January 9th, 2009

International Casualty Update: January 1, 2009 Renewal

Posted at 1:00 AM ET

Thomas Herde, Senior Vice President
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Casualty treaty reinsurance pricing outside the United States and UK was unchanged in most areas, though there were pockets where prices rose - despite the shrinking of many cedents’ premium incomes. Programs in specific classes (such as Financial Institution) or with deteriorating reinsurance results sustained the highest price hikes. Cedents did have access to an increasingly diversified group of reinsurance markets, putting pressure on established traditional reinsurers. Many are beginning to turn over their reinsurance panels, and the London and European branches of Bermudian reinsurers are the primary beneficiaries - at the expense of the traditional European reinsurers.

Pricing

Non-proportional reinsurance rates for professional indemnity and directors and officers (D&O) liability were up an average of 10 percent. Programs with significant losses experienced hikes of up to 80 percent. The market appears to be anticipating a growing number of reported losses in 2009 and 2010, which is expected to have an impact on pricing.

Proportional reinsurance terms remained mainly unchanged, although reinsurers attempted to reduce reinsurance commissions.

In contrast to non-proportional reinsurance, reinsurers have no control on the premium developments of the original market. Ample capacity and little loss activity resulted in a soft original market in recent years. Reinsurers believe that this is no longer sustainable. However, the only ways insurers can correct the situation are to reduce the reinsurance commission or take capacity out of the market (or both).

Reinsurance rates for commercial professional indemnity (PI) - covering architects, engineers, and lawyers, for example - stayed flat. Pricing may eventually follow the upward trend of financial lines PI and D&O. This is particularly likely for certain professions - such as consulting, accounting, and legal - which are expected to be dragged into faster-moving loss cycles.

Overall, general liability rates showed no changes. Loss developments were stable, and capacity was generally more than sufficient.

The price reductions that have been possible in the past few years for casualty clash cover have ceased to be available; rates at the January 1, 2009 renewal were basically unchanged year-over-year. The minimum price for top-layer clash protection of the very lightest exposures appears to have bottomed out at a rate on line (ROL) of 2.5 percent.

Motor pricing is stable on unlimited layers. Working-level excess of loss (XOL) layers continued to experience rate increases, reflecting poor loss experiences. The adverse development of open reserves from previous years contributed to the pricing trend.

Professional Liability and the Financial Catastrophe

Lines of business directly impacted by the credit crisis - such as errors and omissions (E&O) and D&O insurance - experienced some difficulties at renewal. Demand for D&O protection has increased because of the financial catastrophe, as declines in stock prices have triggered shareholder class action lawsuits. While insurers have experienced an increased need for reinsurance protection, the reinsurance market has not added capacity, due to pressures on their capital from the collapse of global financial markets. And, the situation is worsening. As a result of the alleged impropriety of Bernard L. Madoff, for example, E&O reinsurers are experiencing considerable anxiety, and aftershocks will follow in 2009.

D&O pricing was expected to push higher through 2008, because of the collapse of the subprime mortgage market. Of course, the contagion spread rapidly, ultimately affecting the entire insurance industry. Given these developments, D&O and E&O insured losses from the original subprime mortgage market collapse are expected to reach USD8 billion, though this could be a relatively small portion of total professional liability exposure.

At the beginning of the crisis, exposure was thought to be limited to Financial Institution carriers. As the crisis has deepened and broadened, however, a wider range of companies has become exposed to the risk of shareholder class action litigation, with disappointed investors using legal means to try to recoup losses. Filings are already at their highest level in six years.

As casualty carriers remedy their financial conditions, both from investment asset impairment and insured losses, the memory of the financial catastrophe will be kept alive through an increased focus on market security.

In the light of the ongoing financial catastrophe, the (re)insurance industry will reassess its current pricing model. Increases are likely, though it is too early to predict a trend.

Termination Clauses

As casualty carriers remedy their financial conditions, both from investment asset impairment and insured losses, the memory of the financial catastrophe will be kept alive through an increased focus on market security. Termination clauses are being scrutinized, and cedents have sought to introduce other measures such as letter of credit provisions and loss deposit requirements. Reinsurers generally have resisted such enhancements, but if the economic situation continues to worsen, they will remain a topic of intense debate throughout 2009.

Capacity

Capacity is in general more than adequate for most lines, including general liability. One area of concern for the future is Financial PI/D&O where reinsurance capacity has started to drop in anticipation of worsening results.

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