Panelists Say U.S Reinsurers Must Resist Temptation

June 18, 2004

U.S. reinsurers are in peril of repeating the mistakes of history by sacrificing profitability, according to a panel of industry leaders at Standard & Poor’s Annual Insurance Conference in New York City. Now that prices are beginning to level off after a three-year upward surge, they said, managements must resist the temptation to pursue market share at the expense of bottom-line results.

“This is the opportunity to put into practice what we should have learned from the past,” commented Al J. Beer, Executive Vice President of American Re Corp. “We have to get ourselves out of our cyclical behavior.”

He was referring to the industry’s indebtedness (in the form of
inadequate reserves) for policies written in the late 1990s, when pricing was weak. The U.S. reinsurance industry has “a long way to go to convince ourselves and our employees that we can be profitable,” Beer added.

Laline Carvalho, a Standard & Poor’s credit analyst specializing in the
U.S. reinsurance sector, points to the sector’s 6.5 percent ROR in 2003 as “a fairly disappointing number, considering we’re at the top of the hard market.” Over the past 10 years, the average ROR has been a meager 2.5 percent. Although she has witnessed a change in management philosophy in the past few years towards “a bottom-line focus rather than a top-line one,” she questions whether that discipline will be maintained and “whether the industry can reverse its history of underperformance.”

Other panelists agreed the industry is now at a crossroads and that there is hope for stability in ratings if reinsurers can remain steadfast to a profitability imperative. “With discipline you can have a very good return in this market,” commented Joseph Taranto, CEO of Everest Re. “That means being willing to walk away from poorly priced business.”

It also means resisting pressures from shareholders to go after revenue. “When your volumes are dropping, it’s very hard to tell your shareholders that’s a good thing, that they should be excited you’re doing less business,” said Taranto. “Having said that, it beats the alternative of writing more business and later having to pay for it.”

Reinsurers will also have to give up entrenched behavior patterns. “A lot of money has been made recently,” said Britt Newhouse, President of brokerage company, Guy Carpenter – North America. “The problem is that the people who made it don’t stop writing the business when they should.”

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