Rates are plummeting again across the reinsurance industry as the soft market tightens its grip. Brian Boornazian looks at each line and makes his predictions for 2008.
Overall rates in reinsurance are continuing to trend downwards at the 1 January renewals in 2008 but there are significant variations by line of business. While 1/1 finds us in a softer market than we were a year ago, it is important to note that while there are some stories of dramatic rate reductions in the press, as a general rule the more extreme rate movements seem to be more prevalent in the insurance sector than the reinsurance sector. For the most part, it does not appear that reinsurance pricing is reducing at the same level as insurance pricing. It appears that, with the exception of a few reinsurers who are still focused on market share, responsible reinsurers who remain focused on underwriting profit are still exhibiting a fair amount of discipline.
We have seen a few examples this renewal season where the insurance companies disregard the quotes of reinsurers and set firm order terms at pricing levels they feel are more in-line with where they think rate reductions should be. So far, most reinsurers have stayed the course and for the most part, this strategy has failed to gain much traction. Either insurers have had to pay more or deal with shortfalls in their programmes.
As we progress into 2008, the fallout from this differential will be interesting to observe. Will insurance companies retain more net to offset this differential, given that many had to significantly increase retentions due to price increases in 2006? Or, will reinsurers become less disciplined at the fear of losing business? It is also important to note that in recent years generally, the reinsurance market has been enjoying a relatively robust market environment. Therefore, as we now enter what we would all agree is a softening market, it is important to keep perspective as to the starting point.
Beginning with the property catastrophe market in the US, this market remains bifurcated between the coastal-exposed business and non-accumulating regional cat. After two years of favourable loss experience, rates are beginning to fall back from the hard market of 2006 and 2007. At 1/1 on average 15% rate reductions are common for coastal business. However these rates should still produce acceptable margins.
The non-accumulating regional business is seeing larger rate reductions of 20% or more and reinsurer margins are now being squeezed to levels that are not always supportable.
In terms of the international cat market, we are seeing somewhat of a mixed rate environment. In Germany, for programmes that were affected by Windstorm Kyrill, we are seeing rates relatively flat or increasing up to about 7.5%. Unfortunately, for other European cat, we are seeing modest reductions in the range of -5% to -12.5%.
“At best rates will remain at current levels, which are on the whole marginally acceptable, and at worst rates will continue to soften
The US property risk market is showing rate change differentiated by performance. While most contracts have been performing well, those with lesser experience are being renewed at rates that are flat to + 10%. For the business that is performing well, we are generally seeing rates being reduced in the 5% to 15% range. We would expect this to be the case as 2008 progresses barring any significant catastrophic activity. It is also important to note the terms and conditions changes in this market are relatively minor.
In the US, we are seeing primary carriers reducing rates 10% to 25% on the business they are placing in this market overall. Unfortunately, we are now seeing the US facultative market offering terms that are supporting these rate reductions. Until very recently, the US facultative market has been able to resist these reductions so while the rate reductions are not welcome, the facultative market seems to still be able to charge rates that are above technical levels.
One disappointing movement that has been noticed in the market has been a relaxing of wind deductibles (five percent to two percent) and increasing sub limits offered by primary insurance carriers, especially for cat perils.
As for the international facultative market, the story is similar. However, while primary rates are still falling at rates up to 25%, the facultative market has had to reduce rates at 1/1 by less; in the range of 5% in the UK to between10% and 15% in Europe and other international regions. The reason for this is that this market began softening about a year ahead of the US facultative market.
In general, at 1/1, we are seeing the effective rate change in this market (combining original and reinsurance rate change) deteriorate in the range of 10% to 20%. We would anticipate that these types of reductions are fairly typical of what we expect to see for the rest of 2008. At the same time we are also seeing some softening of terms and conditions. However, fortunately these changes are relatively minor and not causing any significant changes in coverage afforded.
In the international casualty arena we are generally also seeing modest rate reductions in the range of 2.5% to 10% depending on class of business and experience. In general, these rate reductions leave the market at a point where it will be either at or slightly below technical price depending on the specifics of the contract. The positive here is that terms and conditions appear to be holding relatively steady with only minor concessions.
“When pricing is under pressure, risk selection becomes the key to underwriting profitability
Looking forward, one can see 2008 promises to be a challenging year for the market in general. Barring any market changing catastrophic event, at best rates will remain at current levels, which are on the whole marginally acceptable, and at worst rates will continue to soften.
If there isn’t a market changing event in 2008, then it is likely one will see certain differentiation amongst reinsurers. In a hard market everyone should be able to make adequate, or more than adequate, returns almost just by being in the business. In tougher market times like these, it is the quality reinsurers that will be able to differentiate themselves from the rest. Quality reinsurers can be identified as having:
• Depth of experience – fully staffed teams of underwriters across the various businesses who have successfully navigated other soft markets profitably;
• Diversified portfolios – companies who have meaningful market positions in enough non-correlating businesses that allow flexibility and the ability not to chase lesser markets down;
• Established multi-platform structure – allows for proximity to clients and markets that will encourage intimate knowledge of the business and marketplace so that the relative best contracts can be written; and
• Relationships – only a few truly have the type of relationships with customers where underwriting expertise is valued and a past history is strong and transcends various markets.
When pricing is under pressure, risk selection becomes the key to underwriting profitability. Sometimes “price” can fool an inexperienced or uninformed underwriter. An apparent good price can often hide inherent shortcomings in the underlying underwriting or terms and conditions. In order to be successful in selecting risk, there is no substitute for experience. The companies that are staffed with seasoned underwriters, located close enough to the clients and marketplaces and who have the ability to selectively choose the best risks will be the ones that succeed during difficult times.
Brian Boornazian is head of reinsurance at Aspen.