While there are differences between the current soft market and previous periods of rate declines, some destructive insurer behavior never seems to change, a group of reinsurance actuaries suggested here.
Listing market pressures for reinsurers that distinguish the current soft market, Elizabeth Mitchell, president, Platinum Underwriters Reinsurance in New York, noted that ceding companies are increasing retentions and that the reinsurance market, while soft, seems harder than the primary market.
That’s “not typical of previous soft markets,” she said, referring to a more typical earlier slide in the discipline of reinsurers.
“Historically, we’ve seen ceding companies use reinsurance more in soft markets, and we aren’t seeing that today,” she added, also noting that reverse phenomenon—in which “ceding companies are perfectly willing to retain more”—has actually accelerated since Jan. 1.
“You’ll hear things like, ‘We’ll keep it net unless you’re willing to pay some really high and egregious ceding commission for the right to write my reinsurance,’ to which many of us are saying, ‘Thank you very kindly, but we’ll pass.’”
The “disconnect” between the reinsurance and primary markets “has gotten so bad that there are still contracts from May 1 that are not placed,” she said. “There is increasing pressure on brokers to get deals done at terms that the reinsurance markets are simply not willing to accept.”
Commenting on conditions in the primary market, she said that since January 1, the ceding companies are more confident that their margins are good, which is leading them to be willing to decrease rates.
“It’s also leading to the phenomenon where they’re starting something new,” she said, referring to ventures into areas of insurance they haven’t written before.
“Everyone argues that they’re going to exercise…discipline, but when you have five or 10 new markets in someone else’s backyard, you cannot help but have extreme competition on rates and terms and conditions,” she said.
Ms. Mitchell said that primary market competition—particularly on large capacity risks on both the property and casualty side, as well as excess and surplus lines risks—has “really started to accelerate.”
Rate drops for these risks were in the mid-to-high single digits through the end of January, but now they’re “hovering around minus-20 percent—and everyone can point out the minus-50 or minus-60 percent risk.”
“In addition, we are just starting to see the softening of terms…something that actuaries struggle with how to reflect, but can nevertheless be much more painful when they slip—and much more effective when they tighten” in terms of how the impact loss costs, she said.
Steve Kelner, managing director, casualty for Swiss Re in Armonk, N.Y., said primary rate levels are now reminiscent of levels at the end of 2001 and early in 2002 for most casualty risks.
“If pricing is at those levels, we’ve got an issue about maybe having inflation on the loss side,” he said, noting that “simple fundamentals” of actuarial work would suggest that pricing should keep pace with inflation.
The cycle “feels like the same cycle but with a different story behind it this time,” he said. “There’s always a new era—a new reason why there’s not irrational behavior,” he said, noting that commentators point to Sarbanes-Oxley (and its impact on reserving practices, perhaps making them more adequate), better systems and better data as factors distinguishing the current cycle.
“I don’t buy it. We’ve got the same cycle. We’ve got the same double-digit rate decreases since the second half of 2004. And each time we’ve gone through the cycle, we understate the impact of rate decreases.”
“We talk about discipline, but I don’t think we actually see discipline to the degree we should yet,” he said, noting that industry forecasters “tend to converge toward means—and to estimate toward a nice staid number” of overall profit.
While there are many public messages suggesting that “that this is a sensible market,” Mr. Kelner said, “I also see a lot of finger pointing,” referring to the conversations he has with primary companies he visits on underwriting audits.
“Our rate change is minus-small number. But when we lose business, it’s minus-big number,” they say, he reported, noting that he challenges them on this because they can’t be winning new business at “minus-small.”
They respond, “Yes, but our underwriting is better,” he said.
Mr. Kelner said, “We had 160 underwriting audits last year, and nobody said their underwriting was worse.”
“Everybody said their rate change is minus-small number. But somebody is writing minus-big number business, and it’s not getting into the rate changes being reported,” he said.
John F. Rathgeber, president and chief executive officer of Arch Reinsurance Company in Morristown, N.J., joined the drumbeat of negative commentary.
“We’re in a pretty bad place right now. Ironically, it’s because good results of the last two years [brought us here]. Capital in the industry is about 80 percent above where it was in year-end 2001,” he noted.
Like Ms. Mitchell, he reviewed the shrinking reinsurance pool, supplying some numbers to underscore the impact of increasing primary company cessions.