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”.
BADEN-BADEN, Germany-Efforts to cut rates, increase commissions and expand coverages are set, once again, to dominate year-end reinsurance renewal negotiations.
Plentiful and expanding capacity in the worldwide reinsurance market, combined with the absence of any significant insured catastrophes in 1997, will keep the lid on rate increases, reinsurers say.
In property and casualty reinsurance lines, most contracts will see rate cuts of between 10% and 20%, and in marine and aviation, some cuts will likely be significantly higher, said reinsurance executives meeting in the southern spa town of Baden-Baden, Germany, from Oct. 27-31 for annual pre-renewal discussions.
In an extremely competitive market, reinsurers are cutting prices, broadening coverage and trying to create volume by reciprocally swapping business, executives say.
Even in a week rife with huge stock market swings around the world, reinsurers saw little prospect of financial tribulations jolting an uptick in the price of reinsurance (see story, page 52).
As reinsurers met here, they saw little to change the general expectation of further rate cuts that had pervaded meetings earlier this year at the Rendez-Vous de Septembre in Monte Carlo (BI, Sept. 22).
Ceding insurers are expecting the fall in excess-of-loss reinsurance rates to continue at year-end renewals, said Edward P. Harrison, associate director in the specialty division of Sedgwick Reinsurance Brokers Ltd. in London.
"The general expectation is for a 10% to 20% decline for property and casualty. We would expect casualty rates to be a little firmer (than property) because of the long-term nature of the business and the uncertainty over its profitability," he said.
Ceding companies are expecting 10% to 20% reductions in reinsurance rates, agreed Martin Oesterreicher, head of marketing for central and eastern Europe at Swiss Reinsurance Co. in Zurich. "So we have to tell them that there won't be any average reductions; we'll be looking at each and every account," he said.
U.K. and North European catastrophe rates still are very high and will likely see significant cuts at year-end, said Stephen Hitchcock, deputy managing director-international division for Heath Reinsurance Broking Ltd. in London. Rate reductions will likely be "something north of 25%," he said.
Generally, cedents are seeking 15% reductions in catastrophe reinsurance rates, said David B. Grant, reinsurance officer at Nationwide Insurance in Columbus, Ohio.
But computer catastrophe models already show that some catastrophe rates are perilously low, so another 15% reduction is unlikely, he said. "We'd be more willing to discuss terms rather than price," he said.
One of the few large catastrophe losses to hit the European market in 1997 was the floods in Eastern and Central Europe. Insured losses from the flooding were estimated at $1 billion (BI, July 28) but did not produce high enough losses in the reinsurance market to increase rates, Mr. Oesterreicher said.
Primary insurers that had flood losses are experiencing flat renewals, agreed Stephen Gordon, director of international operations at Reliance National Insurance Co. in London.
"They were the worst floods for hundreds of years, so if it was a one-off event you should have the accumulations to pay for it, but if it turns out to be a climate change, then we'll have to adjust pricing and conditions accordingly," he said.
Although the floods caused a large economic loss, much of the property damaged was uninsured, said Chris Adams, director of the non-marine division-Europe at Sedgwick Re in London. As a result, even cedents that suffered some losses are unlikely to suffer large increases in reinsurance costs as a result of the floods, he said.
"There will still be reductions, but they will not be as large as they might have been," Mr. Adams said.
In non-catastrophe lines, reinsurers are offering some highly competitive rate reductions, said Timothy Stokes, underwriter for Copenhagen Reinsurance Co. (U.K.) Ltd. in London. Competition for some prime accounts is "absolutely rife," he said.
In the standard property facultative market, reductions are probably in the 15% to 20% range worldwide, Mr. Stokes said.
"It's clear that we are in a much more competitive environment this year," said Serge Osouf, president and chief operating officer of Paris-based reinsurer SCOR S.A.
He attributes the situation to the combination of a number of factors, including profitable 1997 results for insurers and reinsurers, brokers consolidating and fighting to keep accounts, and ceding companies becoming more demanding. The last category includes demands for lower rates, broader coverage, more tailor-made products, more non-traditional products, more finite risk products, more blending of products, including multiyear covers, and larger limits on catastrophe coverage.
Reinsurance rates are falling the steepest for marine and aviation cover, Mr. Osouf said.
SCOR renewed one aviation account at 49% less than last year. Generally, rates have declined in the marine and aviation sectors by as much as 40%, he said.
International marine insurance, including the energy market, is experiencing severe rate cuts, said Sue Gwynne, planning and marketing director at Eagle Star Reinsurance Co. Ltd. in London. Eagle Star Re has let a lot of business go from that line because rates have slipped back to 1991 levels, said Ms. Gwynne.
The company also ceased aviation underwriting in 1996 "because we couldn't see the market producing the level of profits that we wanted," she said.
Many reinsurers say they are walking away from business rather than renewing at lower rates.
In Europe especially, reinsurance arrangements are often long-term business relationships, but the current soft market will disrupt some of those relationships, said Leif Corinth Hansen, chief executive officer of Copenhagen Reinsurance Co. Ltd. in Lyngby, Denmark.
"I can definitely see that we'll be walking away from business," he said.
If cedents want to maintain continuity in their reinsurance arrangements, they have to be willing to pay rates that give reinsurers a chance to make profits over the long term, and some of the rates being sought for the year-end renewals are just too low, Mr. Corinth-Hansen said.
F&G Re Inc. also will likely see a fall in revenues at year-end renewals as it turns down unprofitable business, said Arthur Underwood, vp at the Morristown, N.J.-based reinsurer.
In 1996, F&G Re's premium volume was $499 million. In 1997 it will probably drop by 20% and will likely fall again in 1998, he said.
Where reinsurers have strong and trusting relationships with their clients, they will likely remain with them even during the soft market, said Wilhelm Zeller, chairman of the executive board of Hannover Reinsurance A.G. in Hannover, Germany.
However, to generate increased profits rather than simply increased revenues, reinsurers have to search for profitable niches, he said.
"You lose a substantial amount of commodity business, but you try to write more specialty business," Mr. Zeller said.
For example, many reinsurers have shied away from the contractors liability line in California, as they fear that recent court decisions there make the business less attractive, he said.
Hannover, though, saw it as an opportunity to jump into an underserved market and linked up with a primary insurer there to write the business at attractive rates, Mr. Zeller said.
Generally, some lines of business have been more profitable for insurers and reinsurers over the past year, Mr. Oesterreicher said.
In Germany, for example, property business has been profitable due to low losses, but that could soon be turned around if normal loss levels return; hospital third-party liability business has been unprofitable for several years; and some motor third-party liability insurers still provide profitable business, he said.
The only line of business that consistently provides reinsurers with good results is personal accident insurance, Mr. Oesterreicher said.
But primary insurers are only willing to cede personal accident business as a package along with other less profitable lines, he said.
Another exception to the general downward drift in prices and the broadening of coverages is the effort by some property reinsurers to exclude so-called millennium risks from property reinsurance coverages, said Mr. Harrison of Sedgwick.
The exclusion would eliminate coverage for property losses that result from the computer problem, such as damage caused by a malfunctioning sprinkler system, he said.
But most negotiations on exclusions generally concern their elimination, said Dirk Lohmann, chief executive officer of Zurich Re, a subsidiary of Zurich Insurance Co. in Zurich, Switzerland. For example, more reinsurers are willing to cover non-European risks under European reinsurance treaties, he said.
Previously many European reinsurers had been reluctant to include, say, liability risks from the United States under European treaties due to the bad loss experience on that business, Mr. Lohmann said. "More and more they are being included. It's inevitable because of the internationalization of business in general," he said.
Terms are also widening in the facultative market, said Mr. Stokes of Copenhagen Re. In the non-marine property facultative market, where once reinsurers were able to dictate terms, they routinely have been forced over the past six to nine months to include machinery and breakdown coverage in property risk policies, he said.
Another sign of how soft the reinsurance market has become is the re-emergence of requests for reciprocity between primary insurers and reinsurers and reinsurers and retrocessional reinsurers, said Mr. Grant of Nationwide. Under reciprocity agreements, a reinsurer owned by a primary insurer cedes some of its parent's primary business to a similar company in return for some of the other company's business. Alternatively, a reinsurer will retrocede business to another reinsurer in return for assuming some of its business.
"People are chasing premiums. They want new business," Mr. Grant said.
Reciprocity among insurers and reinsurers was popular in the 1980s as a means of securing geographic spread, but the reinsurance market has changed since then, and reciprocity agreements are unlikely to achieve their past popularity, said Mr. Underwood of F&G Re.
"It's become more complicated. There is no tariff system now, so you can't trade good German business for good Spanish business," because the profitability of the business is less predictable, he said.
Cedents and reinsurers are showing some renewed interest in reciprocity, said Mr. Zeller of Hannover Re.
"We have to place some retrocessional business for our worldwide catastrophe business, but they would not want that because they are looking for industrial fire quota share or marine quota share," and there is little point in retroceding that, he said.
The current abundance of capacity has made it easier for reinsurance brokers to place business, said Mike Caley, chief executive of Kininmonth Lambert Ltd., the main reinsurance broking subsidiary of Lambert Fenchurch Group P.L.C. in London.
Given the ease of placement, many brokers are advising clients to move business to the most highly rated reinsurers, Mr. Caley said.
"There is a trend to give a bigger share of business to the AAAs. Personally, I think there has to be a balance there, and I'm advising our clients to maintain that balance. . . ," Mr. Caley said.
Midsize and smaller reinsurers not taken over by larger competitors should benefit from the consolidation, said Mr. Corinth-Hansen of Copenhagen Re.
Regulators and ceding insurers themselves are keen to maintain a good spread of reinsurers, he said.
"So I just don't believe the horror stories you hear about how in five years there will only be 10 big insurers, 10 big reinsurers and 10 big brokers," Mr. Corinth-Hansen said.
But as a trend toward non-proportional reinsurance continues, cedents will be looking to place business with larger reinsurers as they seek out capital that can support the increased and more volatile exposures transferred under non-proportional contracts, said Mr. Lohmann of Zurich Re.
"You are going to need reinsurers that can accept a worldwide book of business, accept the volatility, and have the capital to do that," he said.
Zurich Re may see an increase in its capacity due to the proposed merger of Zurich and the insurance operations of B.A.T Industries P.L.C., Mr. Lohmann said (BI, Oct. 20).
"There are areas of the world where the group has a very strong exposure on the direct side and other areas where it does not and we need to expand, and increasing the reinsurance business there might be the most efficient way of doing it," Mr. Lohmann said.
But in the current worldwide soft reinsurance market, it is difficult to select attractive areas in which to expand, he said.
The reinsurance department at Nationwide Insurance is trying to increase its share of the reinsurance market by changing its name to Nationwide Re and by opening an office in Miami to target Latin American business, said Raymond B. Blake, vp-reinsurance.
The Miami office was opened in July and so far has written about $2 million in premium. That will likely increase to between $10 million to $15 million after year-end renewals are completed, he said.
Many reinsurers reported increased interest in multiyear contracts.
Cedents are seeking to lock in commissions on pro rata business for several years as rates plummet in the direct insurance market, said Mr. Zeller of Hannover Re.
"People want to renew at unchanged commission terms and sometimes lock in the existing ones for three years," he said.
The next three years may not prove to be as profitable for the cedents as the past several years, but in the current soft market, they will likely find reinsurers to agree to the multiyear contracts, Mr. Zeller said.
Proportional and non-proportional multiyear reinsurance contracts are becoming more popular, several executives at Baden-Baden said.
The multiyear and multiline reinsurance products are more efficient methods of buying and selling reinsurance, said K. Bruce Connell, president and chief operating officer of X.L. Global Reinsurance Co. Ltd. in Bermuda.
This also can lead to more sustained relationships between reinsurers and cedents, because due to the length of the contracts, neither party can easily abandon the other after a year of large losses, Mr. Connell said.
"In today's market it can be very difficult to maintain relationships," he said.
There is increased demand for multiyear reinsurance partly because cedents want to lock in cheap reinsurance for three-year terms, said Mr. Corinth-Hansen of Copenhagen Re.
"Most people see further reductions at Jan. 1, 1998, so they want to get a three-year deal from then on. . .if the market wants it, that is fine with us as long as we like the price and the control of the risk," he said.
There's a big demand for long-term policies of three years or more, concurred Mr. Hitchcock of Heath.
Although the contracts do provide some certainty, some reinsurers are uncomfortable about providing the coverage, he said.
"An issue obviously they will have is how they will deal with the Year 2000 problem on a multiyear policy," Mr. Hitchcock said.