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Two reports by analysts with Benfield Group on the state of European reinsurance renewals in 2005 indicate buyers and sellers don't exactly see eye to eye.

Go figure. Yet another lover's spat between buyers and sellers of multimillion-dollar reinsurance contracts.

"Clearly there is (softening) in property lines," says Lewis Phillips, an analyst with Benfield Group, and co-author of one of the reports, European Reinsuance: 2005 Renewal Rondup, issued last February. "In casualty lines the picture is less clear. In some areas there are still rises. In other areas there's a little bit of pricing competition coming in."

Statements and press releases from the major European reinsurers have also noted stabilizing trends.

Munich Re, for example, noted stabilization in pricing for the Jan. 1, 2005 renewals, after three years of increases. Swiss Re also reported stable premium rates.

Hannover Re boasts of "surprisingly positive renewals in most markets--both regarding rates and volumes," according to the Benfield report. Renewal pricing in the property catastrophe sector declined 5 percent to 10 percent for the Jan. 1, 2005 renewals in Western Europe, compared with the year-earlier period, according to Benfield.

In Central and Eastern Europe, the declines were even more pronounced, reaching as much as 10 percent to 20 percent from the year earlier period.

"Rate declines were biggest in regions such as Central and Eastern Europe which were free from loss, but which had experienced substantial price increases in previous years, in the aftermath of flooding and the earthquake in Turkey," Benfield reported, in its January report titled Outrageous Fortune: Reinsurance Market and Renewals Review.

The rate declines noted by Benfield were echoed by another report issued earlier this year by A.M Best & Co. on European reinsurance.

A DIFFERENCE OF PERCEPTION

Reinsurance pricing trends in Latin America and South Africa, where January 1 renewals were down 10 percent and 20 percent compared with the year-earlier period, also reflected good news for buyers.

So far so good. But when buyers were asked to weigh in on the state of 2005 renewals buyers perceived the reinsurance marketplace to be a very different universe.

Buyers, according to Outrageous Fortune:

Reinsurance Market and Renewals Review, say they are worried about the cost of reinsurance, the terms and conditions of their contracts, and the financial security of reinsurance carriers--who will be around when buyers have a big claim to pay?

In case buyers--or sellers for that matter--needed any reason to justify their nervousness, they had to look no further than at Converium, the reinsurer that almost collapsed last year after rating agencies, in the space of about three months, pounded the company's rating. Though Converium survived, the ratings downgrades were enough to shut down the company's business in North America.

Dropping the company to a BBB+ financial strength rating from Standard & Poors meant a significant drop in the renewed premiums for Converium.

Converium was not alone. In the past three years, from January 2002, to January 2005, ratings downgrades have affected eight of the top 10 reinsurers.

Munich Re, GE Employers Re, SCOR, Converium, Allianz, Swiss Re, Partner Re and Hannover Re, for example, have seen their ratings cut by Standard & Poor's. Only Berkshire Hathaway and

Lloyd's have remained unscathed. Given the brutal assaults on company bond ratings by the agencies, it should come as no surprise that surveys reveal that price, terms and stability haunt buyers at every turn. Who can blame buyers for being nervous?

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A Benfield survey of brokers found that 32 percent said the cost of a reinsurance contract was one of their top-three concerns. In addition, a total of 29 percent said contract terms and conditions was a top-three concern, and 28 percent said that the security of the reinsurer was a top-three concern.

(Only 2 percent of respondents cited the cost of brokerage fees, which have consumed much of the industry's attention in the past several months.)

"The confidence expressed by the companies about the pricing environment was at odds with the more cautious tone of the Benfield broker survey, which commented on the disconnect between management statement and actual underwriter behavior," wrote Lewis, in his European

Reinsurance: 2005 Renewal Roundup report issued last February.

Other highlights of the European Reinsurance: 2005 Renewal Roundup report include:

-Premiums decline: "Renewal premiums of the major European reinsurance groups fell 5 percent at Jan. 1, 2005 compared with a 2 percent increase last year," the report states.

-Pricing contrast: "Contrary to the expectation of some observers, the reinsurers report stable pricing," according to the report.

This was in contrast to the findings of Benfield's recent survey of the international brokered reinsurance market where there was widespread evidence of falling prices, especially in property lines.

-Increasing competition: "Capacity was ample for good business. The U.S. casualty market emerged as one where competitive pressures have risen in certain lines, leading to selective withdrawals by Munich Re and Swiss Re. Hannover Re, however, expanded into this market."

-Changing mix: "Asia provided expansion opportunities for Munich Re and Swiss Re while

Hannover Re expressed caution over this region," the report said. "Swiss Re and Munich Re both reported a shift in their portfolios from casualty to property, driven by expansion in China."

-Flight to quality: "With their higher financial strength ratings, Hannover Re and Swiss Re were shown the most business, allowing them to pick and choose," the report said. "Converium lost significant business following its downgrade."

-Challenging times: "For European reinsurers, underwriting discipline remained the watchword, as they sacrificed inadequately priced business," the report stated. "Top line growth prospects appear limited in the short term. Low investment returns reinforce the need for disciplined underwriting, and leave little room for misplaced pricing optimism."

The next chapter in European reinsurance pricing will have to await until brokers meet in Monte

Carlo in September, if they are not watching the latest rating games. "I think everybody will be watching the rating agenices in the run up to Monte Carlo and whether there are any changes in the stances that they have on the sector," says Lewis. "One or two in particular of the European companies will be looking to see if they can't get upgrades. SCOR and Munich Re in particular are both anxious to secure upgrades."

CYRIL TUOHY, a former reporter, is managing editor of Risk & Insurance®.

July 1, 2005

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