BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe



Insurance companies are spending less and less on reinsurance as rates continue to drop and retentions continue to edge up.

Insurers also are getting more for their money as reinsurers ease conditions as well as lower rates.

Excess capital, good financial results and an absence of any market-rocking catastrophes are keeping the reinsurance market soft, say reinsurer and intermediary officials. Many reinsurance buyers are taking full advantage of this soft market by shopping their business around.

One or more major catastrophes or a downturn in reinsurer's stocks may represent the only realistic prospects of any significant change in the reinsurance market for the immediate future.

While the ongoing consolidation in the reinsurance market means there are fewer players, it has failed to drain any excess capital out of the industry. At the same time, the revived Lloyd's of London is an additional player in an already competitive field.

No change in the market's intense competition is evident this renewal season.

"I would suggest that it is remaining quite competitive, and I think it's driven by a couple of things," said William Munson, president and chief operating officer of the Morristown, N.J.-based Mercantile & General Reinsurance Co. of America. M&G Re was acquired by Swiss Reinsurance Co. last year.

"The primary markets are surprisingly, in many cases, increasing their retentions. At the same time, pricing may be extremely weak, (with primary insurers) probably trying to drive up net written premiums. Reinsurers are responding by either lowering prices, or adjusting various terms and conditions, so it's a pretty competitive market out there," he said.

"It's a competitive marketplace," agreed John N. Gilbert Jr., president of Holborn Corp. in New York, a reinsurance intermediary. "It continues to be more so with each succeeding half-year and will probably continue to be more so until there's some form of major loss activity. But I gather it's not going to take one large loss. It's probably going to have to be a number of losses in the aggregate."

The high level of excess capital in the reinsurance market is preventing any turn in the market, agreed Bard Bunaes, chairman of Constitution Reinsurance Corp. in New York. As a result, one large catastrophe loss is unlikely to lead to a hard market on its own. "There is so much excess capital in the market, and it will take several disasters to end that," Mr. Bunaes said.

"The market's still slipping," said Mike Bungert, president and CEO of Chicago-based Aon Re Inc. "It's a case of far too much capital chasing too little premium."

"Just about all we've seen continues to reflect a softening of the marketplace in the U.S.," said Joe Fedor, executive vp of intermediary U.S. Re Corp. in New York. "That's in spite of hurricane predictions. This is going to be the third consecutive year that will be worse than normal," he said of forecasts for 1997 hurricane activity (BI, June 16).

"Things are getting cheaper, prices are declining, people are changing terms and conditions in order to keep prices up, and I would say all areas of the market are soft," said Steven Bolland, senior vp with reinsurance intermediary Gill & Roeser Inc. in New York.

However, he added, "There's very few crazy reinsurers out there. I think the insanity isn't there. It's just that the competition is making everybody compete." Business will move for a 10% or 15% cut in rates, he noted.

"The trends that we've seen in the past just seem to be continuing," said Jeff Cooper, executive vp with Kemper Reinsurance Co. in Long Grove, Ill. "We don't see any change in direction. It's just more of the same, unfortunately."

Rate declines vary depending upon the line of business and geography.

The cuts are "between 10% and 25%, mostly on the property side. Casualty is going down on a marginal basis, probably to 5% to 10%," said U.S. Re's Mr. Fedor.

Commercial liability rates have decreased between 5% and 15%, said Mr. Bunaes of Constitution Re.

Property and liability reinsurance premiums generally are decreasing by between 5% and 10%, while at the same time reinsurers are offering more coverage, said Edmund Megna, managing director and executive vp at Guy Carpenter & Co. Inc. in New York.

For example, loss corridors are being moved to a higher level, he said. Loss corridors are the portion of risk that cedents retain at a certain level in a treaty reinsurance program. For example, a reinsurer may cover the first 65% of losses under a treaty, then the cedent will cover the next 5% and the reinsurer will then cover the top 30%. The purpose of the loss corridors is to encourage cedents to control their losses.

Now loss corridors, in some cases, are moving up so cedents do not have to pay any losses under a treaty until at higher levels, Mr. Megna said.

"Many reinsurers are willing to look at conditions, but it depends on the company. It's another sign of the continuing soft market," he said.

Reinsurers also are more willing to offer multiyear contracts for property and casualty business, said Mark Hinkley, executive vice president of TIG Reinsurance Co. in Stamford, Conn.

Just as with primary policyholders, cedents like to lock into competitive rates and avoid annual renewal negotiations, and in some cases reinsurers welcome the multiyear contracts, too, he said.

"Particularly in quota-share business, we always preach long-term relationships, so it seems to make sense there," Mr. Hinkley said.

Cedents also are seeking to increase their retentions despite the decreasing cost of buying reinsurance, he said. With primary rates also in decline, managers at insurance companies are looking for ways to maintain growth, Mr. Hinkley said.

"Senior managements don't want to see their top line erode and they see layers of insurance performing well so they decide to retain more," he said.

Property insurers buying catastrophe reinsurance are also increasing their retentions, said Graham J. Dimmock, executive vp at Partner Re Ltd. in Bermuda. "Some larger insurers are questioning the amount of reinsurance they need to buy and are looking at ways to handle it in-house or through financial markets," he said.

Those companies that have the financial wherewithal to retain larger risks also are seeking to become less susceptible to wide swings in the price of reinsurance in the event the market hardens after some future disaster, Mr. Dimmock said.

Some cedents also are using the money they save by increasing their retentions to buy higher limits, said Keith S. Hynes, senior vp and chief financial officer at Renaissance Reinsurance Ltd. in Bermuda.

"Also clients' surpluses are increasing and that increases their comfort level with higher retentions," he said.

As with other reinsurance, cedents buying property catastrophe reinsurance are increasing retentions despite a decline in rates.

In high-exposure areas, such as Florida and California, average declines in catastrophe reinsurance rates are in the single-digit range, while in other areas in the United States they are declining by about 10%, Mr. Hynes said.

Paul Davies, vice chairman of Chicago-based Aon Re Worldwide Inc., said "what I've seen has been a dramatic rate decrease in the catastrophe area. I would say at least 10%, maybe more.

"All areas are soft, but I don't think there's been as much dramatic change as there has been in the cat area. It's the one market that got tight in the last five years, and so it's gradually been coming down," said Mr. Davies, who added that one reason for this is there has not been a major catastrophe for a while.

In the past six months, property catastrophe reinsurance premiums for Guy Carpenter's major clients have decreased on average 15%, limits have increased 6.5% and retentions have increased 6.5%, said Mr. Megna.

Reinsurers also are prepared to improve conditions in property catastrophe contracts, he said. For example, more reinsurers are prepared to agree to reinstate limits for less than 100% of the original premium in the event of a limits loss, Mr. Megna said.

"That is not a universal feature, but it is being looked at in some cases," he said.

The whole nature of the relationship between the reinsurer and the primary insurer has changed, said Albert P. Amato, senior vp at Greenwich, Conn.-based C.L. Frates Reinsurance Intermediary Inc.

During the 1985-'86 hard market, when reinsurers got "burnt," they decided to take on a leadership role and began to "sit there and kind of look over the shoulder of ceding companies on every little thing," he said.

"Now they're retrenching from that leadership position. The ceding companies are reasserting themselves," said Mr. Amato.

The reinsurers are "just happy to be on some treaties, and why rock the boat with lots of questions? There are still inquiries, but they're greatly reduced," Mr. Amato said.

Consolidation has had no impact on the soft market.

"I don't think it's had any effect at all," said Gill & Roeser's Mr. Bolland.

"Strange to say, the reinsurance market has consolidated in numbers, but the consolidation hasn't taken any capital out of the market, so people still have to leverage the capital," Mr. Bolland explained.

Nobody has merged and said 'This is a terrific opportunity to take money out.' It just hasn't happened," he said.

Total reinsurance capital in the market has increased rather than

decreased, said Mr. Hinkley of TIG. "People are not reducing capital through the mergers. Any reduction has come in the work force," he said.

Consolidation "moves business around," said Kemper Re's Mr. Cooper.

"Whether it's hardening or softening, it's hard to tell," he said.

The revival of Lloyd's returns one more competitor to the fray. "It's aided the softening of the marketplace," said U.S. Re's Mr. Fedor.

"They need to re-establish Lloyd's as a significant force within the marketplace. Part of that is achieved by being competitive."

Lloyd's is back and aggressively looking for business, agreed Mr. Bunaes of Constitution Re. "Lloyd's was soft-pedaling for a while, but now it is back in absolutely full swing," he said.

The soft rates for reinsurance are causing a lot of shopping around for low prices.

"In the past you could probably say every three years or so buyers would take a second look at what they buy and what they pay for it," said U.S. Re's Mr. Fedor. "Now, it's more like every year," he said, adding, "It keeps us on our toes."

"There isn't the same long-term commitment," said Gill & Roeser's Mr. Bolland. "I think the hard market taught everyone that reinsurance is becoming a commodity product."

Shopping around "varies with the buyers," said M&G Re's Mr. Munson.

There are two types of reinsurance buyers, he suggested: Those who will "gamble for stability for what they think are better terms and others who are able to get pretty attractive terms with companies they are comfortable with and expect to be there in the long haul."

At the same time, however, "Nobody's out looking to pay more money," he added.

One sign of the shopping around being done is that more and more broker market business is being shown to direct writers, said Steve Tirney, president and chief operating officer of Philadelphia-based PMA Reinsurance Corp. "Direct writers are competing alongside of us on the broker market cover," said Mr. Tirney, who described it as one way of "playing one against the other."

"Most companies, including ourselves, are trying to protect our renewals," observed Mr. Tirney.

"We're trying to deal with the companies that we've dealt with for a long time," and seek growth by doing an increasing amount of business with them rather than by bringing in new business where there is competition from the direct writers, "but even that's becoming hard," he said.

"I think there's a real strong impetus on buyers to buy something other than just reinsurance. They're looking for services, in some cases capital, in some cases other products and services, looking for more out of the reinsurance relationship than just reinsurance, if you will," said Kemper Re's Mr. Cooper.

No one is sure when or if reinsurance rates will harden.

"I think people have got to figure out a way to make money in this market, because it's going to be around a lot longer," at least for the foreseeable future," said Aon Re's Mr. Bungert.

"Everybody's got to allocate their resources and make the most out of this, because if you wait around for better times, I think you could run out of runway," he said.

The next renewal season may see less sharp declines in rates because everyone, including Lloyd's, is already back in the market that they had left or shied away from following Hurricane Andrew in 1992, said Mr. Hynes of Renaissance Re.

"In 1996 you had the re-emergence of the large European reinsurers. Now you have the re-emergence of Lloyd's. In 1998, there will be nobody left to re-emerge," Mr. Hynes said.

"Ultimately, deterioration on pricing will be seen on the bottom line, particularly if there's one or two major catastrophe events in the coming wind season," said Gill & Roeser's Mr. Bolland.

But, he added, "It's going to be interesting after an event to see what ability reinsurers have to increase pricing before people start looking at alternatives."