REINSURANCE BROKER VIEWS

Donald Alexander, senior vice president of Guy Carpenter & Company Ltd. (Canada).

My instincts tell me that the reinsurance market is under-priced. Rating models strongly indicate that market prices are below what they should be. This is not surprising, given year-after-year of price erosion and expansion of coverage. My gut feeling is that any “fat” (i.e., “profit”) has been lipo-suctioned from reinsurance pricing.

There may be some upward movement in pricing in the upcoming treaties, but the reality is that more than half of Canadian business won’t even be renewing next year. Of course, if insurers increase primary pricing that would have some flow-through benefits, but I see little sign of that happening.

Some “broker market” reinsurers have cultivated direct relationships, especially for facultative reinsurance, which is not new to the Canadian market. The buyers of reinsurance will continue to call the shots, and brokers have to demonstrate that they add real value in designing effective reinsurance solutions and providing effective client advocacy.

Canada’s insurers and reinsurers have been very pro-active with their advance planning to manage Y2K uncertainties. That’s the good news. The bad news is that we don’t know what sort of creative litigation we will be presented. My guess is that claims costs connected with Y2K won’t be significant.

As for ART development, our firm is dedicated to providing clients with the latest in innovative solutions. The U.S. is well ahead of Canada in real transactions involving securities and derivatives classes. We don’t doubt that Canada has the potential to present similar opportunities.

As one who has been recently “consolidated” (the Marsh/Sedgwick merger), I don’t see a lot of business need for further consolidation — especially for organizations with the strength and size to service their clients’ needs. But, I’m sure that consolidation will continue, because strategically, growth through acquisition is about the only way to expand in this environment.

I see plenty of quality reinsurance capacity for any available business in 2000. Certainly, underwriting profitability has slipped and investments, especially realized capital gains, have become unpredictable. On balance, 2000 will present a significant challenge to Canada’s reinsurers.

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