Report Reinsurance Rate Rise Reduced

January 14, 2002

A recent survey by Reuters News Service indicates that the expected strong surge in reinsurance premiums for property catastrophe coverage may be a good deal less than originally anticipated.

Although the market remains strong, having recovered most of the ground lost since the Sept. 11 attacks, price increases, which many underwriters anticipated would rise by as much as 100 percent, have in fact remained fairly steady throughout the January renewal period. Premiums have increased, but by far less than than had been anticipated, between 30 and 40 percent.

Reuters sites several reason for this unexpected development. New, mostly Bermuda-based companies, formed since Sept. 11, have been successfully competing for business. They could end up with as much as $6.5 billion worth of premium, according to Standard & Poor’s, out of an expected total of $110 billion.

The new reinsurers are able to offer competitive rates, which have held down premium increases, especially in the Lloyd’s market. Almost all of them are vehicles created by some of the industry’s biggest insurance companies and brokers, including AIG, Aon, Marsh, State Farm, Zurich and others of similar size. They are well capitalized, and their clean balance sheets, with no long tail liabilities, have given them high start up ratings, usually in the ‘A’ range.

The net effect appears not only to have lowered the expected premium increases, but may also shorten the length of any market upturn. Reuters quoted Hannover Re CEO William Zeller as stating that “One effect of the entry of these new companies is that they will definitely shorten the hard market (where demand for reinsurance capacity is very strong and therefore prices are high). Whereas it might have lasted five years, with these additional reinsurers it might only last two or three years.”

If his analysis is correct, and indications seem to point that it is, it should remind everyone of one of Yogi Berra’s famous statements – “It’s déja vu all over again.” The industry could be in for the same swing from not enough capacity to too much, as happened after the 1992 surge of capital into the reinsurance market following the devastation wrought by hurricane Andrew.

According to S&P an estimated $25 billion in new capital has poured into the reinsurance market since Sept. 11, both for the new ventures, and for companies with an established presence. With such an influx of capital it’s a wonder that premiums have increased at all.

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