Traditional reinsurance sector still lives

Despite major financial upsets over the past two years, culminating in the devastating loss arising from the World Trade Center (WTC) terrorist attacks, the global reinsurance sector is emerging “alive and well”, says Ross McKenzie, CEO of Aon Re International. McKenzie presented a future outlook for the reinsurance marketplace at a recently held industry event titled “2002 Rendezvous” hosted by Aon Re Canada Inc.

McKenzie notes that reinsurance pricing had fallen significantly below adequacy prior to the WTC attacks. And, although rates in both the reinsurance and primary property and casualty insurance sectors began rising in early 2001, the industry was unprepared for the impact of the terrorist attacks – the insured loss of which is now estimated at about US$40 billion. Further blows were delivered through the investment market meltdown, reserve shoring based on adverse past years claims, and the series of losses caused by the corporate governance scandals in the U.S. – namely Enron, WorldCom and a host of similar disclosers. The result saw about US$200 billion in capital lost from the global reinsurance sector over the past year, based on Standard & Poor’s research, McKenzie notes. In contrast, only approximately US$30 billion of new capital appears to have entered the industry over the past year.

This has drawn focus to the financial security of reinsurers, with cedants applying more of a “philosophical” approach to pricing with emphasis on retaining more risk. McKenzie predicts that the current environment will spark further consolidation within the reinsurance underwriting sector. Rates will continue to rise, he adds, while terms of cover will be tightened. “All in all, traditional reinsurance is alive…but further medication and some surgery is still required.”