MANY REINSURERS HEDGING THEIR BETS

MONTE CARLO, Monaco-Reinsurers are eyeing their options and shrinking premium volumes as they face yet another year-end renewal season that promises more reductions in reinsurance rates.
Despite making stellar profits in the first half of 1997, reinsurers say rates are getting dangerously low and that bad underwriting habits are creeping back into the market as more and more reinsurers cut rates to keep premium volumes up.
Buoyant investment markets and a continued absence of significant insured catastrophes are combining to keep reinsurers in the black on the back of sometimes inadequate rating levels, some reinsurance executives say.
Barring a major catastrophe in the remaining months of 1997, the trend will continue into the year-end renewal season, with catastrophe reinsurance rates likely to drop another 15% to 20%, some executives say.
Extra capacity entering the market in the form of several new reinsurers will only add to the pressure to cut rates.
Reinsurers are reacting to the increased competition in numerous ways. While a small minority say they will let volume drop rather than rates, most also are searching for new sources of premium.
Some are hedging their bets by diversifying their books
of business, others are looking to expand into developing markets, and still others are writing more multiyear contracts or linking up with other financial institutions to offer new products and capacity.
These are a few of the observations from reinsurance industry executives attending the 41st annual Rendez-Vous de Septembre, held Sept. 8-13 in Monte Carlo, Monaco.
The Rendez-Vous meeting marks the beginning of the year-end renewal season. Rather than hammering out specific deals, though, the meeting is usually the scene of general industry discussions as underwriters, brokers, and cedents gauge each other in preparation for actual dealmaking in December.
As has been the case for the past two years, consolidation among reinsurers and brokers was a major theme at the Rendez-Vous.
Some reinsurers expressed growing concern over the clout now wielded by the two largest reinsurance brokers: Guy Carpenter & Co. and Aon Re Worldwide Inc. Other reinsurers are looking for opportunities to take business from the four big direct reinsurers, Munich Reinsurance Co., Swiss Reinsurance Co., General Re/Cologne Re Group and Employers Reinsurance Group.
Whatever fortunes favor individual reinsurers, few executives are expecting anything but rate declines at year-end.
Soft pricing
"Everybody says that rates are soft and, on average, this is certainly true," said Jacques Blondeau, chairman and chief executive officer of SCOR S.A. in Paris.
In particular, rates for catastrophe excess-of-loss business will likely fall by 15% to 20%, while large industrial accounts probably will fall by about 15%, Mr. Blondeau said.
In the current market, "there's only debate on how much rates will come down," said Martyn Hooper, managing director of Kininmonth Lambert Ltd. of London, the reinsurance brokerage unit of Lambert Fenchurch Group P.L.C. There's another 10% to 15% to go on rate reductions for U.K. catastrophe reinsurance risks, he said.
Reinsurers are aggressively defending their existing market shares by reducing rates for their existing business and also pushing rates down in other areas as they try to win new business, said Norbert Strohschen, chairman of Gerling-Konzern Globale Reinsurance Co. in Cologne.
"They are defending market shares and trying to buy into other markets," he said.
"Everybody is spouting the same story: Results are good and prospects are bad," said John R. Berger, president of F&G Re Inc. in Morristown, N.J.
While most reinsurers produced large profits in the first half of 1997, rates are generally declining, and sharply in some cases, he said.
"Sometimes, people are not losing business by 5% and 10%; they are losing" business to competitors who are cutting rates 30% to 40%, Mr. Berger said.
"Softness is to be expected after three years of good results," said Bruno Porro, a member of the executive board of Swiss Reinsurance Co. of Zurich, Switzerland. There is enough capital in the market to put at risk, and there have been relatively light catastrophe losses, said Mr. Porro, pointing only to losses from the flooding in Poland, Germany and the Czech Republic.
"There is a continued decline in pricing, but operating performance is not declining. Part of that is luck-no huge catastrophes or big new casualty losses," said Donald S. Watson, director of reinsurance ratings for Standard & Poor's Corp. in New York.
"The client is in the driving seat," summed up Ronald A. Iles, chairman of Aon Re in London.
Reinsurers are struggling to maintain or grow their market share as more capacity continues to enter the market, and most of them are following the market down, he said.
"Some companies say that they are not going to actively seek growth, but not many," Mr. Iles said.
Unless there is a significant insured catastrophe of more than $20 billion, reinsurance rates are likely to remain soft, said Herve Cachin, chairman and general manager of Societe Anonyme Francaise de Reassurances in Paris.
While rate reductions will vary in different territories of the world, there is little prospect of general increases anywhere, he said.
However, the chain of sizable rate reductions for catastrophe business over the past few years has to come to an end soon, said Herbert Haag, president and CEO of Partner Re Ltd. in Bermuda.
"I think the reductions will be a little bit less crazy than last year, because they can't fall 15% to 20% every year," he said.
In Europe, in particular, catastrophe rates have fallen to inadequate levels, Mr. Haag said.
The continued soft pricing could spell problems ahead for some companies.
"There's going to be a tidal wave of holes in industry balance sheets with the prices being paid today," said Steven J. Bensinger, president of Chartwell Re Corp. of Stamford, Conn. "Ten years of low general liability pricing in the U.S., for example, has to hurt," he said. "We're seeing signs of negative cash flows in some companies. Even without a stock market correction or a major loss, the industry's fundamentals are deteriorating. Those fundamentals are going to catch up sooner rather than later," Mr. Bensinger said.
Like a rubber band, the market is being stretched further and further, he said. "When it snaps, the correction is going to be as severe as the '80s hard market," he predicted.
"Most people never thought it would get this bad," Mr. Bensinger added.
Rates may be reaching the bottom, said James F. Dowd, chairman and CEO of Odyssey Reinsurance Corp. in New York.
"There is no reason to expect that things are going to get better. . .but we might be beginning to reach the bottom," he said.
Once rates have reached the bottom of the cycle, they will likely remain low for some time before rising again, Mr. Dowd said. But, unless there is a dramatic event, when rates will begin to rise again, they will probably not rise rapidly, and capacity will not be drastically reduced, he said.
Loss control
Insurers and reinsurers, in recent years, have become much better educated about their exposures, Mr. Dowd said.
"There has been an enormous amount of money spent by insurance and reinsurance companies on understanding their exposures," he said.
By using sophisticated modeling systems, the companies can allocate their capital more scientifically and, hopefully, avoid being wiped out by single catastrophes, Mr. Dowd said.
Risk management at the policyholder level also has improved, and this has helped improve the results of insurers and reinsurers, said Brandon Sweitzer, CEO of Guy Carpenter in New York.
"In commerce and industry there is a more professional awareness of risk management. . .and people are taking a little bit more care," he said.
Improved risk management is reducing losses for policyholders, agreed Mr. Cachin of SAFR.
"The big accounts have invested a lot in risk control," he said.
This risk management focus is not a factor only in the United States. In Europe, many industrial plants are now protected to highly protected risk standards, Mr. Cachin said.
"But, all the same, the competition on that business at the primary level is increasing, and with normal loss experience pro rata reinsurance for commercial lines will probably lose money in 1998," he said.
More capacity
The eagerness of some reinsurers to write more business is leading to a less disciplined market, said Hady Wakefield, chairman of Guy Carpenter in New York.
"Last year there was an increase in capacity, but it was responsible capacity. Now there is even more capacity, and I'm not entirely certain that all of it is as well researched or professionally underwritten as it has been," he said.
In recent weeks, several new reinsurers have been launched or proposed (see story, page 47).
Although premium volume is not increasing, capacity in the reinsurance market has increased, agreed Benito Pagnanelli, deputy general manager of Assicurazioni Generali S.p.A. of Trieste, Italy. Assicurazioni in 1996 surpassed Employers Re as the fourth-largest reinsurer based on premium volume (BI, Sept. 1).
The capacity may be adequate given the risk of a large catastrophe, but it is generating a reduction in rates, he said. For now, because of few catastrophe losses, the lower rates have not yet had an adverse effect on reinsurers' profits, he added.
The philosophy of Generali is to look at the underwriting profitability of the business it writes, Mr. Pagnanelli said.
"If rates get too low, we'll stop writing a risk, such as space business," he said.
Generali, long a leader in the space insurance market, in the past year has faced new competition from reinsurers in Bermuda and elsewhere that are seeking to diversify their books by entering the space market.
In addition to lowering rates, other companies are competing for space risks by "extending policy periods or giving launch cover for free," he noted.
"Too much of the new capacity is innocent capacity," Mr. Pagnanelli said.
Profitability
The question of whether 1997 would be a profitable year if reinsurers had suffered a normal level of catastrophe losses produced varying answers. While most reinsurers felt their books still would be profitable because catastrophe reinsurance rates in the United States are still relatively high, the margins are becoming slimmer.
"The industry doesn't appear to be looking at what sort of returns they should be getting on a product line over a business cycle," said William J. Adamson, chief executive officer of CNA Re in Chicago. He advocates a risk-adjusted return strategy, which takes into account the volatility of individual lines in a multiline book of business. "While a company may make a profit with a multiproduct book, they can later find out that wasn't enough to cover their exposure in the lines they write," he explained.
Retrocessions
While some reinsurers may have slim profit margins on their gross writings, they can unload some of their exposures to other reinsurers through the purchase of cheap retrocessional coverage.
"There is a much larger retro market now," said Mr. Berger of F&G Re.
The retrocessional reinsurance market shrank drastically after Hurricane Andrew in 1992.
But now reinsurers are again able to gain greater leverage through the purchase of retrocessional reinsurance, Mr. Berger said.
The retrocessional reinsurance market is growing in particular in London, Mr. Iles said.
"It's growing, but it's not silly growth, and in the non-marine market, its being written by people who know what they are doing," he said.
LaSalle Re Ltd. in Bermuda is one of the reinsurers buying retrocessional coverage, said Graham A. Waite, vp and underwriter.
LaSalle also increased its coverage by buying the CATPUT product marketed by Aon; CATPUT injects new capital into an insurer or reinsurer if a catastrophe depletes the insurer's or reinsurer's capital.
The extra coverage will enable LaSalle to keep similar capacity for clients in the event of a large catastrophe, Mr. Waite said.
"So often in the past, the reinsurance market has reacted to catastrophes by reducing their exposure to the market. . .we see it as an opportunity to expand in a hard market," he said.
"Companies are more willing to purchase retrocessional coverage, because they don't like underlying prices, and it's cheap," said one U.S. reinsurance executive who asked not to be named.
Some reinsurance executives see the possible re-emergence of a retrocessional spiral in the marine market.
The so-called LMX spiral in the 1980s led to massive losses by many Lloyd's of London syndicates that wound up assuming risks they thought they had ceded.
There is a spiral in the marine market, said Michael J. Caley, chief executive officer of Kininmonth Lambert Ltd. of London. "I don't think it ever came out of it," he said of the marine market.
"I don't know if the market has a short memory or not. I hear the spiral market is opening again, and not just in marine," said Mr. Porro of Swiss Re. "We will only be able to judge in a few years' time" whether this spiral is more disciplined than previous ones, he said.
However, the current spiral may be different from earlier ones, said Mr. Adamson of CNA Re. "In the '70s, everyone knew rates were inadequate and bought more coverage. Companies that didn't cover their aggregates got burned," Mr. Adamson said. "Today, we see retrocessional pricing that's low enough it is seen as a good buy. Unlike the past LMX spiral, they are not trying to arbitrage their risk," he said.
Primary retentions
In addition to providing cheaper retrocessional coverage, the soft reinsurance market also provides an opportunity for some ceding companies to reduce their retentions and buy more reinsurance.
The phenomenon is most prevalent in London, where the one-year nature of Lloyd's underwriting encourages syndicates to purchase reinsurance to obtain maximum leverage each year, said Mr. Wakefield of Guy Carpenter. "It is much more difficult for them to take the long-term view," he said.
In the United States, most insurers are maintaining or increasing their retentions, said James Duffy, president of St. Paul Re in New York. "There is a continuation of increased retentions as there is pressure on the primary companies to grow," he said.
As the extended period of low catastrophe losses continues, more primary insurers are becoming more comfortable with large retentions, Mr. Duffy said.
"When you have a long time when you don't have a lot of significant catastrophes, you can be tempted to think that it will go on forever," he said.
"Primary companies are retaining more of their risks," said Donald S. Watson, director of reinsurance ratings for Standard & Poor's Corp. in New York. "With property risks, in particular, the availability of cat models has given companies a better picture of their exposure, and they are only going to sell off the highly exposed risks of their books. You're paying more rate on line because of the higher exposure," but the companies are retaining the better risks, he said.
"There's always the risk of uncertainty, but the primaries are emboldened to retain more," he said.
"A lot of companies, even AIG, are taking less reinsurance, even though some should be buying down retentions in this market," said Richard E. Cole, chairman and CEO of Chartwell Re.
Many ceding companies in the United States are increasing their retentions in an effort to grow, but some other large companies in the U.S. and European markets are buying more reinsurance coverage, said Dirk Lohmann, the new chief executive officer of Zurich Re, a subsidiary of Zurich Insurance Co. in Zurich.
"They don't care if they collect 100%; they are more worried about their bottom line, and if they can leverage their net earnings using other peoples' capital, they'll do it," he said.
New frontiers
Rather than simply increasing their capacity in their existing markets, other reinsurers are looking for new areas and methods to increase their business.
St. Paul Re, for example, has entered the aviation and satellite market in London and has opened an office in Australia to write reinsurance for the alternative risk transfer market there, said Mr. Duffy.
The new business will offset a 10% reduction in revenues on St. Paul Re's existing business, Mr. Duffy said.
Reinsurers can increase their business in some areas without cutting rates drastically, said Mr. Blondeau of SCOR.
"In the U.S., medium-sized regional insurers are expanding, and that is true in Europe, too. And the very large companies are losing ground," he said.
And the rating levels for the midsize companies generally are flat, Mr. Blondeau said.
Claims ratios for certain businesses in Europe are improving, according to Mr. Blondeau, who cited as an example automobile liability in Germany and the United Kingdom.
Rating levels in some emerging markets also are improving. For example, the catastrophic flooding in Central Europe could lead to higher rates in those markets, Mr. Blondeau said.
"The key to success will be to be selective and to be very careful with what you do with your capacity," he said.
Reinsurers willing to cover multiyear deals are attracting more business, as cedents are looking for the stability long-term coverage provides, Mr. Blondeau said.
"They want to save on administration and expenses. . .and instead of shopping around, they want a long-term relationship," Mr. Blondeau said.
Cedents are willing to forgo the opportunity of shopping around for cheaper coverage for the certainty the multiyear deals offer, said Mr. Iles of Aon.
The deals most often are for three years, and often the premium increases only slightly for each year of the contract, Mr. Iles said. So, if the market suddenly turns hard, cedents with multiyear contracts are not faced with massive increases.
"They want to know that if they are paying 1 million pounds ($1.6 million) this year, in 1999 they are going to be paying 1.2 million pounds ($1.9 million), not 3 million pounds ($4.8 million)," Mr. Iles said.
Reinsurers also are expanding their books of business by offering coverage that has not normally been seen as part of reinsurers' array of products, such as interest rate hedging devices, said Mr. Strohschen of Gerling.
Gerling itself does not have the expertise to cover the risks, but can access it through its link with Deutsche Bank A.G. Deutsche Bank owns 30% of Gerling and together the companies work together to offer an extended range of products, he said.
"We would say that we can't do hedging, but we can work with Deutsche Bank to help you out," Mr. Strohschen said.