Abundant capacity and significant continued price competition characterised the reinsurance industry again in 1999. Adverse loss development from prior years, significant catastrophe losses and limited opportunities for growth in traditional markets have combined to make 1999 the worst year for reinsurers in 15 years.

The following is an analysis of the Reinsurance Association of America's (RAA) Reinsurance underwriting report for the year ended 31 December, 1999. This report is prepared on a statutory basis of accounting which is used to report financial information to state insurance regulators for reinsurers with more than 90% of all premiums ceded by US insurers to reinsurers.

Net income

Net income of US reinsurers fell more than 70% last year from $4.7 billion in 1998 to only $1.4 billion in 1999. This represents only a 5.5% return on statutory equity. The components of the industry's earnings include net premiums, losses, underwriting expenses, investment income and income taxes.

Premiums

Premiums earned increased to $21.0 billion from $19.2 billion in 1998. This represents a 9% increase and is primarily due to reinsurers' efforts to put excess capital to work through increased retention of business. Premium growth for the property/casualty industry as a whole was only 1.9% in 1999, which further illustrates that reinsurers' premium growth is a function of higher retention.

Given the extreme price competition for the past several years, most analysts conclude that industry operating results could deteriorate further before improving. Despite significant underwriting losses in both the primary and reinsurance markets, published reports indicate that premium rates did not increase significantly for most business lines in 1999.

Losses

While premiums exhibited strong growth relative to the primary industry in 1999, losses incurred soared 26%. Losses and loss adjustment expenses totalled $17.1 billion and $13.6 billion in 1999 and 1998, respectively. In the past several years, unusually poor underwriting results were often caused by significant catastrophe losses. According to ISO's Property Claims Services unit, catastrophe losses totalled $8.3 billion in 1999 compared to $10.1 billion in 1998. Despite the decline in catastrophe losses, considering inflation 1999 was among the worst years for catastrophes. Significant events in 1999 included European windstorms, Australian hailstorms, hurricanes Bret and Floyd and tornadoes in the midwestern and southwestern United States.

In addition to catastrophes, losses have increased because of adverse development in prior years' business and because insurers and reinsurers have applied any reserve redundancies that existed in prior years. In 1999, these reserves were recognised as inadequate which resulted in significant reserve strengthening. Separately, it has been widely recognised that subsequent to the firming of prices after the catastrophe losses of the early and mid 1990s, the property/casualty industry built a significant level of reserve strength.

Underwriting expenses

Underwriting expenses increased 4.8% to $6.8 billion in 1999 from $6.5 billion in 1998. These expenses represent all administrative expenses other than losses and loss adjustment expenses, investment related expenses and income taxes. They have been kept under control by aggressive cost control, better and more efficient use of technology and through economies of scale resulting from business combinations.

Investment income and realised capital gains

Investment income remained essentially unchanged from the prior year. Investment earnings decreased approximately 1.5% from $3.7 billion in 1998 to $3.6 billion in 1999. This slight decrease reflects the upward movement of interest rates which was more than offset by reductions in the investment base attributed to increased loss payments. Realised capital gains, on the other hand, decreased sharply in 1999. This change is primarily due to unusual and infrequent capital gains of $2.4 billion recognised by a single reporting company last year. Nevertheless, it is clear that the US stock market is having a significant effect on a highly competitive market.

  • Joseph Sieverling is vice president and director of financial services of the Reinsurance Association of America. He joined the RAA in April 2000, after a seven year career with the National Association of Insurance Commissioners. Previously, Mr Sieverling was a senior audit manager with Coopers & Lybrand.

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