The reinsurance market: results and prospects

The crisis of the reinsurance market is deepening. After the disasters of 2001 and 2002, and the collapse of the stock exchange rates, insurers and investors are losing confidence in the capacity of reinsurance companies to meet their commitments.

The reinsurance market in 2003: Perspectives for 2004

Due to the favorable technical results registered in the first semester of 2003, and the world economic recovery, hopes are on the rise for reinsurance companies.

Favorable technical results

Used with permission from MicrosoftThe first semester 2003 registered favorable technical results for the entire reinsurance market. The important adjustment work started by the reinsurance companies during the years of crisis is bearing fruit: decrease in cumulative ratios, result upturn in the first semester of 2003, consolidation of the technical provisions, …

Unfortunately, not all reinsurers have experienced a recovery: The first major reinsurance company, Munich Re, shows downward figures. Other companies still have difficulty returning to positive results.

The quiet after the storm

Both insurers and reinsurers are looking for a consensus. This status quo is a sign that the situation would not greatly affect insurance conditions and rates. Case-by-case adjustments, however, remain inevitable.
Some rates may even decrease especially for natural catastrophes, large industrial risks, aviation and marine insurance.

The insurers' clout

Used with permission from Microsoft (modified picture) Since the early 1990s, globalization has made possible for insurers to build much more powerful financial empires than those of the reinsurers. Facing the insurance giants, reinsurers can no longer impose their conditions. To protect their subscriptions, major direct insurance groups may increase their retentions or look for other solutions outside the traditional reinsurance market.

As a result, a hardening of renewal conditions would reduce police funds, which reinsurers need to rebuild their provisions. Reinsurers are thus obliged to compose with the market, and will probably choose to loosen their grip on some insurance sectors.

The comeback of the Bermudians

Following the long-awaited recovery of 2003, reinsurers specialized in the coverage of natural disasters have made a comeback on the market. Unless major disasters occur in the coming weeks, a rate decrease in the coverage of natural disasters should be expected for 2004.
But even in case of last-minute disaster, the addition of funds resulting from the Bermudian comeback would have the advantage to limit the rate increase.

Rating agencies

Stepping down from their status of ally, which used to be the norm in the years of prosperity, rating agencies represent today a danger for reinsurers, who face an unprecedented crisis.
By questioning the financial solvability of major economic reinsurance companies and by discrediting the entire profession, quotation agencies have instilled feelings of doubt and suspicion among insurers toward reinsurers. Insurers and investors no longer hesitate to question the capacity of reinsurers to face their commitments.

Capital increase

To make up deficits and start financial recovery, some reinsurers are resorting to stockholders' equity to raise their capital. If some stockholders have agreed to concede an additional effort, others are refusing to commit themselves any further in a sector that is still registering weak results. Some insurers "for sale" cannot even find a buyer.

Renewal in Africa and the Middle East for 2004

Despite world economic recovery, 2004 renewal is likely to pose a few problems for the emerging countries of Africa and the Middle East.
In those markets, traditional reinsurers have increasing difficulty accepting disproportionate policies that propose weak retentions or ill-defined risks.

Despite world economic recovery, 2004 renewal is likely to pose a few problems for the emerging countries of Africa and the Middle East.

Looking for better policies during the 2004 renewal is very likely to impose fee reductions, retention increases and a reduction of the capacity.
Reinsurers will also be more demanding as regard policy underwriting, and several limits and exclusions are likely to be imposed.
The hardening trend in the reinsurance conditions for Africa and the Middle East will be more strongly marked for third-party liability, causing, among other points, the gradual disappearance of motor unlimited liability in the countries that have adopted the French legislation.

As for retrocession, the impossibility to manage and to keep their commitments will lead insurers to refuse this type of policy.
In 2004, national reinsurers, used to retrocede their local or international acceptances, may well have difficulty finding ideal retrocession conditions.
Finally, reinsurers will encourage the sale of non-proportional coverage - a sign of further defiance toward local markets.

This shift that some think irreversible may question the very existence of insurers who used to retrocede an important part of their premiums and to benefit from high fee differentials.

In that case, insurers should increase their capital and start a rigorous reorganization of risks. Reinsurers would still fix the intervention threshold, the coverage limits and the rates.

Main actors in the Africa and Middle East region

Major reinsurers

The following reinsurers are particularly active:

Swiss REMunich ReERC FrankonaHannover Re
AllianzConverium1SCORCCR (France)1
ARIGBest ReAfrica Re2 

1 Activity centered on the Middle East 2 Activity limited to the Middle East

Under pressure from the stockholders and their general management, European reinsurers may well adopt a very selective underwriting policy. This position taking will not prevent some new companies from increasing their portfolios.

Reinsurers specialized in a region, such as Best Re, Arig and Africa Re, will have an interesting card to play. These companies who, for several years, have imposed their presence on the market can take advantage of a “loyalty premium,” on the part of their partners. Consequently, they are in a favorable marketing situation.
To note, Med Re, recently established in the Africa and Middle East region, will start its international underwriting January 1, 2004.

Major brokers

Some specific markets will have difficulty finding good financing capacity. They will resort more than usual to brokers to help them place their risks.
As a result, some brokers may consolidate their positions, in particular NASCO, UIB, Willis Faber, Guy Carpenter and AON.

Countries with difficult prospects of renewal

Due to the socio-economic crisis and unfavorable results they have registered, some countries will undoubtedly face a difficult renewal. Libya, on the other hand, may witness a recovery of activity, due to the lifting of economic sanctions, adopted by the United Nations.

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