Despite softening noncat P/C business, market stays disciplined

SEATTLE—While property catastrophe rates are still expected to increase--albeit not as much as they did during the midyear renewals--noncat property/casualty business will continue to soften for the January renewals, say observers.

Some observers say one influencing factor on the softening market may be rating agency pressure on property catastrophe reinsurers to diversify their business, which will cause them to move into casualty lines, thus increasing competition.

But despite the softening, the reinsurance market remains disciplined, say reinsurers, intermediaries and others attending the Property Casualty Insurers Assn. of America's annual meeting in Seattle earlier this month.

Aside from the critical catastrophe areas, "the market's a lot softer than people realize," said Paddy Jago, New York-based chief executive officer of Willis Re Inc., the reinsurance unit of Willis Group Holdings.

For noncat property business, rates really depend on the particular account, but on average, it will be "flat, plus or minus," said Matthias Weber, senior vp and head of underwriting at Swiss Reinsurance America Corp. in Armonk, N.Y.

Outside of Florida, the Gulf Coast and the Northeast, reinsurers are still willing to write property business including in the Midwest, despite the New Madrid earthquake fault line, said Steven K. Bolland, president of reinsurance intermediary Gill & Roeser Inc. in New York.

"People tend to get a little simplistic" and neglect factors that have not been an issue for a while, said Mr. Bolland, adding, "It's always earthquake season."

On the casualty side, there is continued softening, with rates down about 5% to 10%, said Steven M. McElhiney, president of Dallas-based reinsurance intermediary EWI Inc.

"There's still a fair amount of competition on the casualty side," said William H. Eyre Jr., managing director at CEO of Philadelphia-based Towers Perrin Reinsurance. "Reinsurers are keeping a watchful eye on rate levels, but pricing should be flat or slightly down, and there's plenty of capacity."

Some observers say a move towards increasing diversification by property catastrophe reinsurers is leading to more entries into the casualty market.

While it is "tough to quantify," the drive towards diversification is definitely a contributing factor in the softening casualty market, said Brian M. Boornazian, president and head of reinsurance of Rocky Hill, Conn.-based Aspen Re America.

Observers say this is in response to rating agency pressure. Reinsurers, including some Bermuda reinsurers, that have written mainly catastrophe business, have turned to diversification to satisfy rating agencies' capital adequacy ratios and to earn an adequate return for their shareholders, said Mr. Jago.

Grace Osborne, managing director and practice leader for North American insurance financial services ratings at New York-based Standard & Poor's Corp. said, "Diversification in and of itself is not the answer, but good diversification can actually create a more stable earnings stream."

If there is only one line of business, and profit is unsustainable over time, "there's going to be some shocks along the way," said Ms. Osborne.

Even property catastrophe reinsurers have "lots of room to maneuver" into noncat property business, Mr. Bolland said.

"I think the (reinsurer) Class of '01 has diversified fairly effectively both for geographical and for product lines, and the Class of '05 has done that predominantly also for short-tail lines," including property, marine and energy, Mr. Eyre said. "The key question is how successful they will be in diversifying further for products and for geography."

Michel M. Lies, who is head of client markets at Swiss Reinsurance Co. in Zurich, said he would prefer that reinsurers diversify geographically by writing property cat business in Europe, "because the skills exist" already, rather than writing casualty lines where they may have less expertise.

However, Paul Karon, CEO of Benfield Group Ltd.'s U.S. division in Minneapolis said, "I don't see a lot of people shifting their business models." Those who were primarily property catastrophe writers remain so as do those who are diversified, he said.

There are some exceptions to the diversification trend, said Mr. Bolland, pointing to Bermuda-based IPCRe Ltd., which continues to specialize in writing property cat reinsurance on a worldwide basis. "There are companies that are going to stick to their knitting," he said.

Meanwhile, the casualty reinsurance market "seems to have stayed fairly disciplined" despite the price decreases, said James H. Veghte, chief executive officer, reinsurance general operations, for XL Re, a division of XL Capital Ltd., who is based in Stamford, Conn.

Patrick J. Denzer, president and CEO of Minneapolis-based John B. Collins Associates Inc., agreed. "I think the reinsurance market has been very disciplined," he said. "We don't see the market losing its discipline."

"I think a healthy dose of conservatism is what's going to drive people to be responsible in their underwriting," said Mr. Boornazian.

The market will remain disciplined "for the foreseeable future," said Thomas S. Upton, managing director of S&P's financial services ratings, North American insurance. "So many things come into play" beyond six months from now, including the possibility of major catastrophes or another year with no major natural catastrophes, which will create regulatory pressure to lower rates, said Mr. Upton.