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The premium paid for reinsurance companies may be high, but the premiums paid for reinsurance coverage are only getting lower.
Despite the major consolidation among reinsurers in 1996, the drop in the number of large reinsurance companies did nothing to push premiums up, reinsurers and brokers say.
Instead, the good results of the past couple years and the resurgence of Lloyd's of London have led to almost universal decreases in premiums, they say.
Since their last year-end renewals, reinsurance buyers have seen a shake-up among the large direct reinsurers. In a flurry of acquisitions in the last six months of 1996, reinsurers often paid huge amounts to increase their market share by buying rivals.
The impact of the reinsurance industry's consolidation on insurers' mindset is unclear, but the consolidation so far has not restricted capacity or reinsurers' flexibility, according to market executives.
"I don't see the consolidation as having an impact," said Heidi Hutter, chairman, president and chief executive officer of Swiss Re America Corp. in New York. Parent company Swiss Reinsurance Co. this summer offered to acquire Mercantile & General Reinsurance Co. P.L.C. (BI, Sept. 2, 1996).
Several market executives said capacity is at least as plentiful, if not more so, than it was last summer.
That includes capacity for property catastrophe risks.
"If anything, for smaller companies, there may be more capacity. So this is maybe a case where one plus one does equal two, not one and a quarter," said Edmund Megna Jr., managing director and an executive vp with Guy Carpenter & Co. Inc. of New York.
"But, we're still in the early stages" of the consolidation period, he said. Consolidation "takes some reinsurance out of the market."
"If anything, capacity will continue to expand," predicted Edward Noonan, president of domestic insurance company business at American Re-Insurance Corp. in Princeton, N.J. Munich Reinsurance Co. last summer acquired American Re (BI, Aug. 19, 1996).
At the new combined company, capacity will be greater because of the company's greater size and diversification of risk and the stronger balance sheet, Mr. Noonan said.
There has been some speculation that consolidation would drive some cedants of companies involved in deals to move to other reinsurers.
"Naturally, clients-insurance companies-want to deal with a handful of companies. With consolidation, there are fewer companies. There is a concern about having a healthy, viable market," said Mr. Megna of Guy Carpenter.
Mr. Megna added that he has not seen much movement of cedents, though it could still occur.
"That categorically isn't the case" at American Re, Mr. Noonan said. "We grew very sharply at year end."
But some reinsurers are seeing evidence that cedents are shopping around.
"Our submissions are up 30% from this time last year," said Richard Cole, chairman and chief executive officer of Chartwell Reinsurance Co. of Stamford, Conn.
The market consolidation's message to reinsurers is, "You have to be larger," Mr. Cole said. He predicted smaller reinsurers, "those with under $150 million of surplus, will have a tough time seeing business that's being replaced."
He also predicted that, eventually, the reduction in the number of reinsurers and an inevitable increase in catastrophes compared with recent years will halt softening in reinsurance pricing and "bring some saneness to the market."
In the meantime, though, reinsurance premiums in all areas continue to fall.
Those who expected that fewer choices would mean decreased competition are "being proved resoundingly wrong," Ms. Hutter said. "We're seeing increased competition."
Noting that reinsurers' results have been good for a couple of years, she added that reinsurers have "started competing away the profits."
Reinsurers' good results over the past few years have led to a demand for lower rates by reinsurance buyers, said John Berger, president of F&G Re Inc. in Morristown, N.J.
"Buyers feel that they have been overpaying in the past, and now they see a chance to bring the prices down," he said.
"Rates have only gone up if the experience has been really bad or if the exposures have changed dramatically. The consolidation has not had any effect on rates," said Coby Van de Graaf, managing director and CEO of the reinsurance brokerage division of Towers Perrin.
"You want it, you've got it," summed up Steven Bolland, senior vp with reinsurance intermediary Gill & Roeser Inc. in New York.
Some reinsurers are dropping rates so much the business is almost certain to be unprofitable, said Ms. Hutter of Swiss Re.
"The thing that strikes me in this renewal, more than ever, is we're seeing a lot of quotes we've lost to someone else who has priced below burning cost," or the amount of an expected loss, not including administrative and other expenses, according to Ms. Hutter.
She asked why Swiss Re should compete for that business. "If we don't write that cover, we'll be richer a year from now than if we do."
With reinsurers clamoring for more premiums, programs are being placed easily and quickly, said Mr. Van de Graaf of Towers Perrin.
"We can place coverage today in 24 hours, whereas three or four years ago it would have taken a month," he said.
Notably, working layer coverages can be completed by visiting as few as two reinsurers, Mr. Van de Graaf said.
"And, you don't have to go to the bottom of the barrel; you can stay at the top of the barrel and still get it placed," he said.
The result is a new-look renewal season.
"I think it's busier later" as insurers take more time to hunt for bargains, Chartwell's Mr. Cole said.
Property and casualty reinsurance premium decreases vary by line of business, but generally they are down 10% to 15%, said Gill & Roeser's Mr. Bolland.
For property catastrophe coverage, insurers with no losses were obtaining 10% to 20% premium decreases, said Chris L. Walker, president and CEO of reinsurance broker E.W. Blanch Co. in Minneapolis.
But, the rate decreases in catastrophe business were lower than
expected, said Mike Schell, senior vp-North American underwriting at St. Paul Re in New York.
"There was a less than 10% reduction and, frankly, with the experience reinsurers had in 1996, I'd say that was reasonable," he said.
Regional U.S. accounts saw property catastrophe rates decline by as much as 12%, whereas premiums for national accounts and non-U.S. accounts fell by up to 20%, said Guy Hengesbaugh, executive vp at LaSalle Re Ltd. in Bermuda.
Non-U.S. accounts attracted the most spectacular rate decreases, said Mr. Berger of F&G Re.
For example, one account in Mexico enjoyed a 50% rate cut, he said.
"Rates had been at a historically high level, and reinsurers' loss activity has been below normal levels, so the rates are coming down," Mr. Berger said.
California earthquake coverage "is significantly more competitive than it has been," American Re's Mr. Noonan said. Premiums are down 10% to 20%. "And, more importantly, there's a lot more capacity available," he said.
Also fueling the competitive reinsurance market in general and the property catastrophe market in particular is Lloyd's of London, according to reinsurance executives.
Lloyd's has become a resurgent force in the reinsurance market since its reconstruction and renewal plan was endorsed last year. Lloyd's underwriters have sought to reclaim much of the catastrophe business they lost to other markets during its troubled years in the first half of the 1990s.
Meanwhile, the property market is somewhat competitive "but not unreasonably so," said Mr. Noonan.
Premiums this renewal season are down 5% to 10%, but the risk still is not underpriced, he said.
Reinsurers still can make a reasonable profit from property business. And, while they are lowering premiums for insurers with good experience, they still are able to impose some higher premiums on accounts with poor experience, said Mr. Schell of St. Paul.
Casualty reinsurance is far less adequately rated, Mr. Schell said.
"Casualty clash pricing was off more than we thought it would be, and we withdrew from a lot of programs," he said. Casualty clash coverage protects an insurer when several policyholders sustain losses from a single event.
Premium reductions range from 10% to 20%, Mr. Megna said.
In addition, reinsurers are writing multiyear policies for the coverage, he said.
Other casualty business also is being renewed at lower premiums.
Pricing for umbrella and excess liability business "continues to be extremely competitive-so much so that we don't think it makes any sense," said Mr. Noonan. "There's no hope of making an underwriting or an economic profit on the business."
Broker market reinsurers are cutting premiums 10% to 20%, while direct writers are holding premiums more steady, he said.
Mr. Noonan also noted a second level of "discounting." He said some brokers are rebating as much as half their commissions to the ceding company in an effort to retain that business.
The larger retentions insurers began taking for both casualty and catastrophe business during the past several years also continue to help drive the soft reinsurance market.
Fewer insurers this renewal season hiked their retentions, but many retained the higher retentions they accepted during the past couple renewals, reinsurance market executives said.
While those insurers are "getting comfortable" with the higher retentions, Mr. Megna said they "could be playing with fire."
But, a subset of insurers that had assumed large retentions are trying to buy them down again because of their "bad pricing" moves with policyholders, Mr. Noonan said. They are "trying to lay off" the ramifications of that bad pricing on reinsurers now, he said.
One insurer tried to cut its $10 million retention per policyholder to $250,000, Mr. Noonan noted.
"It is similar to the early 1980s when rates got so soft that some insurers used inadequately priced reinsurance to compete," said Mr. Schell.
Meanwhile, coverage from capital markets continues to be more a topic of discussion than a reality for most reinsurers and reinsurance buyers.
While a few capital market deals continue to be completed, most reinsurance programs use traditional reinsurance.
"They've been slow to take off" for several reasons, Mr. Megna said. The traditional market has responded to capital market's interest; several Bermuda facilities have been created in the past couple years; and reinsurers have not been pounded by catastrophe losses in the past few years, he said.
"However, there's still work to be done in the cat area," Mr. Megna said.
He said capital markets could be "supplemental players" by providing protection for losses excess of $20 billion to $25 billion, or "excess of Andrew." Hurricane Andrew caused $15.5 billion of insured damage in 1992.
Swiss Re's Ms. Hutter foresees more of a collaborative effort with capital markets to develop "efficient" products that would "fill in where reinsurance is not an efficient provider of risk financing." Some of those products may be introduced as early as this year, she said, without elaborating.