Two consecutive years of record earnings in the property and casualty insurance industry driven by lower catastrophe losses and healthy investment returns, along with unforeseen risks brought on by the subprime mortgage and credit crises, have created unique conditions in the industry, according to senior reinsurance company executives.
They told attendees at the Casualty Actuarial Society’s 19th annual Seminar on Reinsurance that in the latter half of last year and so far in 2008, the softening of rates has become a hot topic, with discussions centering on excess capacity, increasing retentions among primary insurers, declining rate levels and loosening terms and conditions.
“There certainly are cries that the soft market is coming,” said Mike Angelina, chief actuary and chief risk officer of Endurance Specialty Holdings, Ltd., and moderator of the panel. “The question is when will we fall off the cliff?”
In the first quarter of ’08, investment returns have gone down, there have been large property risk losses, declining revenues in reinsurance premium, increasing loss ratios as pricing trends decrease, and companies withdrawing from certain areas of business, Angelina said.
The reasons for mixed views going forward are the continuing decline of investment returns, inflationary and recessionary impacts on loss costs and reserves, and the upcoming hurricane season. “With all of these things going on coupled with a deteriorating rating environment, no wonder our sector is challenged,” Angelina warned.
H. Elizabeth Mitchell, president and CEO of Platinum Underwriters Reinsurance Inc., characterized the market today as “soft, but very, very interesting.”
She said the market is soft, but different from other soft markets in three respects: ceding companies are keeping higher retentions than in the past; the reinsurance market seems to be more disciplined and harder than the primary market, and there is a higher level of scrutiny on the part of rating agencies and what they require in capital, as well as how ceding companies are looking at reinsurer security and receivables.
Since January, rate competition in the primary market, particularly for big capacity risks on the property and casualty side, has really started to accelerate, Mitchell said.
“We’re also beginning to see the softening of terms which is something that actuaries have struggled to evaluate and which are much more painful in terms of loss costs when they slip and much more effective when they are tightened,” she added.
Ceding companies have been more confident that their margins are strong, which is leading them to be willing to decrease rates and also to expand geographically or by product line. “Everyone argues that they are going to exercise the same discipline as they expand, but when you have five to 10 more markets in someone else’s backyard, you can’t help but have competition – extreme competition – on rates and terms of conditions,” said Mitchell.
Focusing on the primary companies, Steven Kelner, the lead U.S. casualty underwriter with Swiss Reinsurance America Corp., said that rates today are on same level as rates at the end of 2001 and early 2002 for most casualty lines.
“It feels like it is the same cycle but with a different story behind it this time,” Kelner observed. “There is always a new era and a new reason why there isn’t irrational behavior and there is great rationalization;but I don’t buy it. It’s the same cycle with the same double-digit rate decreases;each time we’ve gone through the cycle we’ve understated the impact of rate decreases. So we talk about discipline but we don’t see it to the degree that we should yet,” he said.
“I saw lot of comments in the first quarter about [reinsurer] premium being down because of cession rates but I didn’t see enough comments about premium being down because rates were stupid,” Kelner said. “It’s obvious we don’t yet have a catalyst for change,” he said.
The president and CEO of Arch Reinsurance Co., John F. Rathgeber, warned the actuaries that “we’re in a pretty bad place right now” that is ironically largely due to the fantastic results from the past two years with record earnings in both the property direct side and the reinsurance side.
The capital in the industry is about 80 percent above what is was in 2001, he said. Modest rate cuts started in the middle of 2004. The industry is about to enter the fifth year of rate cuts and the cuts have occurred at an accelerated pace at the end of ’07 and into ’08.
The Arch Reinsurance executive said the industry is at the same point it was in the 1997-2001 cycle and is entering the point at which “we’re going to find out in a few years if we really are better at managing the cycle or not.”
Regarding what has been learned from prior cycles, Rathgeber said that one lesson is to pay close attention to the different reserving practices at each ceding company. In the past cycle, some companies were slower to put up case reserves and instead started putting up “signal” or “bulk IBNR” reserves. There is nothing inherently wrong with these practices, but you need to be aware if there’s been a change and factor that into the reserving process, he told the actuaries.
Source: The Casualty Actuarial Society
www.casact.org
Topics Trends Windstorm Reinsurance Market Casualty
Was this article valuable?
Here are more articles you may enjoy.
Progressive Records Five-Fold Increase in Q1 Net Income 
DeSantis Signs Bill Barring Local Worker Heat Protection Measures 
Pennsylvania Issues Its ‘Expectations’ for Insurance Carriers Regarding Their Use of AI 
If US Inflation Reflected Rising Home Insurance Costs, It’d Be Even Higher 
