Gross Premium Decline Seen As A Badge Of Honor

Some reinsurers wont put profitability at risk by chasing top-line revenue growth

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A nearly 20 percent decline in gross premium that was reported by Hannover Re earlier this summer might not, at first glance, seem like something to crow about. But in the European reinsurance market of 2004, it could be seen as a badge of honor and proof that at least the reinsurers are no longer chasing top-line revenues at any cost.

Hannover Re's chairman, Wilhelm Zeller, certainly seemed to think so.

"A significant decline in gross premium income, due in part to our proactive cycle management, is in no way cause for concern," he said in the company's earnings release. "Quite the contrary, we have once again demonstrated that profitability alone is what counts in our industry, not volume."

Europe, however, is not the only continent across the ocean that interests reinsurers. Throughout the Eastern Hemisphere, reinsurance pricing trends and opportunities vary. And while regulation plays a role in some regions, competition is taking hold in others.


Europe: Premium Drops Reveal Discipline

For European reinsurers in general, property-catastrophe remained the line where rates trended down, according to the annual "Reinsurance Market and Renewal Review" put out by the London-based Benfield Group Ltd. in January. But those declines should be put in perspective.

"European floods and the Turkish earthquake had prompted significant increases in previous years, and it was neither unreasonable nor surprising to see the softening in some regions, although a general expansion of capacity was clearly recorded in this line of business across the area," the report stated.

For the major industrial countries such as the United Kingdom and France, property-catastrophe price declines were kept under 10 percent, and in Germany prices were virtually flat, according to the report.

James Vickers, a broker for Willis Re in London, said it is remarkable how well the reinsurance industry has been able to remain disciplined in property pricing, considering some of the forces at play.

"It was a lot more difficult on the primary side, where a combination of rising rates [in recent prior years] and improving conditions, and a freakishly good run of lack of losses produced some wonderful figures, which in turn led to some rate cutting [this year]," Mr. Vickers said.

"With reinsurance, there is definitely a softening trend, but what we are seeing is that [reinsurers] are not prepared to play too many games," he added. "If the price deviates too far from what they think is acceptable, they will just pack up their pens and go away."

In addition to Hannover Re, Munich Res top-line slowdown also provided proof that this trend is for real, Mr. Vickers added. "To be fair, if the market softens and you want to maintain profitability, then you will have to shed [premium] income," he said.

A rising interest rate environment will put pressure on casualty lines, he said, since the long-tail nature of those risks allows companies to hold premiums longer and use the additional funds to try and gain market share through lowering prices.

A general flight-to-quality, which brokers and other experts say has taken hold in the reinsurance arena, will likely gain even more momentum in Great Britain, where new capital requirements will take effect at the end of this year. There, the U.K. insurance regulator, the Financial Services Authority, announced earlier this summer what FSA insurance sector leader David Strachan described as a "radical program of reform of insurance regulation."

According to an FSA statement, non-life insurers will continue to meet the statutory solvency requirements based on European Union directives. But in addition, they must provide a risk-based enhanced capital calculation to the FSA on a private basis, along with an assessment of their own capital needs.

"These, in turn, will be used by the FSA when we give firms individual capital guidance reflecting our own view of the capital required to support their individual profiles," FSA said.

The Benfield report noted that while buyers are not insensitive to price, security is taking on more importance. "Typically cedants demanded not only a minimal security rating, but also limited exposure to any one reinsurer and requested inclusion or exclusion of certain reinsurers by name," the report said.

Andrew Carrier of the London-based Kiln Syndicate said that while carriers may be looking for higher ratings in their reinsurers more so than in the past, they also have a greater choice now that London, Bermuda and North American reinsurers have gained credibility in the marketplace.

"The catalyst was the 1999 storms in Europe, which created turmoil in the market and widened the exposure. Up until that time European business had for the most part been placed within a tight circle operating on the European continent," he said. The London market has stood to gain the most from this trend, being the closest to the action, Mr. Carrier said.

One factor in keeping prices firm, at least in the Scandinavian countries, has been the introduction of new computer storm models that have predicted higher probable-maximum-loss figures, and thus led to industries seeking more primary coverage, according to Mr. Carrier.

In France, while property-catastrophe rates headed downward, large increases were recorded in the motor third-party liability accounts, and more moderate increases were reported in professional liability accounts. "Capacity was broadly similar to the previous year, but an increase was evident in property-catastrophe and personal accident lines," the Benfield report stated.

In Germany, Austria and Switzerland, pricing trends held, with property down and liability coverages up. But the one notable exception was the Austrian Terrorism Pool, where rates fell by about 50 percent, according to the Benfield report.

In the United Kingdom, downward pricing pressure remained despite the withdrawal of Erie, Hartford, Europa Re and Tokio Marine UK from the market in 2003. "Buyers continued to focus on cost, although reinsurer security was also a key," the Benfield report stated. "This was reflected in cedents imposing minimum rating requirements, restrictions on line size, and in some cases through the use of downgrade clauses."

Ken Brandt, who recently took over as leader of North America and Asia Pacific for GE Insurance Solutions (formerly known as GE Employers Reinsurance Corp.), does not see too much "drama" ahead in 2005. "I think the story for Jan. 1 will be relatively stable. When you look at the pricing on property, it has shown pressure from an original rate standpoint, and from a reinsurance standpoint. But the good news from an exposure standpoint is that everyone is exposure pricing," he said.

Mr. Brandt explained that this process involves taking in the data from properties all around the globe and modeling them using catastrophe models. "And so then you put a price against the actual exposure rather than saying this has been loss-free, so why dont we just cut the price 20 percent?" he said. "This is a very big development in the industry."



Asia: Japanese Market Softens

Moving east, the two Asian giantsJapan and Chinarepresent two ends of the reinsurance market spectrum.

Despite its well-documented economic troubles, Japan is still the second-largest economy in the world, and the one reinsurance market large enough so that it is not easily buffeted by single events or company actions, experts say. Chinas reinsurance market is dwarfed in comparison, but will likely explode in the coming decades if trends in the primary market are any indication, these experts contend.

Sean Mooney, chief economist for New York-based Guy Carpenter Inc., said the April 1 renewal season this year brought a lot of soft prices in the property-catastrophe market in Japan, particularly for non-proportional excess of loss catastrophe covers. "We saw the capacity expand. And in addition, there have been no major losses in Japan lately," he said.

Mr. Vickers of Willis Re agrees there is new capacity in one sense in the Asian property-catastrophe market. "But it is not so much that people are discovering Asiait is just that existing players are getting a little bit more open and aggressive," he said.

But with a market as large as Japan, one or two players taking a more aggressive tack will not upset the balance all that much, he added.

Analysts disagree over whether primary companies are looking to proportional or excess-of-loss reinsurance for property-catastrophe covers. Mr. Mooney said primary companies are looking for proportional reinsurance covers, and his companys 2003 report backs him up. "The recent trend [in Japan] of reducing proportional capacity halted this year, partially due to the bundling by cedants of excess-of-loss signings with participation in pro rata programs," the report stated.

But Neil Maidment, director of the London-based Beazley Group PLC, disagreed. "In general, there is a continued trend from pro rata to excess of loss," he said. "Reinsurers prefer the transparency of excess covers, particularly in the case of Japan, with all these mergers and balance sheets that are very large."

Mr. Maidment said that while there is not an overall shortfall of capacity in Japan, earthquake insurance remains at a premium. "Both from a primary and reinsurance viewpoint, they [market participants] will manage their [earthquake] capacity very carefully," he said.

This comes at a time when, according to the Guy Carpenter figures, over the past 12 years the percentage of Japanese homeowners obtaining dwelling earthquake protection has risen from 7 percent to 16.2 percent.

Chinas eventual move toward a free reinsurance market will see the evaporation of China Res statutory 20 percent cession dwindle to nothing over the next several years. "It is a way primarily of providing a soft landing from a state bureaucracy to a free market enterprise," Mr. Vickers said.

The China Reinsurance Company was one of the units spun off in March 1999 from the old Peoples Insurance Company of China to operate as an enterprise in many ways like a private sector business, but one nonetheless that is still state-controlled.

In the two prime markets of Southeast Asiathe Philippines and Indonesiareinsurers are rapidly acquiring more data through the Catastrophe Risk Evaluating and Standardizing Target Accumulations system, developed by reinsurers to better assess risk within specified zones within countries. "In general, this will lead to higher pricing as companies gather more data, but the opposite could also happen," Mr. Mooney said.

With the inadequacy of primary pricing, and its concomitant effect on proportional reinsurance, reinsurers are for the most part sticking to excess covers if they want to play in the Southeast Asia property market, Mr. Mooney added.

The number of reinsurers located in Singapore has been more than halvedfrom 40 to less than 20over the past couple of years. But that market continues to provide the majority of the capacity for insurers in Southeast Asia, according to the Guy Carpenter report.

"Those Singapore reinsurers that remain have been actively competing for excess-of-loss programs. At recent renewals, leaders requested minimum shares of 30 percent to 50 percent for each program," the report stated. "As a result, many excess-of-loss programs were oversubscribed."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 3, 2004. Copyright 2004 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.