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Light cat year turns focus to renewals


MONTE CARLO, Monaco—Rates for property risks with a catastrophe exposure are likely to increase significantly during the next period of reinsurance renewals, but reinsurance industry executives expect market conditions for noncat-exposed lines to remain stable.

This year's annual gathering of international reinsurance executives at the Rendez-Vous de Septembre in Monte Carlo was quieter than in past years, and for the first time in recent memory there was no recent catastrophic loss event to discuss.

While this year so far has seen light catastrophe activity, "it's a good news/ bad news scenario. we have a good cat year in 2006, people will do well, but it certainly will fuel a more daunting 2007 in terms of competition," said Jacques Bonneau, chairman and chief executive officer of ACE Tempest Re in Hamilton, Bermuda. "I think we can expect to see increases" in catastrophe-exposed U.S. areas, such as the coasts, but "I don't see a great decrease in catastrophe exposure in the U.S., irrespective of whether we have a good year," he said.

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

David Priebe, CEO-Europe for Guy Carpenter & Co. Inc., said, "We continue to believe it will be a challenged market going into '07." The property cat reinsurance market has hardened throughout renewals in 2006, and "we probably will see continued pricing increases at Jan. 1" renewals, he said.

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."

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.

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 Hamilton, Bermuda-based Arch Worldwide Reinsurance Group.

"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 catastrophe risks are reinsured at "not much less than 10 rate on line, about double the rate a year ago, and in Europe about 6 to 8 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.

John Berger, CEO of Harbor Point Ltd. in Pembroke, Bermuda, said most ceding insurers are realistic about rising property rates at renewal. "Cedents probably will say, 'If we want to buy more (reinsurance), we'll have to pay more,"' he said.

"To the extent that capacity is restricted in the market broadly, rates will go up," said Ted Collins, director of the insurance practice at Moody's Investors Service in New York. "But with the influx of additional capital supporting sidecars, there is less pressure to raise prices."

Mr. Collins noted that billions of dollars in capital entered the market after last year's hurricanes and flowed into sidecars, special limited-time investment vehicles that are providing additional capacity. Most of the sidecar arrangements have been set up to provide capital for catastrophe-related risks.

Hans Rohlf, managing director and chief underwriting officer of North American treaty reinsurance at Hannover Reinsurance Co. in Hannover, Germany, said that pricing of catastrophe business is "very much influenced by the modeling agencies and this is not going to change."

"It's very clear in the U.S. that at Jan. 1, cat rates will have to catch up to the models," Mr. Rohlf 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."

Retro cover squeeze

Capacity for retrocessional reinsurance contracted significantly after the hurricanes in 2005 and has become even more scarce, despite sidecars, industry sources noted in Monte Carlo.

At the Rendez-Vous, Swiss Reinsurance Co. announced that it will not renew retrocessional business written by GE Insurance Solutions, which Swiss Re acquired earlier in 2006. While the move was not unexpected, GEIS had been a major market for retro coverage, sources said.

As a result, more reinsurers are looking at alternatives to purchasing retro coverage.

ACE Tempest Re's Mr. Bonneau said that the retrocessional market for property cat business is virtually "nonexistent. Capacity at prices and attachment points, from our perspective, are nonconducive to a buy."

Following last year's hurricanes, ceding insurers and reinsurers are both looking at diversifying their underwriting portfolios away from catastrophe risk in general and North America in particular, sources said.

Over the past year, the buzzwords for the reinsurance industry have been "diversify, diversify, diversify," said Charles Cantlay, deputy chairman of Aon Re U.K. in London.

"Even non-U.S. catastrophe business is getting looked at," said Bruce Ballentine, vp and senior credit officer at Moody's Investors Service in New York. "Asia catastrophe business has been fairly competitive" as a result, he said.

"With the development of improved internal risk management and modeling, companies are seeing a spike in their loss exposure and want to flatten that," said Timour Boudkeev, vp and senior analyst at Moody's.

But not all industry observers view diversification as positive.

"I don't believe that diversification for diversification's sake is an appropriate goal," said Harbor Point's Mr. Berger. "Well-priced diversification happens the market allows that. you write an underpriced book of diversified business, you're guaranteed to have a bad result," he said.

"Diversification is predicated on a desire to avoid volatility," said Ken LeStrange, CEO of Bermuda-based Endurance Specialty Ltd. "In my view, diversification only works it supports your return goals."

With the exception of U.S. wind-exposed business, the reinsurance market likely has all the capacity it needs, noted Hans-Peter Gerhardt, CEO of Paris-based AXA Re, the reinsurance arm of AXA S.A. And it is likely that some underwriters will diversify and attempt to compete on price in other areas, such as Europe, he said.

There is a "demand to diversify" noted Robbie Klaus, CEO of Pfaffikon, Switzerland-based Glacier Reinsurance A.G., and because property catastrophe business is in many ways a worldwide business, that diversification likely will be seen in other areas.

Sarah Veysey and Richard Miller contributed to this report.