Insurers Scramble For Cover In Chaotic Property Re Mkt.
London Editor
The recent January renewal season for property-catastrophe risks was described by one and all as chaotic, late and often expensive for reinsurance buyers. The seasons lateness was the result of the uncertainties that hit the market post-Sept. 11, as well as negotiations over new exclusions for terrorism, cyber-liability and sometimes even mold, sources say.
“The market after Sept. 11 was very chaotic,” said William Heckles, chief reinsurance officer for HSB Group Inc. in Hartford.
“It was a strange renewal. In retrospect it was easier than some people expected because the capacity was available ultimately at a price,” added Rod Fox, chief executive officer of Benfield Blanch in Dallas, Texas. “There was a hurdle rate. Once you cleared the hurdle rate, there was capacity available.”
Indeed, he noted that Benfield had “some programs that were significantly over-subscribed once we achieved the hurdle rate.”
Mr. Fox said the market has thus far been fairly good at avoiding a total knee-jerk reaction, which happened in the hard market of the mid-1980s, although he admitted he has seen it occur in some cases during the recent renewals.
The large commercial property market has had the most problems finding coverage, he said.
Reinsurers are taking a much harder look at their aggregations and are consequently taking smaller lines, according to Mr. Fox, noting that this is a particular problem for insurers with trophy risks on their books, such as sports stadiums, high-rise office buildings, and the like. “That was one of the most difficult areas of the market at year-end and will continue to be going forward,” he said.
These insurers are being forced to cobble together coverage on a subscription basis, prices have gone up substantially, and theyre taking higher deductibles, he reported.
Negotiations over cyber-liability, as well as biological and nuclear exclusions helped delay the conclusion of the renewal season, Mr. Fox said.
“Having been a buyer for 12 years and seeing quite a lot of ups and downs, this past renewal had to take the cake,” Mr. Heckles said. After Hurricane Andrew in 1992, the market was in a bit of turmoil, but Mr. Heckles said he never felt then like he wouldnt be able to complete his program.
“This time around, people just didnt seem to know what they wanted to do,” he said, explaining that no one wanted to take the lead early and begin underwriting unless they saw what other underwriters were doing.
“I think at the end of December, at least 50 percent of the programs in the market were not finished and people were having a very difficult time trying to tie down all their treaties over the issues of terrorism, cyber-risk and mold,” he said.
The problems began in the retrocessional market, which didnt reveal what kinds of capacity it would offer to reinsurers until well into December, he said.
This had a domino effect on reinsurers, he noted, which in turn delayed the primary companies from getting their treaties together, “putting them in a position where they couldnt be definitive with their own customers,” he added.
In setting both price and terms, there was a void of leadership in the market, which contributed to the delays and the problems “that were ultimately felt by the customers themselves,” he said.
In public, many reinsurers were saying that they only would accept one set of terms and conditions, with no exceptions, which doesnt give the competition much to go on, he said. But he found that in private discussions, reinsurers sometimes took “a book-of-business approach” on terrorism, for example.
He noted if a primary company is mainly a personal lines writer, it might have gotten one set of terms and conditions, while a high-hazard, special-risk company that writes utilities, water treatment plants, and so forth, saw much stricter wordings involving terrorism.
James Vickers, managing director of reinsurance for Willis Ltd. in London, said that for personal lines business outside the United States, risks below approximately $50 million have required no terrorism exclusion. “For risks over $50 million, the reinsurance market has not been prepared to provide it, other than in exceptional circumstances,” he said.
Mr. Vickers said there are lots of underwriters who are prepared to write terrorism facultatively, which enables them to control their exposures. Some people are saying, “I dont mind writing certain types of risk, but I dont want to write football stadiums, government buildings or other target risks,” he explained. “But they say they dont mind writing normal commercial office blocks, provided theyre not above 25 stories. Everyone has got their own attitude towards the terrorism risk.”
However, he added, its very difficult to find support for treaties that include automatic cessions of terrorism-exposed risks.
“Given how widespread the change within the industry is, everyone tends to be dragged along with it,” Mr. Heckles said, adding there is hardly any line of business thats escaped the post-Sept. 11 issues, even if a company doesnt have terrorism or cyber-liability exposures.
Mr. Heckles predicted that rate increases and coverage restrictions will continue on through the July renewals, and are unlikely to abate by the time the January 2003 renewals get under way.
He said he hopes that as the market settles down, more agreement will be possible between primary companies and reinsurers “as to what is truly needed in the way of exclusionary wording,” and that more terrorism capacity will become available for a better price.
Cyber-liability became a problem because reinsurers were facing a catastrophe accumulation problem from a virus or a worm that affects computers on a global scale, explained Mr. Vickers.
Some property policies potentially would allow a company to recover damage to computer software that has not come about from a physical loss, such as a fire, he said. Many reinsurers want to provide coverage only when a physical loss is involved, he said, adding that “theyre tightening up on the definition of software as property.”
As a result of these cyber-exclusions, the original insurers are either excluding this exposure from their original policies, adding the same exclusions to their original all-risk policies, or are granting coverage subject to a small sub-limit, which they can then retain themselves without needing any reinsurance, Mr. Vickers explained.
Chris Hills, managing director at Guy Carpenter Inc. in London, said the cyber-liability issue is a rehash of what went on with Y2K two years ago. The underwriting guidelines that were required for the 2000 renewal should actually cater to the push for a tighter position on cyber-liability, he added, explaining that the issue lay dormant last year because the market was not as tight.
“Weve largely tried to steer clear of exclusions by presenting underwriters with position papers from our clients,” he said. “But I have to say, the attitude appears to be tightening among reinsurers in favor of including a contractual exclusion.”
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 18, 2002. Copyright 2002 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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