By CYRIL TUOHY, managing editor of Risk & Insurance®
Though we'll stop short of calling the January reinsurance renewal season a post-Christmas markdown, there should be some deals out there for reinsurance buyers, particularly in casualty lines where pricing is soft.
Soft pricing may bode ill for investors, but it is great news for buyers, particularly those with the luxury of shopping around for cheaper rates or easier terms, or both.
"More pressing are the lack of meaningful pricing improvements that were anticipated for the year and the looming forecast for pricing pressure on Jan. 1, 2010, renewals and beyond," wrote the authors of a Dec. 14 report issued by A.M. Best & Co. about the Bermuda insurance market.
A "lack of meaningful pricing improvements" is analyst-speak for the inability of the reinsurance sector to raise prices. Reinsurers can't raise prices, in part because there are too many of them.
So many companies are writing reinsurance that, over the past 12 months, some have been forced to merge. Major deals last year included Validus Holdings Ltd. and IPC Holdings, Partner Re Ltd. and Paris Re Holdings, and Renaissance Re and Spectrum Syndicate Management Ltd., all of which were announced last June and July.
Keep in mind that these mergers came in the wake of seven major reinsurer transactions in 2008, according to a November report by Moody's Investors Service. Moody's maintains a negative outlook on both the U.S. commercial lines insurance and global reinsurance sectors.
"In Moody's opinion, the headwinds remain forceful for the Bermuda companies as soft pricing, overcapacity, volatile capital markets and proposed legislative initiatives combine to place pressure on firms," according to James Eck, vice president and senior analyst with Moody's.
He also cited broker market consolidation for soft casualty reinsurance pricing in the near term.
ECONOMY PRESSURES PROFITS
The recession has forced companies to shed millions of jobs and shutter factories, which means there are fewer lives and less value to insure.
Even for buyers who can afford to pay, budgets have been trimmed and they can't afford to pay higher prices. As a result, profit margins for the reinsurers are expected to come under pressure in 2010.
For buyers in the hunt for bargains during this January renewal period, casualty pricing and its "downward trajectory," in the words of Moody's, is where buyers have still got some negotiating power.
Reinsurers are not likely to budge on U.S. property-catastrophe pricing, as prices there have "generally held up well," according to Eck.
In fact, with property-CAT pricing one of the industry's only underwriting bright spots, some Bermuda companies have shifted their business mix in favor of property coverage in search of greater profit, said Eck.
December 29, 2009
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