Best Reports Pressure on Reinsurers, Sees Radical Change

September 9, 2003

A.M. Best’s report, “Global Reinsurance,” focuses on the pressures affecting the financial strength of the industry, and discusses the factors that it sees driving market conditions.

The report cited the following:
–Reductions in capital following losses on equity portfolios, adverse development in casualty lines and the World Trade Center loss.
— Limited willingness of institutional shareholders to restore capital reflecting both the demand for maximum returns on capital provided and fear of further adverse development.
— Low levels of likely investment returns given the interest rate environment.
— Improved underwriting performance but doubts that this will be sufficient to support high levels of risk-adjusted capital adequacy over the cycle.

“These factors are leading to radical changes in the industry. In particular, some major insurance or financial services groups have reduced their commitment to reinsurance, leading to market withdrawals and reduced ratings where parental commitment is a rating factor. In addition, to defend their own risk-adjusted capital position, some professional reinsurers have been reducing risk exposure by moving out of some lines, territories or even businesses,” said Best.

“The upside, however, is the ongoing global hard market. While property pricing may be beginning to soften, this is typically from rates well above the technical level. Casualty, meanwhile, continues to firm in many lines, although absolute quality of current pricing remains uncertain given the ongoing potential for adverse development from the 2002 and 2003 accident years,” it continued.

Best’s report also noted that newer reinsurers have been doing better than the older ones, as they benefit from the premium increases and from the fact that they do not have the long-tail liabilities of many older companies. “At this point, any softening appears largely controlled, although some strong regional competition is emerging,” said Best. “But the next 12 to 18 months will be crucial. If the major players start using their scale in the market to put pricing pressure on smaller rivals, then discipline could evaporate. Equally, if the start-ups use their clean balance sheets to enter new lines via pricing, especially casualty, the move back to irrational prices could all too easily be triggered.”

The report noted that “senior management teams of both groups are adamant such developments will not occur,” but then added that “the industry has been here before, and there must be some doubt. If significant softening does happen, then the current reduced levels of financial strength will come under still further pressure.”

Best’s reinsurance report also provides “a ranking of the world’s 35 largest reinsurance organisations and commentary on the following individual property/casualty reinsurance markets: — Bermuda — Continental Europe — Lloyd’s and the London Company Market — United States.”

BestWeek subscribers can download printed copy of the full 20-page special report for $25 or a combination of the printed report plus a spreadsheet file of the report data for $100 from www.bestweek.com.
Nonsubscribers can download a printed copy of the full report for $75 or a combination of the printed report plus a spreadsheet file of the report data for $200 from www.bestweek.com.

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