Newsletter Sign-up

By CYRIL TUOHY, managing editor of Risk & Insurance®

With reinsurance prices generally flat or falling, it's going to be difficult not to notice a slight spring in buyers' steps in Monte Carlo as they saunter down to the Sporting d'Hiver conference hall, or repair to their favorite luncheon spot, the Café de Paris.

The reinsurance market is generally awash in capacity, competition among reinsurers remains fierce, and buyers can expect sellers to work hard to offer them some attractive prices or better terms.

"Buyers are in a relatively good mood, provided nothing happens between now and the end of the year," said James Vickers, co-chairman of Willis Re International and Specialty. "It's still a bit of a buyer's market."

The nasty first quarter, which forced several major European reinsurers to book heavy Chilean earthquake losses, eroded the excess of loss premium base, affecting some property-catastrophe lines. The damage, however, still wasn't anywhere near enough to drive up reinsurance rates overall, according to market reports from Aon Corp., Guy Carpenter & Co. and Willis Re.

Chilean-specific renewals have seen rate increases of between 40 percent and 70 percent. But outside of that, Peter C. Hearn, CEO of Willis Re, said in a report to clients on the state of July 1 renewals, there have been "no general market moves to increase prices," in property-catastrophe lines.

"Catastrophe program costs decreased by 10 percent to 20 percent in the United States and were generally softening elsewhere in the world where loss experience was not present," according to Aon Corp.'s Reinsurance Market Outlook update on July 1 renewals. Other than in Florida, risk-adjusted pricing with small regional placements are seeing the greatest declines, according to the Aon report.

And even in the case of Chile-specific property renewals, when retrocessional earthquake coverage markets exhibited skittishness or declined to renew a program outright, other markets stepped in with capacity, according to Aon Benfield (Bermuda) Ltd. CEO Robert W. Bisset, who spoke to Risk & Insurance® in early July.

Accounts with losses from the Chile earthquake saw price increases "in line with expectations," according to Guy Carpenter in a reinsurance renewals report issued in July. "Whatever view was taken of pricing seen at the Florida June 1 renewals, it did not appear to divert any significant capacity to retrocession," the report said.

Could a large event change the overall global property-catastrophe market? Yes, it could. But it has to be big, really big--Katrina, Rita, Wilma-big.

"A large event will likely change the market, but a modest size event between now and the end of the year may not be enough to change the market," Vickers said. "But, in general, the average buyer--other than in some very specific lines--is going to feel reasonably bullish with regard to reinsurance costs going into 2011."

The Chile quake has caused a number of insurers to re-examine their diversification model of writing property-catastrophe lines in smaller territories. "There's been a pricing break in some of these smaller territories, and Chile will throw a harsh light on that diversification model for property-catastrophe in terms of increased loss ratios," Vickers said.

Vickers also said that rates for the primary insurers are dropping faster than the (flat or lower) rates being charged by reinsurers. Insurers, therefore, are being squeezed.

"All the good buyers will come to Monte Carlo and Baden Baden looking for rate reductions," said Jeffery Palmer, managing director at LECG, an expert services and consulting firm. Price renewals will depend on the kind of insurance lines buyers are looking to renew, Palmer also said.

IN DEEP

Outside of property-catastrophe and earthquake coverage, buyers can expect some uncertainly around excess casualty reinsurance pricing in the energy sector in the wake of BP's Deepwater Horizon disaster.

"The way this loss has played out, most primary insurers and reinsures are looking to re-evaluate their alternatives and the risk in the energy markets," said Chris Clark, co-chairman of Willis Re International and Specialty.

Buyers, brokers and underwriters are looking to calculate their potential liability associated with the spill, given the number of insureds involved from the cement manufacturer, to the blowout preventer manufacturer, to the rig builders, to the rig operators, and to the subcontractors, Clark said.

The severity of the loss and the "multiplicity of insureds involved and the multiplicity of liability policies involved in the claim," Clark also said, is causing energy underwriters to revise their actuarial models.

"These operators all swap and share platforms so there's a big change in the way underwriters are looking at this and what kinds of percentages they are willing to insure," Clark said.

Pricing for marine and energy industry loss warranties increased by about 60 percent in the wake of the loss of the Deepwater Horizon platform and the subsequent well blowout, according to the Willis Re report titled "Running on Empty" covering the June and July renewals.

Reinsurers are now requiring more transparency on liability exposure when rating energy-exposed businesses, the report said. "Energy lines are tight," Palmer added.

The well disaster has eclipsed all other U.S. oil spills. U.S. government estimates the Deepwater Horizon calamity has belched between 95 million and 185 million gallons of crude oil into the Gulf. The Exxon Valdez, by contrast, spewed 12 million gallons into Prince William Sound after the supertanker ran aground in 1989.

For self-insured BP, the cost of the spill has been astronomical. The company, which finally shut off the oil flow in late July, more than three months after the April 20 accident, is expected to be paying the price for cleanup for years to come.

Clark, in a July interview, added that he'd just returned from a biannual marine seminar in May. Not since the discussion of terrorism in 2002 and the chatter around Y2K in 1999 has a subject so dominated the conference's agenda. "Deepwater Horizon dominated every conversation," he said.

BP on July 27 announced a record $17 billion quarterly loss, and set aside $32.2 billion to cover the costs from the spill from the April 20 explosion. Beyond direct property/casualty losses, the spill by the end of July also cost the company $60 billion in market value, or about 35 percent since the explosion, which killed 11 workers.

BP's board in July also announced it would replace CEO Tony Hayward with Managing Director Robert Dudley, the first American to head the company. Hayward will step down Oct. 1, the company said, and BP's management shuffle may bear watching in the context of directors' and officers' (D&O) reinsurance pricing.

Pricing and terms in the D&O and professional liability reinsurance marketplace were similar to Jan. 1 renewals, "but heavily influenced by experience," the Aon report said.

Companies with profitable track records over the past six years have been rewarded with better terms, the Aon report said. Companies with losses, of which there have been many in the wake of the Great Recession, have seen higher reinsurance costs. "BP-related directors' and officers' (D&O) claims are an issue and who else gets thrown in with that basket may be interesting," Palmer said.

Prices in U.S. casualty reinsurance lines continued to soften, according to the reports issued by the three global reinsurance brokers.

Workers' compensation reinsurance pricing is stable with capacity "readily available," according to the July market outlook reports issued by Aon and Willis. Though prices have hardened a bit for reinsurance capacity at attachment points below $5 million, according to the Willis report, the hardening trend was offset by softening rates in catastrophe capacity.

"The (workers' comp) catastrophe market has softened every year since 2002," the Willis report said. "Costs for this capacity continue to drop, although most of the cost decrease at July 1 is in response to decreases in the underlying payrolls. As an industry, this payroll decrease is roughly 5 percent."

Surety reinsurance pricing, terms and conditions remain stable, the Aon report said, and the lawyers professional liability market remains unchanged since Jan. 1. Medical professional liability reinsurance lines remain soft, the report also said.

September 1, 2010

Copyright 2010© LRP Publications