John Orchard, Managing Director and Practice Leader, Credit, Bond, and Political Risk
Credit and Bond
Buyers’ market conditions and a very late renewal characterized the January 1, 2009 renewal for Credit and Bond (surety) reinsurance, which is dominated by proportional placements. Buyers gained no advantage from submitting cases early for quoting, as reinsurers waited for a bigger suite of submissions before offering terms.
Renewals of currently profitable proportional treaties were generally achieved at expiring terms - or at worst, slightly tougher terms and conditions. Proportional contracts that are expected to be unprofitable in 2008 were renewed at draconian terms. There was significant and market-wide pressure for cedents to accept sliding-scale terms with significant down-side risk. Ceding commissions were also under extreme pressure, with reductions of up to two thirds. Prices for loss-free non-proportional covers rose, as well, albeit by a smaller margin than the related exposures. Prices were up 100 percent or more for loss-suffering non-proportional renewals. Significantly, previous over-placements of 30 percent to 40 percent dried up completely for 2009, with the possibility of shortfalls.
The general hardening of the market was driven by an expected increase in loss frequency, particularly attritional, as the economic recession bites harder. In Europe, the construction and retail sectors are causes for particular concern. Pricing was also affected by a mismatch between experience and exposure rating tools and models based on estimated default frequencies (EDF) issued by the rating agencies. In some cases, the EDF models are demanding increases in excess of 60 percent. Meanwhile, cedents tried to buy-down deductibles, reversing the trend of rising retentions of recent years. Capacity was not constrained, as most reinsurance underwriters are net writers of the class, with very little (or no) reliance on the retrocession or wider capital markets.
Perceptions of political risk have increased, resulting in higher prices at what is predominantly a January 1 renewal. Underwriters are concerned that the effects of the global recession will filter down to countries that are less stable and put pressure on governments to take actions which could trigger political risk losses. Repudiation of commercial and trading agreements, currency exchange problems, and the expropriation or confiscation assets are expected to become greater risks.
The market for political risk is small and is largely self-sufficient in capital terms, with underwriters operating net books. The principal constraint is the lack of knowledgeable practitioners in this class of business.