REINSURANCE PERSPECTIVE — from the frontline

CU: What impact will global cat losses have on reinsurance renewal rates?

Tom Hopkinson: On a global basis, insured catastrophe losses in1999 were the second highest on record. The combined ratio for the global reinsurance industry exceeded 115% for calendar year 1999. Since the largest reinsurers are global players, the Canadian market is being impacted by events around the world, including the U.K. and European storms which hit in late October of this year. In Canada, however, catastrophes in 1999 and 2000 have been relatively light, following the worst catastrophe loss in Canadian history, the January 1998 Ice Storm. As a result, we saw some renewal rate increases in 1999, for those clients impacted by the losses of 1998 and then stabilized pricing for 2000 catastrophe reinsurances. There will definitely be some firming in the marketplace for January 2001 renewals.

CU: What is the impact of global reinsurance trends on the Canadian market?

TH: Globally the reinsurance industry is under severe financial pressure. The top 25 global players have seen their worldwide combined ratios skyrocket from1998 to 1999, and year 2000 results over all territories will not be good. Adding to the pressure on a number of reinsurers is the diminished capacity of the retrocession market. A number of players have withdrawn from this market in the past year, driven by severe losses.

CU: Will not the excess capital in the business hold back rate increases?

TH: While most observers believe there is more than adequate capital in the reinsurance market, this does not mean that reinsurers can continue to give this capital away by under-pricing risk. Shareholders are demanding better returns and increasingly reinsurers are prepared to withhold capacity rather than take on risk at prices that they believe are grossly inadequate.

CU: Is this market turn like others?

TH: The turn in the marketplace is more like a rifle shot than a shotgun blast. Reinsurers are carefully reviewing their accounts. Where pricing is believed to be significantly out of line with exposures and/or experience, they are seeking significant price increases and, in some cases, declining the business. In situations where exposures are lessened and experience has been good, they are renewing at expiring terms or with only modest increases designed to offset their higher costs of doing business, including retrocessional protection charges.

CU: What lines are affected by the market firming?

TH: The hardening market is spread across most lines but is most pronounced in the property area. On the property catastrophe front, our rate-on-line price index for major programs increased slightly in 1999, the first upward move since 1994. Although the 2000 rate increases in most cases are in the single digits, there is clear evidence of a market turn.

CU: What about multi-year contracts?

TH: About 60% of contracts did not renew in January 2000, as they were multi-year and specifically designed to cross the perceived Y2K chasm. This means that the vast majority of contracts will be up for renewal this coming January. As reinsurers are expecting rates to continue up, they are reluctant to enter into multi-year transactions.

CU: Do you see reinsurers dropping out of the Canadian market?

TH: No, in general and over the long term, most reinsurers have had good experience with their Canadian operations and are not likely to exit the market. If anything, we would expect more competition, but probably coming from a capacity and service standpoint, not just in terms of price.

CU: How is Guy Carpenter dealing with this changing environment?

TH: We are optimistic about the future direction of the market. While the firming means higher prices for a number of our clients, most recognize that a gradual return to adequate pricing levels is preferable to a continued downward spiral, followed by a capacity meltdown. A firming market provides a great opportunity for all of us at Guy Carpenter to assist our clients in obtaining appropriate reinsurance protection, at reasonable prices.