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LONDON-It's happening all over again.

At January 1995 renewals, property and casualty rates in London softened following two strong years for insurers, setting the stage for another downturn in the ubiquitous insurance cycle. One year later, rates have plummeted and for those that are still working on their renewals, rates are continuing to fall.

While that's good news in the short-term for buyers of commercial insurance, it may be a harbinger of more problems down the road for the London market. The changes in pricing resemble the boom and bust cycle of the early 1990s, a cycle that led to high-profile collapses in the London company market and brought Lloyd's of London to its knees. Lawsuits by policyholders and investors trying to sort through those messes are still working their way through the courts.

Although rates remain stable-or are even rising-in some lines, the general trend is down. This hasn't particularly shocked to reinsurers and brokers, which have been predicting as much for months.

Brokers and reinsurers seem to have correctly predicted that the renewal season would start late as buyers waited for the best deal.

"Even by recent previous years, it started very late," said Stephen Riley, managing director of Swiss Reinsurance Co. UK Ltd. in London. He attributed this partly to buyers' expectations that if they held out they would get better terms and rates, and also to the fact that some buyers hadn't necessarily decided in advance what they wanted to buy.

Late starts of renewals are no particular surprise and are in the nature of the "mating ritual" of London renewals, said Victor Blake, chairman of CNA International Reinsurance Co. Ltd. in London. Buyers expected rate cuts at renewal, though insurers had been trying to talk rates up; therefore, brokers held out for better coverage terms, Mr. Blake explained.

That sentiment comes after buyers were hit during the past few renewals with huge rate hikes, higher retentions and tighter conditions, while the level of insured catastrophe losses was lower. Put alongside the increased capacity across all lines, 1996 renewals represent a buyer's market.

General non-marine reinsurance rates were down as much as 15% or 20%, depending on location of the risk, according to broker Alexander Howden Group Ltd. For example, U.K. multiline insurers found catastrophe reinsurance premiums reduced by 15%, though terms and conditions are pretty much unchanged from last renewal season, while Continental European insurers' rates were down 20%, and in some cases more.

Catastrophe reinsurance rates in the London market fell about 15% for U.S. risks and more for non-U.S. risks, said Richard Keeling, underwriter for syndicate 362, which is managed by Murray Lawrence & Partners Ltd.

"It's because of fear and greed," he said, citing competition with monoline underwriters outside the Lloyd's market that are aiming to fill their premium budgets.

Swiss Re's Mr. Riley calculated that non-U.S. catastrophe reinsurance rates were down about 10% on average-"what was expected has happened," he said.

But he was concerned that the pricing pressure in commercial lines, both on primary and facultative reinsurance business, was forcing rates to a level where underwriting could be unprofitable.

"Although the loss experience has been better than expected over the past two or three years and rates are still higher-probably-than they were five years ago, we now don't want to see any more price reductions," said Mr. Riley, who added: "Although I expect them to carry on."

But Neil Woods, executive director of London-based Nicholson Leslie North America corporate risks, said he has seen rating stability in his part of the market, as well as an influx of U.S. business. This, he said, is because buyers cannot get the catastrophe coverage limits they require in the U.S. domestic market. "Catastrophe risks and hard to place or high hazard risks are getting coverage in London," he explained. "And earthquake capacity in critical areas is still at a premium."

Increased market-wide capacity in London accounts for much of the lowering in rates, though much depends on a risk's claims record.

But the added capacity isn't coming from new capital entering the market for the first time. Rather, it's insurers and reinsurers already in the market increasing their capacity, influenced primarily by buyer demands for top-flight security.

Over the last year, a number of market players have upped the amount of capital dedicated to London-based underwriting. Big names such as Swiss Reinsurance Co., Copenhagen Reinsurance Co. (U.K.) Ltd. and Sphere Drake Insurance P.L.C. have injected extra capital into their London market operations, while other outfits like Mid Ocean Reinsurance Co. Ltd. have opened branch offices in London (BI, Oct. 23, 1995).

"Security is a serious issue for any buyer," said an Alexander Howden spokesman. Ceding insurers have instructed their brokers as to which are the "preferred reinsurers" they want to reinsure their risks, he said.

"The big security boys are getting bigger and wanting to be bigger," said CNA Re's Mr. Blake. "They are prepared to write more and the bigger players have been able to absorb lines."

One big player getting bigger in the overall market is Munich Reinsurance Co., which in 1995 raised 580 million DM ($403 million) in a shareholder offering.

Following the emergence in prior years of competition from the Bermudian reinsurers, this renewal season has seen the Continental European reinsurers aggressively chasing business-and rates down.

With existing reinsurers "more aggressive" and with "bigger appetites," there is downward pressure on rates, admits Robert Wallace, underwriter for Lloyd's syndicate 386, which is managed by Janson Green Ltd. and specializes in employers liability, professional indemnity and general liability coverages, including product liability. He said, though, that his syndicate generally has been retaining business at the same rates.

Many policyholders have been with the syndicate for 10 to 15 years and value the "continuity and loyalty" of the relationship, he explained. Disastrous results in the overall Lloyd's market do not seem to be hurting his business, said Mr. Wallace, adding that generally only syndicates that write primarily U.S. business have had their security called into question.

By contrast, CNA Re's Mr. Blake said buyers this renewal season are evaluating all syndicates individually rather than accepting the Lloyd's name as blanket security. Size and rating agency assessments of syndicates are central in their decisions, though buyers will "probably take comfort if a particular syndicate is aligned with a major reinsurer," since the reinsurer will have performed a due diligence test, said Mr. Blake. "This may become more important in the future."

Another Lloyd's underwriter, syndicate 362's Mr. Keeling, said his syndicate hasn't seen business withdrawing this season over questions of security.

Aside from increased capacity, another factor in the pricing pressure at renewals was strong investment performance in 1995.

Higher returns have increased capacity and could soon lead to overcapitalization, said Nick Bunker, insurance analyst with ABN Amro Hoare Govett in London.

Overall he didn't find the renewal pattern "surprising or worrying" given the profitability of the market over the last few years. "Provided deductibles remain firm, it is not particularly alarming," he said of lower rates. But a jump in inflation could threaten to boost claims levels, which have been relatively "well behaved" in recent years, he noted.

Also, Mr. Bunker warned that Lloyd's, with capacity of 10 billion ($15.5 billion) in 1996, is substantially overcapitalized, which may put pressure on underwriters to write more business at inadequate rates. "I am slightly perturbed that the authorities at Lloyd's have slipped back in a 1980s way of thinking," he said.

Their delight at capacity holding up so well, probably because of traditional names at Lloyd's continuing underwriting when it was anticipated they would not want to or would not be able to afford to, was out of place, Mr. Bunker said. "Lloyd's needs a maximum of 9 billion ($13.95 billion) gross capacity," he said.

Alexander Howden's spokesman described Lloyd's 1996 capacity as far more than realistically expected, though he added that "Lloyd's has a lot of mouths to feed."

Not all syndicates reported consistent downturns in rates.

Property rates this renewal season are off 10% for U.K. risks, but have increased in the rest of the world, said Mr. Keeling of syndicate 362.

Among the few casualty lines seeing rate increases, U.K. personal injury liability coverage has seen some of the highest rate hikes, according to Janson Green's Mr. Wallace, with average rate increases of 20%. This is a direct result of liability insurers' anticipation that the Ogden Tables-actuarial tables used to calculate awards for personal injury cases -will be brought into play later this year, potentially raising the awards for a number of pending court cases as well as future claims.

Clive Archer, senior casualty underwriter at Employers Reinsurance International Ltd. in London, echoed Mr. Wallace's sentiment on the effect the Ogden Tables are going to have on U.K. personal liability. "Rates are on average up about 20% across the programs on layers above 1 million ($1.5 million)," he said, adding that he thought this would be an inadequate increase and next year the programs would see even greater hikes.

The general consensus is that the more prevalent rate declines may be keeping many insurance buyers with the London market.

"The market's been fairly stable, with no big moves," confirmed Mr. Riley of Swiss Re. But business retention has not been at all costs-risks are being individually assessed and rated, he said. "We have certainly been selective in what we do," he said. "We are not following the market down if we think it has got to the point where it will make losses."

That view is echoed across the London market, though the competitive spark may yet light a fire for further reductions.

"There has been a lot of consolidation and merger activity driving the desire for companies to be bigger and better," explained CNA Re's Mr. Blake. The attitude is changing to one of market share, being in the "top ten in the business," he added.