Draw encouragement from creative solutions

Sharp hikes in reinsurance rates already have been felt at the primary insurance buyer level, but, uncomfortable as that experience may be, a closer look at the reinsurance market does offer some good news for risk managers.

The big increase in reinsurance rates for catastrophe-exposed risks over the past year has been one of the major factors in driving up coastal property insurance rates and, according to reinsurers, there is not likely to be a letup in rate increases anytime soon.

As our report starting on page 11 on the Rendez-Vous de Septembre reinsurance meeting indicates, reinsurers and primary insurers still think there is a ways to go before primary rates for U.S. coastal property exposures reflect the underlying risk, regardless of the mild storm season so far in 2006.

But the reinsurance and capital markets' reactions to the problem also raise a little hope for risk managers.

First, rate hikes at the year-end renewal season are likely to be confined, in large part, to the problem area: coastal cat risks. Other lines are not being penalized and competition to attract those risks is rising.

Secondly, high reinsurance prices have led to another spate of innovative risk financing vehicles in the same way that other capacity crises in the past have inspired innovation in the insurance sector.

This time, several reinsurers have established "sidecar" companies that enable them to offer more capacity to cedents, and industry loss warranties--risk financing structures that are linked to overall industry loss experience--have started to come into their own. ILWs have even been touted as instruments that could be used as part of a program to cover some terrorism risks.

While these vehicles are not going to turn the market on their own, they are a reassuring indication that the insurance and reinsurance industries are still capable of providing creative solutions to difficult problems.

Such innovations provide relief to buyers now, and in the future the potential for them to be used to at least alleviate, if not eradicate, other problems is encouraging.