Reinsurance Trends: Steady as It Goes

Canadian Underwriter Magazine recently asked Tom Hopkinson, the CEO of Guy Carpenter’s Canadian operations, to share his observations on the trends that affected treaty reinsurance year-end renewals, and his expectations for the upcoming season’s negotiations. According to Hopkinson, while reinsurance buyers face a tightening market, they can rest assured that reinsurers are by and large making reasonable increases based on sound underwriting.

CU: During the recent reinsurance renewal period, were there any signs of a tightening market? What are some of the recent trends that are causing a market turn? Is Canada’s market firming to a greater or a lesser extent than the U.S.?

Tom Hopkinson: Certainly the Canadian reinsurance market at year-end 2000 was tighter than it had been for a number of previous years. As expected, conditions varied from reinsurer to reinsurer, dependent on each company’s own experience and appetite and on the underwriter’s perception of the attributes of each reinsurance account. The vast majority of Canadian property/casualty reinsurance treaties have a January 1 renewal date, although most Canadian business was re-examined and in some cases re-priced during the last three months of 2000.

Simplistically speaking, the market turn resulted from deteriorating reinsurance underwriting profitability in conjunction with uncertainty over equity market investment yields. Canada has been free of major catastrophes for more than three years, but this is definitely not the case elsewhere in the world. Canadian reinsurers are, for the most part, branches or subsidiaries of foreign parents that buy worldwide retrocession covers, which include their Canadian operations. The law of supply and demand impacts those global retrocession agreements, forcing them to be bought over higher deductibles and at higher prices. Those increased retained exposures and more expensive costs of retrocession covers now form part of the Canadian reinsurers’ rating models, thereby squeezing margins, even on historically profitable accounts. Retrocessional catastrophe costs were the main reasons why upward pressure on rates affected catastrophe reinsurances to a greater extent than property per risk covers or automobile/casualty business.

The market firming in Canada has been less pronounced than is the case in the U.S., but that is not surprising given that over the last few years results for reinsurers south of the border have been far worse than those of their Canadian counterparts. However, when Canadian reinsurers priced this year’s January renewals in the fall of last year, they did not know that Reinsurance Research Council members’ combined ratios would jump from under 105% in 1999 to almost 113% for 2000, in a year that was catastrophe-free.

CU: Can you briefly describe the changes that took place at renewals both by line and by type of reinsurance contract?

TH: Around this time last year, in anticipation of a turning reinsurance market, we had expressed the hope and expectation that reinsurers would avoid a “knee-jerk, broad-brush” response to pricing. Thankfully, most reinsurers took the more sophisticated pricing methodology we were looking for. Rather than using an overall approach for each class of business – property or casualty, proportional or excess – reinsurers based their renewal pricing on past performance of the specific treaty in question. Unprofitable accounts were subjected to remedial action. Marginal results were treated with understandable price increases. Historically profitable accounts enjoyed the preferential treatment they had earned.

Treaty rate reductions were admittedly few and far between, but there were a not-unexpected number of “renew-as-is” offers for 2001 treaty business. Deductibles were increased in some cases, but there was no real trend toward higher reinsurance attachment points.

CU: What happened with regard to the multiyear contracts that were up for renewal? Are reinsurers still willing to enter into multiyear contracts?

TH: If you are talking about renewing traditional products for multiyear terms, reinsurers are not listening. However, nontraditional reinsurances, with extraordinary coverages or innovative pricing methods, remain good candidates for properly structured treaties spanning more than just one year.

CU: Are insurers having any trouble filling out the layers on their reinsurance programs?

TH: Up to this point, completing placements has not been an issue, provided the broker has done a proper job of counseling and then negotiating on behalf of the client. Capacity is driven by terms for the individual account. If pricing is realistic, recognizing market conditions and historic as well as probable future results, then good support follows. If ongoing pricing expectations disregard the facts, then reinsurers will balk at the renewal offer in favor of what they perceive to be better-paid business.

CU: Do you expect market tightening to continue for the next few years?

TH: This, of course, depends on experience. The traditional three-to-five year cycle concept seems to be pass. Insurance products need to return to more sensible pricing, and that will go a long way towards stabilizing reinsurance costs. If reinsurers’ profitability and ROEs are adequate, then we do not expect much continued tightening. We will know more once the year has progressed and we have gotten a better sense of results both in Canada and elsewhere.

CU: Are you optimistic about the future of the reinsurance market in Canada?

TH: I am tremendously optimistic about what is likely to happen over the next few years. This country’s results are better than most, and the Canadian reinsurance market is fundamentally sound. It can only get better as more well-educated young people with different skill sets continue to be attracted into our business, bringing with them bright minds capable of developing new ideas on how to create value for our clients.