Some experts say current market tightening will lead to rate increases across the board and an extended period of more realistic pricing. Others with equally good credentials think the current upturn will be mild and short.
Those who believe the glass is half full predict a continuing upturn. It began with a tighter retrocessional market and is spreading rapidly across the spectrum of traditional reinsurance. The psychology of the business is changing. Reinsurers are focusing on exposures and loss costs instead of market share. Some reinsurers are even said to be withdrawing from inadequately priced programmes. Cut-throat competition is giving way to cost-based pricing, at least for now.
Some insurers faced with renewals at sharply higher rates are turning to alternative catastrophe products to fill out their programmes. Others are looking to the bond market as a way to avoid higher prices for reinsurance products. While these options may restrain excessive price hikes, they're not expected to block the return to more rational pricing in the conventional reinsurance market.
After the industry's dismal performance in 1999, reinsurers are putting profit ahead of market share. While the results may not be dramatic in 2000, the current upturn will translate into significantly improved profits next year. However, many believe it will take a couple of years with successive price increases for the industry to recover.
So, how about those who see the glass as half empty? A recent market analysis from Standard & Poor's pointed out that most reinsurers are underperforming the primary property/casualty industry for the first time in a decade. The cumulative effect of past price reductions, contract extensions and underreserving will darken the outlook. The study concluded that while the market is changing direction with real price increases, future upturns will be considerably less pronounced than in the past.
A.M. Best reported the combined ratio for reinsurers in 1999 shot up to 114.8, 11 points worse than 1998. The fourth quarter combined climbed to 125, thanks to winter storms Lothar and Martin in Europe. Unfortunately, the storms came after many reinsurers had inked contracts for 2000, which prevented them from reflecting these losses in higher prices this year.
S&P reported improvement in 2000 with the combined ratio dropping to 112 for the first quarter. The Reinsurance Association of America reported that the ratio held at 112 through the second quarter. S&P predicts reinsurance premium volume will grow between 3% and 4% this year. If, under the best case scenario, the increase reaches 7%, the industry's combined ratio could return to a healthy 103%. Clearly, there are some restraining influences on the brighter outlook. Merger and acquisition activity is creating larger insurance companies that may require less reinsurance. Elimination of barriers between the financial sectors is creating new competition for reinsurers. Up to now, the capital markets have zeroed in on high-end catastrophe risks. However, as they become more comfortable with insurance, they may begin to provide other reinsurance-type arrangements such as stop-loss protection on adverse development of casualty loss reserves and protection for large losses.
What does all this mean for reinsurers and brokers? The current upturn will substantially improve industry profits in 2001. However, the fiercely competitive nature of our business and the introduction of challenging new products by our Wall Street friends will head off a long-running hard market. The reinsurance industry won't be able to win with conventional reinsurance alone in the new marketplace.
Today's creative brokers see exciting opportunities for growth through specialisation, alternative risk transfer, global outreach and the wholesale sector. Brokers that once specialised exclusively in traditional products are offering innovative catastrophe coverage that provides multi-year protection in hard and soft markets. Instead of only selling time-worn, off-the-shelf products, they're working with clients to determine the best mix of traditional and non-traditional products to meet their clients' needs year in and year out. Finite reinsurance and related financial products have been refined over the years to meet regulatory requirements. Today, these products are a staple offering in the marketplace.
Global outreach is an essential strategy for reinsurers and brokers facing a mature market in the US and western Europe. International business is one of the strongest growth areas. Reviving economies across Asia and expanding opportunities for foreign insurers in China are creating greatly increased demand for reinsurance. Major brokers also are focusing on the growth potential of Latin America.
In addition, reinsurance brokers are moving into the wholesale sector. Some are forming or acquiring managing general agencies that market and underwrite specialty products. They seek synergistic relationships in which reinsurance is an important part of the package. Whether the glass is half full or half empty, companies can be winners if they're willing to branch out, to develop new products, to enter new business sectors and to create profitable niches.
Mechlin D. Moore is President of MDM Communications, which provides consulting services in marketing, public relations, editorial and public affairs to clients in the property/casualty insurance business.