(Re)insurers who took measures in the late 1990s to combat lack of profitability resulting from stagnating premiums in the US non-life insurance sector will be in an advantageous position in the early 2000s as rates show signs of stabilising and, in some cases, increasing, says Sue Copeman.
Lack of real premium growth and strong competition in the US non-life market have forced property/casualty insurers to identify strategies both to reduce costs and to maximise profitable areas. Many have engaged in mergers and acquisitions (M&As), often designed either to achieve economies of scale or to expand in those specialist sectors offering the greatest returns.
As well as consolidation, the need to obtain critical mass to remain competitive has led to the withdrawal of some foreign insurers, due to the perceived prohibitive cost of obtaining sufficient US market share. Specialised niches and high margin insurance products have become attractive in view of the strong competition in more traditional lines. Insurers, such as Chubb Corp (with its purchase of Executive Risk Inc), Hartford Financial Services Group (Omni Insurance Group) and Royal & SunAlliance (Orion Capital Corp), have used acquisitions to expand in niche markets.
The same drivers have applied to US reinsurers' M&As. Non-life business accounts for by far the largest share of ceded premiums and insurers' consolidation has led to higher retentions and less demand for reinsurance.
In addition, US reinsurers have been actively seeking to establish themselves as true global players and participate in markets that offer better opportunities for profitability.
Some reinsurers have cut back their US exposure and will continue to do so if rates remain low. Some have sought new opportunities, such as alternative risk transfer (ART) products, to fuel growth in a continuing competitive market, although the availability of cheap reinsurance has so far impeded ART development generally.
Like direct insurers, US reinsurers have also been alive to the possibilities offered by speciality business. The desire to expand in this sector has contributed to a number of major reinsurers' acquisitions, including Hannover Re's purchase of Clarendon Insurance Group.
Against this background, how will the US property/casualty (re)insurance market develop in 2000? It appears likely that there will be fewer mega reinsurance group M&As. It could well prove easier for large groups to reduce premiums to gain market share rather than buy other companies. Future reinsurers' consolidation could well affect mid-sized companies who wish to remain large enough to compete (as seen recently with Trenwick Group's merger with Chartwell Re).
More significantly, January 2000 property/casualty (re)insurance renewals
showed signs that the long-awaited hardening of the market could be in view. Rates have stabilised in some sectors. In a few specific areas, they are increasing. For example, in the wake of substantial losses arising from business generated by the Unicover pool, which mainly specialised in Californian workers' compensation reinsurance, Californian workers' compensation business rates are rising. While increases are by no means across the board, those (re)insurers who have bolstered their workers' compensation book by M&As in the last three years, may have grounds to congratulate themselves. Swiss Re cites a positive trend in non-life renewals as a reason to be optimistic about 2000, saying that original rates in commercial business in the US market are increasing, with reinsurance terms following suit, and noting a firming in North American workers' compensation business and a slight increase in some specialty lines.
Price stabilisation and the possibility of rate increases could do much to encourage the development of ART products. Reinsurers who have invested in this area may see more significant returns as price differentials shrink.
For the US non-life market generally, much depends upon the level of catastrophe claims in 2000. Last year, although the fifth worst for catastrophe losses since 1949, according to the Insurance Services Office, was, at $8.2 billion in insured property losses, down on 1998 ($10 billion) and substantially less than the record worst year, 1992 ($22.9 billion). A continuation of the downward trend, combined with increased rates, would give the market a much needed boost.The tough market conditions of the last few years have compelled US non-life (re)insurers to take a critical look at their operations. The strategies introduced to survive the bad times mean that they will gain maximum benefits from even a slight improvement.
Sue Copeman is the author of Effects of insurers' mergers and acquisitions on market share throughout the world published by Insurance Research & Publishing Ltd.