REINSURANCE PRICES SOFT, CAPACITY PLENTIFUL, BUT RATE OF DECLINE IN PRICING MAY BE SLOWING DOWN, SOME INTERMEDIARIES SAY

The pace of reinsurance rate decreases appears to be slowing at midyear renewals, but still there are no signs of any hardening in the market.

The prolonged soft market continues to prevail, and cedents are enjoying plentiful and cheap capacity.

About the only change in the market is the looming issue of how to tackle the Year 2000 problem from a reinsurance standpoint. And while the Year 2000 problem may be causing concerns throughout the insurance industry, reinsurers in the United States do not appear to be attempting to exclude coverage.

Instead, reinsurers say they will monitor how cedents are underwriting accounts from a Year 2000 standpoint and consider leaving programs with which they are unhappy. But there is little evidence of any exodus from Year 2000 risks.

At midyear renewals, the reinsurance market "is absolutely a marketplace without energy or direction," said Willis T. King Jr., vice chairman in charge of sales at reinsurance intermediary Guy Carpenter & Co. Inc. in New York.

Rate decreases appear to be slowing slightly, but there is little change in what is a heavily capitalized business, Mr. King said.

"We live in an overcapitalized business, and guess who just arrived at the door" with more billions in capital? he asked, referring to the pending merger between Omaha, Neb.-based Berkshire Hathaway Inc. and Stamford, Conn.-based General Re Corp. (BI, June 22).

Brian McGuire, senior vp and director at reinsurance intermediary U.S. Re Corp. in New York, said, "I wish I could say (renewals) were going nice and fat with prices."

However, he added: "It's not much different than it was on April 1 in terms of the property classes. Primary business rates are pretty much down, probably from where they were a year ago by about 8% to 10%," said Mr. McGuire.

"If I was to draw a picture of the market I'd draw a picture of a snake swallowing its own tail," said Dennis Zettervall, chief executive officer of Hartford Re Co. in Hartford, Conn.

Reinsurers are broadening the coverage they are offering and at the same time reducing rates to levels that are too low to support loss payments, he said.

"I'm now convinced that there will be a turn in the market because results will be so bad. . . .If you sell your product below costs, you will pay a price," Mr. Zettervall said.

There are "no signs of a tightening of the market," said Chris Walker, chairman of Bloomington, Minn.-based reinsurance intermediary E.W. Blanch Co.

There has been "no significant change in terms of pricing. It certainly is not getting any firmer," he said.

The rate of decline may be slowing, he said, but not significantly.

Rate decreases seem to be slowing a little, but still there are

no signs the market is hardening, agreed Steven Bolland, senior vp with reinsurance intermediary Gill & Roeser Inc. in New York.

"I'm not noticing it going down as fast, although obviously you're seeing reductions in prices year on year because the price went down a little bit at year end, and people (renewing now) are catching up.

"I've noticed a slight slowdown in the rate of decline apart from that. The market is still very soft, and it's very, very competitive out there. I just think we've seen a slowdown in the scale," said Mr. Bolland.

Tom Rogers, senior executive vp for Aon Re Inc. in Philadelphia, represents primarily large, publicly held insurers. He said that while the market is "very, very soft," it is not any softer than it was six months ago for the market for which Aon Re places business.

"There's a view out in the market right now that anything can be accomplished and, frankly, that's not the case," said Mr. Rogers.

John N. Gilbert Jr., president of New York-based Holborn Corp., a reinsurance intermediary, said, "It's business as usual," with no significant changes in the market.

"Because of lack of loss activity, further improvements have been granted by reinsurers in terms of rates and some coverage improvements," said Mr. Gilbert.

On the other hand, there has been some deterioration in experience on programs in general, and the Midwestern storms have caused higher losses than originally were expected, he said.

"I don't think (the storms are) going to have a major effect on the market, but I do think it will have an effect on slowing down the downward spiral," said Mr. Gilbert.

Casualty reinsurance rates are falling about 5% to 10%, and insurers are seeking increases in profit commissions as the market remains soft, said Steve Tirney, president and chief operating officer of PMA Reinsurance Corp. in Philadelphia.

"The commissions were very high last year, but this year (cedents) are still looking for another point or two," he said.

Generally, rates across all lines are falling about 15% to 20% for international business and 10% to 15% for U.S. business, said John J. Dwyer, chairman of Terra Nova (Bermuda) Holdings Ltd. in Bermuda. "But it is not any worse in July than it was in January," he said.

Cedents are continuing to enjoy plentiful capacity as the absence of any large catastrophes continues to keep reinsurers profitable, Mr. Dwyer said.

"But some sanity has to come back to the market. . . .You can't have profits for four years in a row and think that that is enough to cover a one-in-a-hundred kind of event," he said.

The profitable business of cedents is largely personal lines coverage, said Jean-Pierre Fillebeen, vice chairman and CEO of SAFR Reinsurance Corp. of the U.S.

"In many instances, personal lines business is carrying the results of companies," he said.

When the programs are brought to reinsurers, cedents are enjoying similar decreases to those granted in January, Mr. Fillebeen said.

For example, catastrophe excess-of-loss rates are down about 15% in June, he said.

The cheap price of reinsurance is encouraging some cedents to reduce their retentions and buy more coverage, said Jacques Bonneau, senior executive vp at Chartwell Reinsurance Co. in Stamford, Conn.

"The (cedents) want to show growth in terms of premium volume, but there is also the realization that they can transfer risk at very attractive rates," he said.

But that increase in demand is doing nothing to change the market, Mr. Bonneau said. "There is continued pressure on pricing, commissions and brokerage," he said.

Reinsurers themselves are looking for more retrocessional coverage, said Mr. McGuire of U.S. Re.

"On the retrocessional side, we're seeing a greater demand, believe it or not, in terms of acquiring higher retrocessional limits, and that's one area of the industry where rates have seemed to hold firm," he said.

Traditional market capacity on the retrocessional side has not grown significantly, Mr. McGuire said.

As a result, buyers seeking higher limits "are buying basically non-traditional or alternative reinsurance arrangements to satisfy that need," and there has been more growth in this area, he said.

Demand also is increasing for multiyear policies, said Mr. McGuire.

"A number of clients are trying to basically buy 36-month covers, which would in effect give them the benefit of the soft market rates for another 24 months beyond the first year" of coverage, Mr. McGuire said.

Last year, he said, major primary clients that attempted to do this found about $40 million to $50 million of capacity per treaty available on that basis as of Jan. 1. "On July 1, we're seeing a little bit more capacity beyond that $50 million mark," he said.

In this market, capacity growth is "understandable because of the need to maintain or attempt to grow market share," he said.

The increase in multiyear policies can be attributed in part to the Year 2000 problem, said Mr. Tirney of PMA Re.

"It could be that they want to lock rates in or it could be that they want to make sure that their reinsurance program spans the year 2000," he said.

While reinsurers say they are closely monitoring Year 2000 exposures, generally, they are not trying to exclude the risk at midyear renewals.

"We are asking specific questions of ceding companies as to what they are doing about their Year 2000 exposures, because if there are losses presented to us it will be because of what they are doing," said Mr. Tirney.

While most existing programs are not being refused because of Year 2000 exposures, some new accounts are being turned away, he said.

"We have turned down some new opportunities because we thought there were some Year 2000 problems," Mr. Tirney said.

Reinsurers still are deciding what they will do about Year 2000 exposures, said Mr. Fillebeen of SAFR.

"Our position on the Year 2000 is evolving, but we want to know what insurers are doing and what measures they are taking," he said.

But any real action by insurers and reinsurers over Year 2000 exposures will likely come, if it comes at all, at year-end renewals, when the annual contracts renewing will encompass the turn of the millennium, said Mr. Bonneau of Chartwell Re.

"At the moment, it is not the norm to put in exclusions, but people will have to make some hard decisions when 1/1/1999 comes up," Mr. Bonneau said.

Currently, ceding insurers are resisting reinsurers' attempts to impose Year 2000 exclusions, said Mr. McGuire of U.S. Re.

"The reinsurers are looking to impose exclusions, especially in some of the professional liability portfolios." However, "our clients are not prepared to accept such exclusions" and they "are the ones that are putting their foot down because of the softness of the market," said Mr. McGuire.

But, in most cases, reinsurers are not aggressively seeking to exclude Year 2000 exposures, said John Cashin, executive vp at Willis Faber North America Inc. in New York.

"Underwriters have agreed to leave the Y2K problem unaddressed, and it appears no one wants to be the first to issue an exclusion for fear of losing market share on renewal," Mr. Cashin said.

TIG Reinsurance Co. is also tackling the Year 2000 problem on a case-by-case basis, said Mark W. Hinkley, executive vp at the Stamford, Conn.-based reinsurer. TIG Re has not left treaties as a result of the problem but when it is concerned with a particular cedent it has led to tougher negotiations, he said. "And we have walked away from some facultative business," he added.

Reinsurers still are mulling over what the Berkshire Hathaway purchase of General Re will mean for the market.

"It's a good move for General Re, and it will add to their strength. But if you take us and Partner Re, it will make us work even more with the intermediary market. We want to be an alternative to the big companies," said Mr. Fillebeen of SAFR.

The purchase will help both General Re and Berkshire Hathaway in terms of their own organizations, but it should not be especially detrimental for other reinsurers, said Mr. Tirney of PMA Re.

"Now that they are together, they will have some synergies, but we were competing with them both individually before, and now that they are together, I don't think it will make a whole lot of difference to us," he said.

The purchase likely will not have much effect on other reinsurers, said Mr. Hinkley. "General Re was attractive enough before, so I don't think this will change the landscape that much," he said.