold the line' on pricing, but are showing some flexibility on requests for reductions. Lower layer pricing has reached the threshold where clients have chosen to increase retentions when reinsurers have been unwilling to reduce pricing. Top layer minimum rates on line, which had been holding at between 2.5% and 3.0%, appear to be falling modestly.

Whilst new capacity has not typically attempted to undercut the established leaders, their presence has caused some to be more 'competitive' on renewal quotes. Retrocessional capacity appears plentiful and rates seem reflective of this situation. Such actions may well eventually serve as a catalyst for further change in the first tier reinsurance market. Specifically, Bermuda marine capacity is becoming more meaningful with several companies seeking to write more marine reinsurance. Once firm order terms have been agreed with a recognised leader, programs have been oversubscribed with demand from existing and new reinsurers from both the US and London markets.

Given the overall environment, we do not anticipate strong pressure from reinsurers to increase retention levels or to offer less vertical cover than before. In the past two years, the market has witnessed considerable change with retentions rising in order to mitigate substantial price increases or as a result of reinsurers' refusal to accept previously lower retention levels. Many clients retain between $1m and $5m on their general protections, and both clients and reinsurers seem comfortable at these levels. However, recent experience at 1 July 2004 suggests that some clients may be seeking further reinsurance price savings by holding $10m or more as a general program retention.

Clients are also considering buying more vertical cover at renewal. Some are writing more business and the additional exposure obviously has reinsurance implications. Furthermore, some recent studies predict that 2004 and 2005 will be bad years for hurricane activity and clients with yacht exposures are concerned about their potential exposure.

Marine reinsurers are increasingly using actuaries in pricing analyses and involving catastrophe modeling services when clients have sufficient data on fixed location marine exposures. However, compared to the non-marine reinsurance market, the actuarial and modeling disciplines can best be described as 'work in progress'. Nonetheless, both insurers and reinsurers now see the value in these important analytical tools and some clients are increasing their limits of catastrophe cover as a result of such analysis.

We appear to be in a new phase in the cycle. New capacity may present new buying opportunities, although the issue of acceptable security will remain paramount in the minds of many buyers. The relative abundance of retrocessional capacity may further impact the market and may possibly increase pressure for rate reductions, particularly on accounts with good experience.