“Status Quo” for Reinsurance Renewals: Aon Re Rendezvous

It should be a case of “status quo” for reinsurance renewals, despite reports of market softening and the impact of hurricanes hitting the U.S. this fall.

Speaking at the 3rd annual Aon Re Rendezvous, Aon Re Americas vice chairman Ross McKenzie says the broker accurately forecast modest discounts in the property catastrophe line, on the order of 5-10%, for 2004 renewals, but was surprised by serious discounting in lines such as excess directors’ and officers’, which dropped 10-40% in the U.S., property for the energy sector, which similar saw rates drop, and even big, international property facultative risks. However, McKenzie cautions against taking such decreases as signs that price competition will suddenly proliferate. “I don’t read these [discounts] as necessarily the end of the hard market or the start of the soft market.” These lines were among the first and worst to harden and therefore they could be expected to see the most significant price corrections.

In fact, the “hard market” of 2001-2004 saw premiums increase overall by only 8%, he says, and this comes after the 14-year soft market which ran from 1987 to 2001. Questions remain about the industry’s ability to attract new capital given that its returns have fallen well below that of other industries for many years – even with the influx of US$100 million in new capital between 2001-2003, well over half of that, US$65 million, went to reserves to deal with prior years’ claims, he adds.

The insurance industry may defy predictions that it will sink rapidly back into price competition given the number of lingering issues still hampering the industry, agrees John Andre, vice president at A.M. Best. These issues include 2004’s hurricane losses, the continued malaise of investment markets and the inability of U.S. politicians to come up with a solution to tort issues such as asbestos.

The rater continues to take a conservative approach to industry analysis, particularly with regards to the industry’s ability to make auto insurance reforms work in light of rate rollbacks and freezes. He points to last year’s experience with the Facility Association (the industry’s pool for high-risk drivers), which produced almost $500 million in losses which put a damper on profitability for many companies.