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Reinsurance renewals 'very orderly' compared to past renewal periods

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This year's January reinsurance renewal period has been relatively smooth in contrast to just a year ago, observers say.

"Boring is the word that actually comes to mind," said John Ehinger, president and chief operating officer of Willis Re Inc. in Philadelphia, "at least in comparison to what we've seen in the recent past. I think things are much more stable than they've been."

"Very orderly," is how Patrick J. Denzer, president and chief executive officer of Minneapolis-based John B. Collins Associates Inc., described January renewals.

"I think there's a lot less uncertainty this year" than last year at this time when the industry was dealing with 2005 storm losses, impending changes in catastrophe models and the expectation of additional rating agency capital requirements. At midyear 2006, there was "substantial dislocation between supply and demand" in reaction to the storm losses, said Mr. Denzer.

"I don't see any major problems really," said Steven M. McElhiney, president of Dallas-based reinsurance intermediary EWI Inc. "We're able to get our Jan. 1 accounts placed, and it seems that reinsurers are hungry for business, and we're seeing good support out there."

Observers say that while property catastrophe rates continue to rise, other areas are stable or are softening somewhat.

Richard DiClemente, president and CEO of THB Intermediaries Inc. in New York, said, "The only area of the marketplace starting to see any real, continued increases are in the property cat area, and that will probably remain intact throughout much of 2007, contingent on what happens with the cat season."

Catastrophe peak zone pricing is up "and everything else is relatively static," said William J. Adamson, CEO of reinsurance intermediary Carvill America Inc. in Chicago.

More capacity is generally available, though, say observers.

"Overall, I think that we are finding that there is, in every line of business, much more sufficiency of capital than we had going through 2006," said Chuck Hewitt, Boston-based executive vp, client development, for reinsurance intermediary Benfield Blanch Inc.

Some very large catastrophe programs are still not finding adequate capacity in the traditional market, but there is plenty of capacity for most other programs, said Mr. Hewitt.

Property cat rates continue to rise, although not to the level of the July 1, 2006, renewals, said Tim Gardner, managing director and leader of the global property specialty practice for reinsurance intermediary Guy Carpenter & Co. Inc. in New York.

"It's now pretty clear that July 1 was the peak of the market for property cat, and so we're seeing prices that have come off from those levels, and capacity seems to have materialized that wasn't here a year ago," said Mr. Gardner.

There was a 30% rate increase between the Jan. 1, 2006, and July 1, 2006, renewals "with the expectation" that Jan. 1, 2007, pricing would be in line with mid-2006. Instead, early 2007 prices are 10% to 15% below summer 2006 renewals, he said.

Mr. Gardner said he would not have expected this a month ago, "but I think all the positive experiences of 2006 and the retained earnings really enabled the market to give a little back." Those renewing at the beginning of this year are "still paying more than a year ago" but not as much as the middle of last year, he said.

Rate hikes are in the 30% to 50% range in some cases for programs concentrated in the most cat-prone areas, said Eric Brosius, senior vp and manager, reinsurance, for Liberty Mutual Insurance Co. in Boston, which buys and sells reinsurance. For businesses with less cat-prone concentrations, "the impact on them may be less," he said.

Meanwhile, noncat property business "has been very stable," said Mr. Gardner.

Observers also describe casualty rates as either stable or slightly lower.

Casualty rates are down, on average, 5% to 10%, Mr. Ehinger said. "I think part of the softening we're seeing on the casualty side is driven a little bit by reinsurers' desire to diversify a little bit, particularly new Bermuda startups starting to show more appetite for casualty business as a means for diversifying their portfolios," he said.

Andrew Marcell, managing director and global casualty practice leader at Guy Carpenter in New York said, "Typically, you're getting some improvement if you had good results, or you can articulate a meaningful strategy about how you're going to manage your business over the next couple of years."

Retentions have also increased with cedents keeping up to 10% more of the business risk, Mr. Marcell said.

Casualty rates are "fairly stable," said Mr. Hewitt. "In general, the experience of the working layer casualty business has been very good over the past several years, and (reinsurers) are giving credit for that better experience," he said. Rates are "really being driven by the experience of the line itself vs. the reinsurers competing the price down artificially."

Mr. Brosius said noncat property and casualty rates continue to moderate, "not dramatically, but there seems to be almost no leakage" in hard market conditions between the catastrophe and other markets, unlike previous years. "What we're not seeing is any kind of upward reaction that's driven by the property cat piece. It's just not spreading at all," he said.

Meanwhile, the retrocessional market remains tight, say observers. "That's probably going to take a good six months to a year to really start normalizing," said Mr. DiClemente.

In many cases, there is such a large difference between what sellers want and what buyers are willing to pay that "deals are just not getting done," said Mr. Gardner.

"It just seems that people are reluctant to sell retro capacity," said Mr. Brosius. "Mostly capacity in retro has gone down, much of it has disappeared and prices, where it is available, have gone up dramatically. It's the most pressured part of the market."

Sidecars have helped to some extent, he said, but they are primarily providing only quota-share protection, which provides less protection in the case of a big event.

"Right now, the traditional retro market has dried up," though some new facilities are emerging, Mr. Hewitt said.

For example, Bermuda-based Harbor Point Ltd. has formed New Point Re Ltd. to write retrocessional business, he said.