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Cat losses prompt market shifts

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MONTE CARLO, Monaco—Rates for property catastrophe reinsurance business are expected to remain hard for North American business at year-end renewals but the effect on European business is less clear.

While reinsurers continue to reel from the 2005 U.S. storm losses and revised models for future losses, the European market remains comparatively stable and cedents should not expect large rate hikes at the upcoming Jan. 1, 2007, renewals, according to industry executives.

Reinsurers, brokers and analysts gathered at the 50th annual Rendez-Vous de Septembre in Monte Carlo, Monaco, earlier this month noted that the hard market conditions experienced on U.S. property catastrophe-exposed business at the mid-year renewals are likely to be maintained at year-end renewals, but brokers said they would resist any substantial rate increases on European business.

The meeting marks the traditional beginning of year-end renewal discussions.

A "two-tier market" has been a theme of the past nine months, said Charles Cantlay, deputy chairman of Aon Re U.K., a unit of Aon Corp., in London.

Many reinsurers are seeking to diversify their books of business, he said, in part because of the increased capital requirements being placed upon monoline-style underwriters by rating agencies (see story, page 12).

Price rises 'muted'

Underwriters with heavy U.S. property catastrophe exposures increasingly are seeking to diversify, he said, and this--coupled with availability of affordable retrocessional capacity for non-U.S. property/catastrophe exposures (see story below)--has meant that any rate rises for European property business have been "muted."

In the immediate aftermath of Hurricane Katrina last year, observers were predicting the storm would be a market-changing event, said Mr. Cantlay, resulting in rate rises across the board.

But, he said, "the reverse has been true" and severe rate hikes have only really been seen on U.S. catastrophe-exposed business.

U.S. catastrophe business, however, will likely continue to experience rate increases, said Jacques Bonneau, chairman and chief executive officer of ACE Tempest Re Group in Hamilton, Bermuda.

"I think we can expect to see increases" in catastrophe-exposed U.S. areas, such as the coasts, he said. "I don't see a great decrease in catastrophe exposure in the U.S., irrespective of whether we have a good year."

While 2006 so far has had light catastrophe activity, "it's a good news/bad news scenario. If we have a good cat year in 2006, people will do well, but it will certainly fuel a more daunting 2007 in terms of competition," Mr. Bonneau said.

"Some not well-educated observers would expect the lighter hurricane season would lower rates at Jan. 1 renewals," said Hans Rohlf, managing director and chief underwriting officer of North American treaty reinsurance at Hannover Reinsurance Co. in Hannover, Germany. "It's not happening."

Pricing of catastrophe business is "very much influenced by the modeling agencies and this is not going to change," Mr. Rohlf said. "It's very clear in the U.S. that at Jan. 1, cat rates will have to catch up to the models," he said, adding that increases of up to 50% are warranted on some cat exposures. "Even the influx of additional capacity from capital markets is not going to change that."

"We continue to believe it will be a challenged market going into 2007," said David Priebe, CEO-Europe for Guy Carpenter & Co. Inc.

In North America, the major question for cedents has been: "How do I access capacity, how do I assess exposure and hedge against that?" Mr. Priebe said.

Additional capital

Mr. Priebe said the capital markets are expressing a growing appetite for some catastrophe risk, but available capacity for property cat exposures remains tight. While Guy Carpenter is "looking to educate a broader range of investors and increase knowledge around this asset class, there still is a sizable gap between supply and demand for capacity in the southeast" United States, he said.

Some capital that entered the market after last year's hurricanes went into sidecar arrangements that provide a form of retrocessional cover, noted Ted Collins, managing director-global insurance at Moody's Investors Service in New York. "To the extent that capacity is restricted in the market broadly, rates will go up," he said. "But with the influx of additional capital supporting sidecars, there is less pressure to raise prices."

In the United States, renewals at June 1 and July 1 were "tough," said Patrick Thiele, president and CEO of PartnerRe Ltd. in Pembroke, Bermuda. "Clients didn't get all their programs placed," but "inevitably, supply and demand will come back into balance in the catastrophe market," he said.

Cedents and reinsurers such as PartnerRe are "not particularly far apart in many cases" in their expectations heading toward the Jan. 1 renewal period, Mr. Thiele said. "There is some gradual, modest pressure on rates overall, but it won't be dramatic. The underlying stability is there," he said.

PartnerRe remains committed to writing catastrophe business, and "we quoted business all through the fourth quarter of 2005 and through 2006," Mr. Thiele said. 

'An unhealthy obsession'

Julian James, director of worldwide markets at Lloyd's, said "there's almost an unhealthy obsession with hurricanes" by insurance and reinsurance companies. "No one's talking about the Terrorism Risk Insurance Act, liability classes or earthquake risk. People aren't talking about that in our industry."

"People need to remind themselves that they live in a bigger world. Nothing has changed with the fundamental need to get pricing right with the risk," Mr. James said. "Most underwriters recognize the fact that 2005 was exceptional and they shouldn't do anything stupid for prices going forward."

After Hurricane Katrina last year, reinsurers reacted quickly to increase prices and have done so at successive renewal periods, said Marc Grandisson, chairman and CEO of Arch Worldwide Reinsurance Group, a unit of Arch Capital Ltd. in Hamilton, Bermuda.

"Insurers feel losses over time and can't pass price increases along right away. It usually takes 12 months to turn over their portfolio," he said. As a result, North American cat risks are reinsured at "not much less than 10 rate on line, about double the rate a year ago, and in Europe about six to eight rate on line," Mr. Grandisson said.

Rate on line expresses reinsurance cost in relation to limits purchased; for example, a premium of $100,000 for $1 million of limits would yield a rate on line of 10.

Generally, "renewals should be easier than last year, but there still will be good discussion of what will happen," said Mr. Grandisson.

The only really hard part of the market is U.S. catastrophe-exposed business, said Simon Gander, CEO of the London operations of broker Gallagher Re.

Primary insurers are "minting money" and that will likely lead to softening in most areas apart from U.S. property catastrophe business, added J. Patrick Gallagher Jr., president and CEO of Itasca, Ill.-based Arthur J. Gallagher & Co., Gallagher Re's parent.

In Europe, property catastrophe renewals may be affected by "a perception of increased cat risk," said Mr. Grandisson of Arch. "There is a heightened perception of cat exposure and not enough capacity, and rating agencies are putting tougher constraints around capital," Arch's Mr. Grandisson said. "This will have an inductive effect on European markets," but the overall impact on renewals for European risks is hard to tell, he said.

Generally, property catastrophe business outside of the Gulf of Mexico is not affected by severe capacity restrictions, said Henry Keeling, chief operating officer of XL Capital Ltd. in Hamilton, Bermuda. "Capacity issues aren't the same outside the Gulf of Mexico. More traditional issues apply" elsewhere around the world, he said.

This is one reason why XL prefers to look more closely than just pricing, Mr. Keeling said. "Telling people to pay more money" is not going to help if the terms and conditions around the risk don't make sense, but XL does anticipate pricing will increase, he said.

"We focus at least as much on terms and conditions as we do on price," agreed James Veghte, CEO of reinsurance general operations at XL Re, a unit of XL Capital Ltd.

Brokers will try to resist imposition of any rate rises for European property catastrophe business at the upcoming renewal, Aon's Mr. Cantlay said. Reinsurers would like to see "double digit" rises in rates for the business at the year-end renewals, but "the reality is that there is overcapacity for the sort of business because people are keen to diversify."

Changes in models

But he noted that changes to European catastrophe models, such as those introduced recently by Risk Management Solutions Inc. (BI Sept. 11), would "run contrary to that" because reinsurers likely will have to hold more capital for writing European catastrophe business.

While further rate rises are likely for some U.S. business, only business in "peak zones" in Europe is likely to be subject to price increases, observers said.

In Europe, "even after Hurricane Katrina, there were not really any major rate increases," a situation likely to remain true at Jan. 1 renewals, said Frank Rieder, vp at Cooper Gay & Steele in New York.

"What you should see is increases in international property catastrophe pricing" and probably "a slight bump in peak zones in Europe,"said Mr. Bonneau of ACE Tempest.

"Whether property rates will be up in other non-peak zones remains to be seen," he said. Some programs "may renew as is, just because people are looking for diversification."

The property cat markets in Europe and Asia are likely to see "a continuation of business as usual" and clients there will seek to "continue to enhance their ability to assess and manage their risks," said Mr. Priebe of Guy Carpenter.

Apart from U.S. windstorm-exposed business, the market is largely "stable, flat," said Hans-Peter Gerhardt, CEO of Paris-based AXA Re.

Reinsurers are concerned about "primary rate erosion" on business not exposed to U.S. windstorms, he noted. The German motor market, for example, "appears to be in free fall," he noted.

Industrial business in general is softening in Europe, and some property programs will see reductions of between 20% and 40% at renewal, he said.

Market conditions for major commercial property risks in Europe are softening, in part because of good results in recent years, according to A.M. Best Co. Inc. analysts.

In Europe, new capacity is coming in to write property business, noted Vincent Redier, chairman and CEO of Aon France in Paris, and it is likely there will be increased competition as reinsurers seek to write more European business to move away from heavy concentrations of U.S. property risk.

Primary insurance rates for European property business have been softening since the July renewals, he noted, and competition for European reinsurance business likely will result in some softening of rates.

Aon expects European property reinsurance rates to be stable or to rise by up to 10% in some cases, according to a report by the broker.

Catastrophic rates on lines will increase by about 10% for continental Europe, predicted Konrad Rentrup, president and CEO of Hannover Reinsurance (Bermuda) Ltd. in Hamilton, Bermuda.

An area where there are signs of capacity pressure, though, is northern European wind exposure, said James Vickers, CEO of Willis Re International in London.

"When capacity pressure comes, then prices move up a bit," Mr. Vickers said. "But, having said that, the key buyers of northern European wind exposure are the major European primary companies, and their balance sheets are in pretty good shape, so they may not be so happy to see prices going up and they may adjust themselves by retaining more, which could take a little bit of pressure off the capacity."

Rates for some property business in northern Europe may rise at upcoming renewals, said Seymour Matthews, managing director of reinsurance at Heath Lambert Group in London.

The extent to which large programs will see rate increases in Europe depends largely on what the "professional reinsurers"--Munich Reinsurance Co. and Swiss Reinsurance Co.--decide to do, Mr. Matthews said.

Richard Miller contributed to this report.