However, with a short-term capacity crisis potentially ahead, some of the lower-rated companies pegged at single-A and triple-B that struggled during the soft market might now find willing buyers for coverage, several sources agreed.

The pendulum has swung in the direction of the reinsurers in that clients are now worried about capacity, said Robert Mebus, managing director of financial services at Standard & Poors in New York. “[R]ight now reinsurers can sit around and pick and choose the business they want to write,” he said.

Those insurers that bought reinsurance opportunistically on price might have more difficulty finding coverage than those with long-term relationships, he said.

The capacity crunch is such that primary companies might be willing to buy reinsurance from carriers that they wouldnt have talked to during the soft market because their ratings werent high enough, Mr. Mebus said.

“During the soft market, the primaries are very demanding as far as the credit quality and rating of reinsurers, which over time puts pressure on those companies they define to be on the margin,” he said.

Now, however, “a fairly large number of reinsurers, especially after the World Trade Center [attack], havent got the capital to write much business and maintain their existing ratings,” he noted.

Reinsurers might decide to write more business and take the chance of getting their ratings lowered “if they feel the primaries will still do business with them,” Mr. Mebus added. “A year ago, these reinsurers never would have considered that.”

The immediate concern has to be capacity versus security, he said, although he thinks this is a short-lived phenomenon.

Steve Bolland, senior vice president for Gill & Roeser, a New York-based reinsurance broker and financial adviser in the insurance industry, believes there will be a flight to quality on the part of ceding companies. Insurers will have to consider how much more they are willing to pay to get the quality reinsurance they seek and, secondly, they will have to consider the old saying, “that the most expensive reinsurance is the reinsurance you cant collect on,” he added.

These two realities will be fighting each other, according to Mr. Bolland. “At the end of the day, if there is a capacity shortage, people have to decide whether theyre willing to reduce their security requirements,” he said.

Mr. Mebus predicted that the World Trade Center losses will lead to an even wider split in the industry between the bigger, well-capitalized companies that are highly rated on the one side and the companies with lower ratings and more marginal capital on the other.

The unknown factor that could change the dynamics is how much new capital comes into the market to take advantage of hard market conditions, Mr. Mebus said.

As a result of the additional capital that has been coming into the industry recently, Don Watson, director of S&Ps Insurance Ratings in New York, said he did not think the hard market would last more than another two years. “I do not believe that the hard market were entering will be as enduring as previous hard markets as a result of the influx of new capital, which will create the soft-market cycle all over again,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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