2007 PROPERTY CASUALTY INSURERS ASSN. OF AMERICA CONFERENCE
Posted On: Jan. 1, 2007 12:00 AM CSTSoftening market will test reinsurers pricing discipline
Capital markets involvement strong despite decline in sidecar formation
Munich Re America implements growth strategy in soft market
Reinsurance rates set to fall across most coverage lines
Softening market will test reinsurers pricing discipline
by JUDY GREENWALD
Published Nov. 12, 2007
BOSTONA key question for cedents and reinsurers in the months to come is how disciplined the market will remain.
"If the price adequacy isn't good, we won't be looking at (the business)," said Pierre L. Ozendo, chief executive officer-Americas division, at Armonk, N.Y.-based Swiss Reinsurance America Corp.
You can be more competitive "if you don't do it stupidly," said Mr. Ozendo. Swiss Re, he said, wants to know the total return and whether it is appropriate for the coverage provided.
Mr. Ozendo was among those attending the Property Casualty Insurers Assn. of America's annual meeting in Boston late last month.
William H. Eyre Jr., managing director and chief executive officer of Philadelphia-based Towers Perrin Reinsurance, said that over the past several months reinsurers have expressed "the need to maintain their underwriting discipline, which does not necessarily mean not providing rate relief."
"I don't think reinsurance underwriters these days can sort of go off on a tangent (into market-share underwriting) the way they have in the past," said John Spencer, group chief executive for London-based BMS Associates Ltd. They "do not want to end up holding the bag when companies go out of business," he added. We have all seen the end of that process, "and it's not very pretty."
"By and large, it's an orderly market," said John N. Gilbert Jr., chairman of New York-based reinsurance intermediary Holborn Corp. "At this stage, there don't appear to be loose cannons out there. But capacity has to be fed."
As we go into 2008, even at reduced prices, "the risk-reward ratio is still attractive," said Kevin Stokes, managing director and leader of the property specialty practice at reinsurance intermediary Guy Carpenter & Co. L.L.C.He said the bigger question is, what will happen 12 to 18 months from now if there are no significant losses? At that point, "things will heat up as we've seen in the past."
"Across the board, we've never been disciplined," said John Berger, CEO of Hamilton, Bermuda-based Harbor Point Ltd. "That top-line pressure is just enormous," he said.
"Things will get very competitive, because the holding reinsurer of an account will do everything in its power to maintain its business. Therefore, new reinsurers competing for that account are going to have to offer extremely competitive quotes" to win the business, said Brian R. McGuire, senior vp with reinsurance intermediary US RE Corp. in New York.
The situation won't be too different from 1997's soft market, although one difference will be the industry's larger capital base, which will only fuel additional competition, said Mr. McGuire.
Some observers say the use of models may be at least a restraining factor. Reinsurers are saying they will not go below the correct rates, said Steven K. Bolland, president of reinsurance intermediary Gill & Roeser Inc. in New York. But "when push comes to shove," the question is whether reinsurers will risk losing their business, he said.
However, he noted that reinsurers are using models that indicate what technical pricing should be, and so market participants will be watching to see how far below this level they will go. "I don't think the market has ever seen that kind of discipline before," said Mr. Bolland. "It will be interesting."
The rating agencies and the use of models "produce some discipline that maybe wasn't there in previous cycles," said James Kent, executive vp-reinsurance with Willis (Bermuda) Ltd. in Hamilton. But reinsurers and investors are seeking growth, "which is a major test of discipline in a softening market," said Mr. Kent.
Discipline also is being imposed by rating agencies, investors and by corporate governance issues, said Simon Gander, chief executive officer of London-based Gallagher Re.
We will not see the swings that occurred in the soft markets of the 1980s and 1990s, where companies would "go after whatever they could" just to generate revenue, said Larry Tucker, London-based Gallagher Re managing partner.
Market participants now realize that this "comes back to haunt you," he said.
Capital markets involvement strong despite decline in sidecar formation
by JUDY GREENWALD
Published Nov. 12, 2007
BOSTONSidecar formation may be slowing for now, but the capital markets' involvement in the reinsurance industry will continue despite reinsurers' current strong capital position, observers say.
Particularly in light of the subprime debacle, the reinsurance sector offers the capital markets a welcome diversification in their investment portfolios, say observers attending the Property Casualty Insurers Assn. of America's annual meeting in Boston last month.
Steven K. Bolland, president of reinsurance intermediary Gill & Roeser Inc. in New York, noted that the capital markets currently are withdrawing from the reinsurance arena, with sidecars in particular disappearing.
"There's no need for capital" now in the industry, said Mr. Bolland. "Overcapacity is more of a problem at the moment."
But, he added, "you don't want to burn your bridges, because reinsurers could need sidecars once again in 2009, so (reinsurers) are still keeping them."
Bermuda-based XL Capital Ltd. is in negotiations over whether to renew its Cyrus Reinsurance Ltd. sidecar, said Jamie Veghte, Stamford, Conn.-based executive vp and chief executive officer of reinsurance operations for XL Re, an XL Capital unit. "There's clearly less capacity needs than there were a couple of years ago."
Investors seek diversity
But despite the slowdown in sidecar activity, capital markets still are being considered by most companies as a way to diversify their reinsurance capital sources, said Paul Schultz, president of Chicago-based Aon Capital Markets. While they have "now pulled in a bit" with respect to sidecars, the capital markets are "not going away entirely."
Investing in the insurance sector diversifies hedge funds' portfolios and lowers their overall risk, "and because of that, returns are still attractive" despite the softening market, Mr. Schultz said.
"There is still a keen interest in purchasing insurance-related risk" on the part of either hedge funds or private equity investors, said Grace Osborne, managing director and practice leader for North America insurance financial services at New York-based Standard & Poor's Corp. "It's more fluid whether they will participate or not," and depends upon whether the capital markets get an appropriate return, said Ms. Osborne.
Some capital market investors may drop out because their returns are down, but "others will stay in because it's such a diversified class," said Paul Karon, CEO of Benfield Group Ltd.'s U.S. division in Minneapolis.
John N. Gilbert Jr., chairman of reinsurance intermediary Holborn Corp. in New York, said, "There may be a bit of a lull in the activity, but I think they're a force that's going to be there, and they're going to offer competition to the traditional marketplace."
John Spencer, group chief executive for London-based reinsurance intermediary BMS Associates Ltd., said the capital markets are now moving beyond catastrophe bonds and securitizing property cat risks to other areas, including auto and workers comp.
Meanwhile, the subprime crisis is likely to have only a short-term affect on the capital markets' involvement in the reinsurance sector, said Mr. Bolland. "Ultimately, liquidity's coming back," he said.
The lack of correlation between the capital market's problems in the subprime area and the insurance industry "was a test case, in a way, and (insurance) proved a good investment for the capital markets," said Brian R. McGuire, senior vp at reinsurance intermediary U.S. RE Corp. in New York.
Munich Re America implements growth strategy in soft market
by REGIS COCCIA
Published Nov. 12, 2007
BOSTONMunich Re America, the U.S. division of Germanys Munich Re Group, will enter 2008 with new leadership and a new strategic approach to growing its business.
Effective Jan. 1, Anthony Kuczinski will succeed John Phelan as Munich Re Americas chief executive officer. Mr. Phelan is retiring after more than 34 years with the company. Among other management changes, the reinsurer has established units more aligned with its businesses, offering both direct and broker distribution channels.
Mr. Kuczinski and Peter Roeder, a member of Munich Re Groups management board who oversees Munich Re Americas North American operations, outlined the companys strategy in an interview during the recent Property Casualty Insurers Assn. of America annual meeting in Boston.
Announcing a growth plan may sound strange in light of the softening market, but our strategy is about the next five to 10 years, said Mr. Roeder. We will stick to risk-adequate pricing but also continue to set the basis for further development.
The U.S. market space is $500 billion in insurance premium, with about $50 billion in reinsurance premium, said Mr. Kuczinski. Were looking to find complementary pieces of business that we can work with. Munich Re America is interested in being wheres theres disruption, a limited number of dominant players, where skill sets are needed, he said.
Mr. Kuczinski said the reinsurer will also seek to grow the amount of business placed by brokers, but were not going to pick and choose; clients will make the decision on how to access Munich Re Americas capacity.
We dont feel pressured to grow in this cycle, Mr. Roeder said. Rather, the company is looking for business that aids its position, fits our strategy and meets our return targets, he said. We dont feel in a hurry or under pressure.
Reinsurance rates set to fall across most coverage lines
Strong financial results combine with low catastrophes losses to drive down prices, but depth of declines remains unclear
by JUDY GREENWALD
Published Nov. 12, 2007
BOSTONHow far will reinsurance rates fall in 2008?
As the insurance industry prepares for January renewals, that was the main question for reinsurers and cedents gathered at the Property Casualty Insurers Assn. of America annual meeting late last month in Boston.
The two strong financial years enjoyed by both reinsurers and insurers in a period marked by no major catastrophes will likely bring increased competition in an already softening marketand reinsurance rate reductions of 5% to 20%, depending upon the line of business, according to observers who attended the annual PCI meeting in Boston last month.
Reinsurers, insurers and intermediaries use the meeting as a backdrop for negotiating January renewals.
Two years after Katrina, "I think reinsurers are going to produce very good results," said Brian R. McGuire, senior vp at reinsurance intermediary US RE Corp. in New York. "But I think it's, where do we go from here?...That's the question most people are going to be asking themselves as they leave this conference."
Observers are divided as to whether reinsurers are likely to stay disciplined in their rate cuts as they seek to grow their revenue despite primary insurers' increased retentions (see story page 29).
The capital markets' participation is likely to continue also, observers say, though the insurance industry's strong capital position now means sidecars are likely to be less frequently used as a vehicle to shed risk, at least until the next major catastrophe (see story page 28).
"It's very relaxed, actually," said Steven K. Bolland, president of reinsurance intermediary Gill & Roeser Inc. in New York. "Everything's fairly casual. Obviously, it's a good year for everyone, and nobody has specific problems."
There is "no big issue apart from how far the rates are going to go down. It's very, very quiet," he said.
"Pricing seems to be the general theme here," said Grace Osborne, managing director and practice leader for North America insurance financial services at New York-based rating agency Standard & Poor's Corp. It is well-known that rating levels are down, she said. "It's just a matter of the extent of the decrease in pricing relative to the risk."
"Reinsurers are keeping their heads down," said John N. Gilbert Jr., chairman of reinsurance intermediary Holborn Corp. in New York. "Everybody knows rates will go down and nobody knows how much. But there's a ton of capacity out there, and it's got to be fed."
"The struggle for reinsurers is maintaining a flat level of income, and I just think it's going to be extremely difficult" without giving their clients very steep rate reductions, Mr. McGuire said. People talk about a flight to quality, Mr. McGuire added, "but I think pricing will be more important."
William H. Eyre Jr., managing director and chief executive officer of Philadelphia-based Towers Perrin Reinsurance, said that while "reinsurers are willing to consider rate relief in all lines of business," it is "still subject to individual companies' experience and exposures."
While broadly speaking there has been some pressure on terms and conditions, there is "generally more price-driven softening" rather than coverage changes, said Jamie Veghte, Stamford, Conn.-based executive vp and chief executive officer of reinsurance operations for XL Capital Ltd.
"It is likely to be a relatively easy renewal season," said Mr. Bolland, with plenty of capacity from the cedents' perspective, and the major issue for reinsurers being, "how far down is down?"
"It'll be the same it's been the last couple of years," said John Berger, CEO of Hamilton, Bermuda-based Harbor Point Ltd. With ceding companies buying less reinsurance, there will be intense competition for new business, he said.
"I don't think the industry's ever been as strong," Mr. Berger said. Reinsurers used to increase their reserves every year. Now, they feel their reserves are redundant and are releasing more to boost current earnings, he said. "It's just about as good as it's ever been."
A lack of major catastrophes has helped hold prices down.
The reinsurance sector was not significantly hurt by the recent wildfires in California, the floods in Europe or the two hurricanes that hit Mexico earlier in the year, said Mr. Berger. "We got lucky. We dodged all the bullets," he said.
Albert P. Amato, senior vp at Stamford, Conn.-based C.L. Frates Reinsurance Intermediary Inc., said in addition to their own rate decreases, reinsurance prices on treaty business also reflect the ceding companies' underlying base premium. "That's the real decrease," he said.
Most lines dropping
Property catastrophe rates will decline 15% to 20%, said Paul Karon, CEO of Benfield Group Ltd.'s U.S. division in Minneapolis. "There'll be a lot of posturing, but when the ball stops," that is where it will be, said Mr. Karon.
Peak catastrophe zones, including Florida and the Gulf, are the most stable in terms of rates, said Mr. Berger. "People are still worried about aggregates," he said.
Noncat property business is likely to decline 10% to 20%, said Mr. Bolland. Some discipline will remain on coastal business, but in the Midwest, "pricing is going to go down significantly," he said.
Casualty rates are likely to decline 10% to 20%, said Mr. Bolland. Many reinsurers that have been focusing on property cat business "are still trying to diversify their books," he said, so for the right line of business, "people are going to be aggressive."
"We see a lot of new markets coming in" as property catastrophe reinsurers expand their business into casualty, said Ann Marie Roberts, Dallas-based CEO of BMS Intermediaries, a unit of BMS Group Ltd.
People mistakenly see the U.S. casualty market as "super stable," said Mr. Berger. "I think they're foolish," he added. We have "as many lawyers today as we did eight years ago."
Meanwhile, the subprime crisis could affect the industry on a micro and macro basis, said Simon Gander, London-based chief executive officer of Gallagher Re. On a macro basis, the tightening of credit could lead to an economic downturn, with increased claims "almost inevitably" following, he said.
And one micro effect is that it will inevitably lead to increased directors and officers liability claims and may lead to more errors and omissions claims, he said.
It could affect the E&O and D&O markets, agreed Mr. Berger. It "just takes time to develop. The seeds of problems are out there."