Robert E Kelly looks at the new capacity in the marketplace.
In the unpredictable climate following September 11, here is one more interesting development to add to the list: the sudden influx of reinsurance capacity to a previously shrinking marketplace. While re/insurers concentrated on was picking up the pieces following the attacks, some industry players were simultaneously positioning themselves to adapt to the changing landscape.
Reports on the size of post-September 11 commitments vary, but it is clear the new capacity in the Bermuda market easily exceeds $10bn, more than doubling the surge of capital investment that followed Hurricane Andrew almost a decade ago. Although much of the increased capacity is in the hands of existing reinsurers, there are a number of startups, such as the new Marsh and Aon-backed facilities, that are particularly well-positioned to enjoy the benefit of hard market pricing without the baggage of recent loss histories.
Possible price wars
One unexpected development could be an abbreviated hard market for financial products if the capital infusion leads to price wars, but this will depend on how much of the new capacity finds its way into specialty lines,
However, we don't expect the new money to have a significant, or at least immediate, effect on what continues to be a hardening market.
As for impact, regardless of the opportunities, seasoned players will continue to pledge their dollars cautiously, at the same time attempting to elicit concessions from insureds on available coverages, retentions and coinsurance. Even as prices continue to trend upward, we are still a long way from a break-even point based on the loss ratios for the last several accident years, with no solid indications that overall losses have peaked. With combined ratios for major reinsurers for the first three quarters of 2001 up more than 25% from the same period the previous year, analysing the spillover effect of September 11 adds a new variable to the already difficult task of pricing risk.
Regardless of the underwriting appetite, much of the new capacity didn't appear in the marketplace until well after the January 1 treaty renewals, and some probably will not surface until the third quarter of 2002. Having the money on hand is one thing; staffing new facilities or building up existing ones - particularly under Bermuda's restrictive employment and housing laws - are other considerations that will likely delay any impact on the marketplace. In addition, prudent risk managers and brokers should be looking to buy and sell increased liability limits. If pricing and policy changes don't become prohibitive, much of the new capacity could simply blend into the existing landscape. In sum, we expect most underwriters to watch, wait and proceed with caution, at least for now. The aggressive players who can't resist the lure of short-term gain may learn, or in some cases relearn, tough lessons down the road.
By Robert E Kelly
Robert E Kelly is an associate in the Philadelphia, PA office of law firm Duane Morris LLP