The renewal season is likely to be erratic for those in the casualty arena, says Peter Middleton

Driven by sizeable post 2001 rate increases and a continuing benign claims climate, the casualty market has just passed a key inflection point in the cycle, with downward pressure on rates and terms now the norm across almost all lines of business. This point is characterised by broker manipulation of a handful of new entrants and newly expanding players. Most underwriters continue to demonstrate a strong desire to resist, but in the medium term this will prove difficult. The current outlook is therefore patchy and mixed.

Underlying insurance pricing is generally weak worldwide. Reinsurers therefore need to increase their own prices at renewal as a counter measure and there is a general determination to do so. Regrettably, some reinsurers are cutting prices already - including the larger players - despite their need to rebuild reserves and their issues with finite reinsurance. As usual these moves are sporadic with some insurers obtaining particularly attractive terms whilst others are penalised.

In the professional liability insurance market there is downward pressure on rates from brokers using new or expansionist insurers to undercut existing market prices. New markets are offering up to 30% off expiring rates, forcing existing insurers to offer up to 10% off in order to retain the business. Existing books already show negative rate indices although only in the minus 1% to minus 5% range for the time being. Risks where there is a poor loss record continue to attract substantial rate increases.

Clean risks can expect an average of 10% off with a range of flat to 30%.

The market is generally shocked at the speed with which rates have fallen.

In the directors' & officers' market downward pressure on rates has come later, but is yet more marked in consequence, with perhaps 20% reductions being seen albeit from a higher starting point.

In the casualty reinsurance market there is some overcapacity reflecting good result potential from the period 2002 to the present, but with continuing uncertainty regarding the final outcome of the poorer period from 1997 to 2001. Some reinsurers continue to see deterioration in their reserve position on these older years. Casualty is somewhat protected from new entrants by the more stringent financial rating requirements of cedants.

The reinsurance market is generally behaving sensibly and rates continue for the moment to be flat or even slightly upward. This market is disciplined, has remained hard for longer than other areas and should successfully resist rate reductions at this upcoming renewal. To this end, somewhat perversely, further hurricane losses would assist.

The UK motor reinsurance market carried rate increases last year and most business was significantly over placed. This year the underlying insurance rates are falling and there is continuing uncertainty as to the extent of the adverse effect of the Courts Act. This permits the judiciary to order settlement of injury cases by periodical payments rather than the traditional lump sum and to award provisional damages, which leaves open the question of future variability if a medical condition deteriorates.

There is also a strong indication that the discount rate used by the courts to value awards will be cut. Both of these issues are likely to give rise to much larger monetary awards in UK injury cases, with the whole of the additional cost falling to reinsurers.

In the US market, both insurance and reinsurance rates are easing off for the larger general, professional and directors' & officers' liability risks whilst the pricing of smaller risks continues to hold up better.

Workers' compensation insurance rates are also easing and workers' compensation catastrophe reinsurance rates are now under pressure from the Bermuda market following the spectacular price hikes post 9/11.

Medical malpractice continues to be a difficult line for reinsurers following significant insurer withdrawals, with pricing remaining correspondingly strong for hospitals and physicians but weakening for allied health professions.

There are many fundamental factors that should allow the casualty market to withstand the current competitive pressures better than may be the case for other lines of business, but in practice most areas of the casualty market are beginning to soften.

- Peter Middleton is managing director, specialty division at Markel International.