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Brokers and underwriters in London and continental Europe are licking their wounds after a grueling year-end renewal season dominated by rate cuts in almost all classes of business in almost all parts of the world.
Policyholders called the shots and waited for the right price, extending the renewal season much later than usual. Spurred by substantial overcapacity, underwriters were writing business for market share and generally met policyholders' demands.
This typical soft-market scenario forced brokers and underwriters in London and continental Europe to do some tough negotiating through the Christmas and New Year holidays to come up with deals acceptable to buyers. The lion's share of activity took place during the last half of December, and the streets around Lloyd's of London and the London Underwriting Centre were packed with brokers.
This fierce competition resulted in some prices falling lower than predictions prior to year-end. For example, according to interviews with executives in London and continental Europe:
Property catastrophe reinsurance rates worldwide fell on average by about 10% to 20%, with some programs receiving cuts as high as 50%.
Property risk excess reinsurance rates worldwide fell 10% to 20%, and some policies included provisions to give policyholders large premium rebates if no claims are filed during the policy periods.
Property facultative reinsurance rates fell as much as 30%.
North American casualty treaty reinsurance business saw an unspecified squeeze on profit commissions and ceding commissions.
Industrial fire insurance in Europe saw rate reductions of as much as 40%.
Meanwhile, the International Group of P&I Clubs is expected to receive at least a 40% rate reduction in its liability reinsurance program of $2 billion when it renews in February (BI, Jan. 6). The protection and indemnity clubs, which are shipowner mutuals for general liability and pollution liability risks, buy what could be the single largest reinsurance program in all classes of business.
Some pockets of coverage have seen rates remain flat, such as U.K. auto reinsurance, where claims have not been as good as expected, and U.K. liability reinsurance, because underwriters are concerned about the increase in personal injury lawsuits in the country. U.K. employer liability insurance rates actually may go up this year as a result (BI, Dec. 23/30, 1996).
But overall, the worldwide insurance and reinsurance markets have softened for the third year in a row.
"Competition is fierce," said Victor Blake, non-executive chairman of the reinsurance operations of CNA Insurance Group. "No rates are going up."
In the catastrophe reinsurance business, for example, certain companies tried to keep rate reductions to about 10% from last year, said Mr. Blake. "That's reasonable," because underwriters have been making money and can afford it, he said.
However, "some underwriters haven't heeded the lessons of the past" and are cutting rates even more to win new business or try to get business back on the books, he said. Mr. Blake said he hopes buyers will see that this type of approach means "the underwriters won't be around long."
"There's been substantial reductions in just about every line of business," summed up John Pelly, chairman of non-marine reinsurance for Willis, Faber & Dumas Ltd., the reinsurance arm of Willis Corroon Group P.L.C. "It's very bloody out there, dog-eat-dog."
The year-end renewal season was "diabolical," added one Lloyd's of London catastrophe underwriter. Although a lessening of rates was expected before year-end, "I was surprised by the amount of reductions going on." Several months ago, the underwriter thought rates would be off by 10 points, "but it was more than that. The clients pushed."
Some underwriters compared the softening of the market with 1983, but "it smells like 1989 to me," said the underwriter, referring to the last major soft market.
Another Lloyd's underwriter described his competitors as having "a lemming instinct"-both in Lloyd's and the wider London market-though another pointed out some were wearing life jackets and would most likely survive despite their actions this renewal season.
The renewal season was "at least 10 days to two weeks later than last year," said Ross McKenzie, chief executive officer of all non-marine operations of Alexander Howden Group Ltd. in London. Few orders were placed before Christmas, but most deals were completed by last week. "Buyers wanted rate cuts and they wanted lower pricings.*.*.*.It's weird. Last year was late enough.
This year's later than last year."
"The market in general is very competitive, more so over here (in Europe) than in the States," added Dirk Lohmann, a member of the executive board of Hannover Re Group of Hannover, Germany.
Prices are coming down for property catastrophe coverages outside the United States, and rates can be off by as much as 40%, said Mr. Lohmann. However, there still is a shortage of capacity for some of the major U.S. ceding companies, so prices there remain steady, he said.
"The market is very, very weak and reductions on some single accounts are bigger than we thought," said Benito Pagnanelli, deputy general manager of Assicurazioni Generali S.p.A. in Trieste, Italy. "Everyone is trying to get market share, and no one is interested in profitability."
In particular, commercial fire insurance rates in continental Europe have dropped as much as 40%, which is "illogical, unjustifiable," said Mr. Pagnanelli.
Major companies like Generali try not to follow the market down and be aggressive in rating, but "we have to react" to show a "sign of vitality," he said.
"On average, rates will be lower in 1997 than in 1996," said Jacques Blondeau, chairman of SCOR S.A. in Paris. Unlike most executives, Mr. Blondeau thought the renewal season confirmed what underwriters predicted at the Rendez-Vous de Septembre. Some classes are seeing drops in rates-such as marine and aviation and natural catastrophes particularly in Europe, he said.
"The market is pretty competitive," acknowledged Philip Marcell, chairman and chief executive of Unionamerica Insurance Co. Ltd. and chairman of the London International Insurance & Reinsurance Market Assn. Despite rate decreases of between 10% and 20% for the past three renewal seasons, Mr. Marcell anticipates further decreases.
Dec. 31 and Jan. 1 are the traditional dates for many insurance and reinsurance renewals around the globe.
Most executives in London and continental Europe said at least half of their books of business are renewed at year end, particularly in Asia, South America, the United States and Europe. There are other big renewal seasons-such as April 1 in Japan and July 1 in Australia-but year end sees the largest amount of business at any one time.
Usually renewal seasons see a cyclical pattern, where the markets are hard for a few years and then soft the next five to seven years. No one has really talked of a hard market in the United States for many years, since the collapse of the casualty market in the mid-1980s.
However, poor catastrophe results from 1988 to 1990, coupled with the collapse of the retrocessional market, crushed the London and continental Europe markets in the early 1990s, leading to a sharp drop in capacity for property catastrophe coverage worldwide.
Many markets have taken up the slack, which led to rates softening at the beginning of 1995 and 1996.
Meanwhile, there have been few major catastrophe claims since 1992, resulting in significant profits for new and old underwriting capital. For example, LIRMA saw gross premiums rise 15% for 1995, the last year reported, to 3.4 billion pounds ($5.28 billion), while gross claims dropped 13% in that period to 1.9 billion pounds ($2.95 billion), statistics show.
With new capital and few losses, there is now a huge amount of capacity that needs to be fed, and traditional markets are on the mend. For example, Bermuda now has $5 billion in capital that wasn't available in the last cycle and competed hard for U.S. business this renewal season, according to executives. Sydney, Australia, also is trying to set up an international reinsurance market and competed for business this renewal season, said Mr. McKenzie.
London also is on the mend now that Lloyd's of London has completed its reconstruction and renewal program. Lloyd's this year has increased its capacity 3% to 10.3 billion pounds ($17.64 billion), of which 44% will be provided by corporate members. Competition as a result was fierce between company markets and Lloyd's syndicates this renewal season.
In addition, the two largest reinsurance companies in the world, Munich Reinsurance Co. and Swiss Reinsurance Co., have been very aggressive during this year's renewal season and have been fighting for market share, many executives commented.
Swiss Re in Zurich did not return calls. A spokesman for Munich Re in Munich said the markets are now "in a more competitive environment and, as No. 1, we're forced to follow developments without damaging ourselves."
"There have been no catastrophes of any consequence since 1992, so reinsurers have had a number of profitable years when rates rose" and there were good investment income returns, said Mr. Pelly of Willis Corroon. "So reinsurance balance sheets have been substantially repaired."
"Supply and demand has turned around 180 degrees" from the early 1990s because of the combination of all these factors, said Mr. Pelly. "We are going into another very competitive cycle in the marketplace that will ultimately hurt (some companies)."
The fierce competition during the recent year-end renewals also was fueled by a number of major mergers of both insurance and reinsurance companies in the past few years, "so appetites become bigger," said Mr. Pagnanelli.
These mergers and acquisitions coupled with new underwriting entities "are generating overcapacity. You have to wonder how long it will continue. . . .(It's all about) premiums and losses, (and) a big catastrophe will occur one day."
Competition will continue, particularly in London, for just these reasons, added Mr. Marcell of Unionamerica. "If demand remains constant and supply increases, inevitably the price goes down," said Mr. Marcell. "Insurers can afford to let the price go down" as a result of the gentle claims activity, he explained.
But the question is whether to let rates drop too far. Andrew Elliott, underwriter at Liberty Syndicate Management Ltd., thinks some of the lessons that should have been learned from the past have been ignored. "Looking at most reinsurance figures, there have been five years with no claims." That, he says, is longer than most people's memories, particularly of those new to the market.
David Mann, Lloyd's underwriter at DP Mann Underwriting Agency Ltd., described the current market as "grudgingly competitive," one in which powerful competitors are forming long-term strategies and taking very long-term positions.
Mr. Mann sees no evidence of a soft market ending. The period between 1993 and 1996 was "remarkable" for its lack of claims, particularly on property business. As a result, "it would take tremendous upheaval in terms of the loss cost (for rates) to change. . . .The next few years are going to be a real test of all our skills," said Mr. Mann.
Sarah Goddard contributed to this report.