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Casualty lines challenge reinsurers but offer long-term opportunities

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MONTE CARLO, Monaco — Casualty lines represent a near-term challenge and a long-term opportunity for reinsurers, executives said at the Rendez-vous de Septembre reinsurance meeting in Monte Carlo, Monaco, last week.

The immediate challenges facing casualty lines result from forces inside and outside of the industry, they said. The persistent low interest rates in developed economies has sapped investment yields, making long-tail lines of business such as casualty more risky, said Michel Lies, CEO of Zurich-based Swiss Re Ltd. “Historically low interest rates are one of our main challenges,” Mr. Lies said.

Moreover, the duration inherent in long-tail lines exposes reinsurers to political risk, said Torsten Jeworrek, CEO of reinsurance for Munich-based Munich Reinsurance Co. For example, reinsurers writing business in certain areas of the European Union face the remote prospect of accepting premiums in one currency and being forced to pay claims in a different currency, Mr. Jeworrek said, adding such considerations are reflected in pricing.

“The longer the tail of the business, such as the casualty business, the more conservative our pricing approach,” he said.

Economic and political uncertainty, paired with what many reinsurers see as insufficient rates, have caused reinsurers to temporarily pull back in casualty.

Matthias Weber, group chief underwriting officer for Swiss Re, said his company has reduced its casualty business over the past several years due to the low rates, but the reinsurer would be ready to increase its casualty book if rate increases are pushed through.

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Likewise, Jamie Veghte, executive vice president and CEO of reinsurance operations for Hamilton, Bermuda-based XL Group P.L.C., said his company is turning down business in certain areas of casualty where the price did not match the risk.

“My concern with the long-tail markets is that while we have definitely seen improvement, I am worried that the glide path is truncated and short-lived,” Mr. Veghte said. “I take no joy in shrinking a (line of) business, but the economic realities of that business are, in our judgment, inadequate for our shareholders.”

Also clouding the pricing picture in casualty lines is the fact that many primary insurers have significantly increased their retentions for casualty business, further decreasing demand for casualty reinsurance, said John Berger, chairman and CEO of Third Point Reinsurance Ltd., a Pembroke, Bermuda-based hedge fund-backed reinsurer that began writing business this year.

“The amount of casualty reinsurance being bought has really gone down, and there's a disconnect between what people will pay and the risks they want us to take on,” Mr. Berger said.

Simon Clutterbuck, a director of BMS Intermediaries Ltd., a unit of broker BMS Group Ltd. in London, said he expects a mixed bag during upcoming casualty renewals. “There have been recent increases for tougher lines such as financial institutions, but workers comp and medical malpractice, for example, have been very flat,” Mr. Clutterbuck said. “And on a case-by-case basis, there have been reductions.”

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Another mitigating factor for casualty is the release of redundant casualty reserves. Many companies relied on reserve releases to compensate for substandard underwriting results, said Robert DeRose, vice president of reinsurance ratings for Oldwick, N.J.-based A.M. Best Co.

“Without the releases, we would have seen many more combined ratios above 100%,” he said.

However, Christian Mumenthaler, CEO of reinsurance at Swiss Re, said reserve releases were unlikely to continue for much longer, noting some companies have been releasing reserves for relatively recent underwriting years. “The momentum is decelerating ... it's possible that there's one more year, but three years is unlikely,” Mr. Mumenthaler said.

Slowing reserve releases coupled with ongoing low interest rates may spur higher casualty rates, said James Few, CEO of Aspen Bermuda Ltd. and Aspen Reinsurance in Hamilton, Bermuda.

“For long-tail business, we need to see more rate increases,” Mr. Few said. While there's been a general improvement in primary casualty in most areas of the world, reserve releases are running out and investment yields are likely to be low for some time.”

David Cash, CEO of Endurance Specialty Holdings Ltd. in Pembroke, Bermuda, said the primary market is seeing casualty line price increases, and the reinsurance market usually follows the primary market more closely on casualty lines than property lines.

“It's clear that the market is trying to move toward price increases,” he said.