'Hard' Conjectures About this Market

By CYRIL TUOHY, managing editor of Risk & Insurance®

It's that time in the pricing cycle, the time when insurance and reinsurance prices are changing direction.

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Carriers, who've been in a market-share war for the past two years trying to cope with price declines, couldn't be happier. Buyers, who typically sit at the opposite end of the negotiating table, will likely start their year on a sour note. In case they hadn't already noticed, premiums have already shot up.

The global economic downturn, higher prices across most asset classes, an increase in the frequency of natural disasters and a softening pricing cycle have contributed to the new pricing landscape.

"The confluence of all these events leads us to believe that this could be an inflection point in the reinsurance pricing cycle," wrote Standard & Poor's analysts, in a note to investors in early November.

Not that any of this should come as a surprise. No less an authority than ACE CEO Jeffrey Greenberg said, in third-quarter earnings announcements, that this soft market was finally history.

Loss estimates for hurricanes Gustav and Ike are likely to top $20 billion, losses more severe than those in both 2006 and 2007. The $20 billion in itself would have been enough to slow the rate declines of the past two years, or at best stabilize rates, according to Taofik Gharib, managing director with Standard & Poor's in New York.

But the losses sustained by the two hurricanes, coupled with the declines in the financial markets, have decimated the asset side of insurance and reinsurance company balance sheets.

Many Bermuda players, though well diversified, had to slash the value of investment holdings because of exposures to Lehman Brothers debt and equity from Fannie Mae and Freddie Mac, the big government-backed mortgage lenders, according to analysts' reports.

"Companies are now averse to risk, and they would like to protect their balance sheet, so before deploying capital, they have to make sure they would be adequately compensated for that risk," said Gharib.

"We think that the rates will go back up," he added. "I don't have a range, but at least for the prop-CAT first for the 01.01 renewals." S&P has a "cautiously stable" outlook for the Bermuda insurers and reinsurers because the Bermuda companies are considered well capitalized.

Pricing in casualty lines is also expected to rise sometime next year as hardening property-catastrophe rates "trickle down" to other lines of business.

January 1, 2009

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