`Cover Armageddon' failed to materialise at the latest renewals, but the season was, nevertheless, a rocky ride.

Towards the end of last year, as the January 1 reinsurance renewals season approached, market forecasts appeared to belie Benjamin Franklin's famous observation that "in this world nothing can be said to be certain except death and taxes". The prospect that rates would not show significant hardening was unthinkable. In November, Rob Bredahl, CEO of online reinsurance trading platform inreon, predicted the season was likely to be one of the "toughest ever".

The inevitability of the situation seemed to be accepted by all market participants. Underwriters, as usual, were keen to talk up prices as much as possible. But brokers and other buyers indicated that they were resigned to some substantial rises.

Rate increases that had failed to be pushed through in recent years "would need to be introduced at this renewal," commented London broking firm Jardine Lloyd Thompson (JLT) in a market overview report. The only real questions appeared to surround the extent to which prices would escalate, how restrictive terms and conditions would become, and how severe the capacity crunch would be.

It is not difficult to see how such a state of affairs had materialised. Recent years have seen pretty dismal results across the market, while over capacity in some areas had prevented reinsurers achieving the prices necessary to maintain a profitable book of business. Booming investment returns had helped to mitigate this state of affairs, but as stock markets around the world began to falter there came a renewed focus on underwriting discipline.

Contributing to these pressures were some less than satisfactory claims experiences, to put it kindly. Particular business lines such as energy have demonstrated appalling claims records in recent years and in 2001 the situation generally went from bad to worse - much worse.

In March, the loss of an offshore rig by Brazil's state oil giant Petrobras resulted in a hefty $500m claim. June saw tropical storm Allison blow a $2.5bn hole in the accounts of property casualty insurers after it had devastated large parts of the southern US. Another $500m loss arose later in the year with the explosion of an AZF chemicals factory in Toulouse, France.

And then there was September 11.

The terrorist atrocities resulted in the world's biggest ever insured loss to date, with estimates of the final bill coming in well above $50bn. If there was any residual doubt about the credibility of the approaching hard market, it was swiftly eradicated by the tragedy. JLT's market overview suggested that even prior to September 11, rates could have been expected to jump by a minimum average of 15% to 25%.

Limited negotiation
The experience of inreon members during the renewal season confirms that the post-September 11 experience was indeed much more severe. There are now 14 reinsurers operating on the inreon platform representing more than 50% of the world's capacity. These include the industry's two biggest players, Munich Re and Swiss Re, both founding partners of the platform. In addition, there are around 50 reinsurance buyers including both brokers and major primary insurers like AXA Corporate Solutions. Naturally, price hikes varied from programme to programme, but in general reinsurers appear satisfied with the rates that have been agreed. Certainly many capacity sellers have achieved the increases they wanted.

The tough state of the market has perhaps been most acutely demonstrated in a willingness to lose business rather than accept less than adequate terms. During the renewals, negotiation on price was often limited and sometimes virtually non-existent, as reinsurers adopted a firm `take it or leave it' approach.

All reinsurers were forced to reassess their underwriting guidelines in the wake of the seismic shock delivered to the industry by the attack in the US. This amounted to nothing less than a fundamental re-evaluation of basic underwriting strategies. Terrorism cover in particular was examined with a fine tooth comb and legal advice sought on every clause.

Strong reaction
Catastrophe business also reacted strongly to the impact. For example, treaty rate rises in the UK were reported to be in the region of 40% to 60%, though clients coming off three-year or other multi-year deals were facing even higher increases. Elsewhere in Europe similar price jumps were also recorded.

On some individual facultative classes the rate rises were even greater than those experienced on treaty business. Reports of escalations in the region of 100% and more were not uncommon.

Predictably, it was the small firms that lost out most. Larger insurance groups bringing high volumes of business to the negotiating table were able to secure the best deals for themselves. Those with more modest reinsurance requirements found themselves paying something of a premium in order to secure the cover they wanted.

Of course it is not just prices that have been affected in the prevailing hard climate. Terms and conditions were also severely tightened with deductibles higher, exclusions wider and premium payment terms stricter. Long-term contracts became rare animals indeed, and multi-class packages were unravelled into single classes.

Overall there has been a move towards more standard forms of coverage such as those available via the inreon platform. Previously accepted non-standard wordings and extensions are no longer seen as cost effective or desirable.

Capacity crunch?
However, it was not just prices that industry debate focussed on before the renewals season began in earnest; capacity was also a concern. The nightmare scenario was that of a severe capacity crunch with certain business simply impossible to place at almost any price. A need to address such concerns was partly behind inreon's decision to hold a sale of European property catastrophe capacity in December. Insurers and brokers were invited to submit details of their catastrophe reinsurance needs over a period of two days and under the platform's fixed timeframes for trading, a response was guaranteed within three working days, and any quotations submitted were binding. A second wave of submissions dealt with in a similar timetable began towards the end of December.

The high level of interest expressed in these sales demonstrated the very real worries that existed in the market about the availability of capacity. Several insurance buyers, attracted by the chance to quickly and efficiently access a range of potential new trading partners, were prompted by the event to sign up as new members of the platform. These new members comprised of four brokers and three primary insurers.

Fortunately, however, as the renewals developed, the capacity picture was not quite the Armageddon that some had feared.

In general, there was no severe crunch on capacity for catastrophe business, provided buyers were willing to pay the appropriate rate. The difficulties in finding cover tended to materialise where a buyer was looking for a cheap deal. In these situations, capacity just did not exist.

But real shortages of cover only emerged in territories where historically exposure has exceeded market capacity, for example US natural catastrophe. The accepted view for these particular classes is that the influx of new start-up capacity, in particular in Bermuda, did not come close to even matching the capacity recently lost from the market, never mind the losses incurred on investment portfolios by those operations continuing to write business.

Generally the difficult capacity areas are still difficult, but elsewhere risks were able to find a home if the price was right.

Another important point, demonstrated by inreon's catastrophe sale, was the timetable of this year's renewals season. The Monte Carlo Rendez-Vous in September traditionally marks the opening of discussions on the subject, but last year these early negotiations were scrapped mid-session as the horror of the terrorist attacks in the US struck. As the industry struggled to assess the full impact of the tragedy and its financial exposure to the loss, many renewals were pushed back and were eventually finalised much later than usual.

Some cedants waited to try to second-guess the market. Meanwhile, a lack of clarity on what terrorism cover might be available and the need to provide even more information in the renewal package than had previously been requested added to the delay. As the inreon catastrophe sale progressed it soon became clear that activity would be much greater in the second wave of submissions (held on December 20 and 21) than the first (held on December 13 and 14).

Some members even expressed interest in the possibility of holding a third wave in early January. In the event this was decided against, but some risks in various classes of business were still in the market during the first weeks of 2002. Inevitably, attention is now turning away from the last round of renewals and focussing on where the market goes from here.

Rate rise rationale
Much of the rationale behind the big rate rises that have recently been pushed through was based on a `now or never' feeling. Significant increases had already been observed the previous year and for some the hard market had begun the year before that.

As a result of the hard market, large primary insurance companies have had to retain more risk and are centralising their operations to ensure they can effectively manage business without the safety net of comprehensive reinsurance arrangements. When AXA Corporate Solutions announced its membership of inreon in December, improved monitoring and management reporting of reinsurance activity among its network of global offices was cited as a key advantage.

It may, however, be overstating the case to say that we are at the peak of the market cycle already. Many underwriters feel that rates have now only recovered to the level they should have reached in 2000. Further jumps are expected as more renewals take place throughout the remainder of this year. And the full impact of the World Trade Center loss is still to work its way into the system.

By Scott Farley

Scott Farley is the press and communications manager for inreon. He has previously worked as a re/insurance journalist.