View this article online: https://www.insurancejournal.com/news/national/2010/06/21/110903.htm
A softening casualty market, strong company earnings, and a quiet catastrophe season resulted in the reinsurance industry enjoying, in 2009, one of its most profitable underwriting years in nearly a decade.
Today, reinsurers must continue to push-back on multi-year deals and reject raw coverage despite pricing pressure by primary insurers, according to a panel of senior reinsurance executives who spoke before the Casualty Actuarial Society (CAS) Seminar on Reinsurance.
George Venuto, executive vice president, Willis Reinsurance, noted that there is a distinct difference in how primary business and excess casualty business is being viewed. “Trying to please primary casualty insurers is probably the most difficult thing to do right now,” he said. “On the property side, we are continuing to see rate pressure. The model changes have created a visual downward pressure on pricing,” he said, adding, “It is not the best pricing environment on the insurance and reinsurance side.”
Venuto said that terms and conditions were softening somewhat and there was an increase in loss trends. “Capacity is available for all lines, in particular property and casualty. You can get it placed.”
Damien Magarelli, director, Standard & Poor’s, said that his firm has not seen a change in terms and conditions. “Multi-year policies are very few and far between, and there have not been a lot of changes in profit commissions,” he said. “After Hurricane Katrina, there were 30 to 40 percent price increases for some property lines; renewal rates in 2010 have exhibited declines from 0 to 10 percent. Additional capacity has contributed to declining prices,” he said.
Magarelli noted that 2010 has so far been active with disasters. “The Chilean earthquake was a large event but much smaller than Northridge, with losses expected in the $8 to $10 billion range,” he said. “But that won’t be a catalyst to drive rate increases globally. Floods and storms in the northeast will not change the pricing cycle. If you have a regional carrier, their earnings will be affected, but not dramatic enough of an impact for a new pricing cycle.”
According to Magarelli, the Gulf oil spill is about a $1.5 billion insured property loss and while there may be litigation in terms of the debris cleanup, this is “not expected to be a significant insurance industry event, in our view.”
Venuto agreed and said he didn’t see that any of these events had enough impact to suck capacity out of the market because it is an overcapitalized industry. “I don’t see these events being enough to change anything dramatically.”
Magarelli said that these catastrophe events have reduced the margin reinsurers had going into hurricane season, but it’s not outside the normal budget. “At this point in time, cat losses were low last year, but there were losses in the Midwest, which impacted a different group of regional companies. This year it is affecting more Northeast regional companies.”
“It’s not so much where we are, but where we are going,” said Magarelli regarding where the industry is in the cycle. “Frequency has been declining for a number of lines for many years. That has propelled earnings to a greater degree,” he said.
“Severity is increasing; we see frequency now turning flat; buying habits have changed,” he said. “You may see a larger pick up of loss costs trends. It’s an issue for us,” he said. “If there is an acceleration of loss cost trends, then you may see a dramatic increase in losses and reduced earnings.”
Venuto thought that the industry may have a loss ratio environment similar to that of 1995. “We are getting close to where there’s not much rate left to give back,” he said. “Frequency has been flattish. The impact of the economy on what’s happening, chasing fewer exposure dollars, will have a dampening affect.”
Venuto said that there are more fail-safes today than in the late1990s. “It’s not just actuaries looking at it; now everybody gives you a price monitor. We really see where trends have been. Terms and conditions have held and that was the monster under the bed in the late ’90s. We’ll come out of this soft market better than the last one mainly because actuaries are more involved than they were in the past.”
“The difference between the late ’90s versus now is the reinsurance appetite for risk,” added Magarelli. “Most direct reinsurance companies in the ’90s opened up a lot of capacity that companies were allowed to write against. There’s more discipline now, better tools. Also a fundamental change — reinsurance companies are more restrictive in terms of capacity. We’re still going to have cycles, but we may not have as many peaks and valleys as we did in the past.”
“Clearly there have been external influences that have reinforced the focus and improved the testing of setting reserves,” said Magarelli. “Some companies still think there are rate declines that can be had; others think rates should go up. Our view is that reserves are adequate, but we still think companies are living off the 2002-2005 accident years.”
Venuto said that the rules have changed to some extent and that there is more discipline. “Claims are settling quicker. There is definitely a movement on the claims side of best practices, driven by actuaries, underwriters and claims adjusters. Reserving and claims practices have improved dramatically.”
Venuto said that pricing actuaries are the “gatekeepers to get something placed in this business.” He advised actuaries to be more visible with clients. “The way you’re going to outperform your peers is to know how a company works. Get out there with your underwriters; get to know your clients and how they view risk,” he said.
Source: Casualty Actuarial Society