Broker: Reinsurance 'Sharks' = Soaring PC Prices
BY SUSANNE SCLAFANE
National Underwriter News
June 5, 2006
Posted June 19, 2006
NEW YORK -- Facing property-casualty reinsurers in a "feeding frenzy" to raise prices, brokers should advise clients to buy as little as they can afford, a brokerage expert advised here.
Rod Thaler, executive director and national director of Willis Re in New York, gave that counsel to actuaries during the Casualty Actuarial Society's Seminar on Reinsurance last week.
Mr. Thaler admitted that this was unusual advice for a broker to deliver. He said the message for brokers was a by-product of his concern that business will be driven out of the market, never to return.
Reviewing conditions he's seen in recent weeks in the U.S. property reinsurance market, he said that pricing in Florida is up 125 percent over last year, and that nationwide programs are facing price increases close to 100 percent. Even catastrophe-exposed regional insurers are seeing 25-to-50 percent hikes, he said.
Continuing to describe the situation for nationwide programs, he said there has been a compression in capacity as reinsurers pay close attention to their exposed catastrophe aggregate limits -- in some cases, responding to pressure from rating agencies to reduce their exposures.
He estimated that commercial nationwide capacity (available limits) from the worldwide reinsurance market, which was $1 billion at January 1, has fallen to $500-to-600 million.
"As that capacity has reduced...prices have gone up, up and away," he said.
Reflecting on implications for the long-term viability of the risk transfer products offered by the reinsurance market, he said, "The thing I really worry about is killing the goose that laid the golden egg."
"We have sharks in a feeding frenzy," he said, referring to reinsurers. "Just because they have so little aggregate available, they're looking to maximize what they get," he said.
"We should advise our clients, as brokers, to buy as little reinsurance as they can afford. Ultimately, if you give...credible advice like that, you're going to have loyal clients," he added.
Mr. Thaler continued: "The prices we're seeing right now make no sense. There are going to be alternatives," and insurers will look at catastrophe bonds and at "drilling down" and paying more attention to risk management.
"Retentions will be driven up. Business will go out of the market. And it ain't going to come back," he said.
Mr. Thaler began his presentation describing a "tale of two cities" in the reinsurance market, referring, in part; to the big difference he's witnessed in property reinsurance market conditions at midyear compared to what happened on Jan. 1.
Giving what he called the "in-the-trenches" perspective of a practitioner with 30 years experience, he noted that it is not typically true that a large August or September hurricane has a dramatic impact on cat-re pricing on Jan. 1, instead being felt in the second or third quarter of the following year.
Yet, he suggested the change was more dramatic this year. "I won't say that 1/1 renewals went like a hot knife through butter, [but] it was almost as if, this year, at March 15, someone turned the switch and the market was tighter than a drum."
Later, during a discussion of various factors impacting the market, he suggested that the "someone" might have been the rating agencies.
"Basically, it seemed like they had a 'come to Jesus' conversation with some of the reinsurers, where they took them aside and said...show me your business plan. [Then,] they gave [reinsurers] a choice: You can raise more capital, or you can cut your aggregates."
He said brokers sensed that such conversations took place during the last week in March and early April, calling them key drivers of market changes.
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