July 6th, 2009

7/1 European Casualty Renewals

Posted at 1:01 AM ET

George Carrington, Managing Director and Head of European Casualty Specialty

The July renewal does not affect a large number of cedents in Europe, but the programs that did renew suggest a continuation of the year’s broader themes. Hotspots across the market at the January renewal have persisted as expected, though the recent renewal was not robust enough to support forecasts for January 1, 2010.

Financial Institutions (FI) directors and officers (D&O) and errors and omissions (E&O) remain challenging in the United Kingdom and Continental Europe. A significant amount of litigation and loss notices related to the ongoing financial catastrophe could result in an increase in insured losses, and the anticipation of these claims has caused the FI market to tighten. Legal action pertaining to the Bernard L. Madoff and Robert Allen Stanford alleged securities frauds has also led to tougher international D&O and E&O market conditions.

General liability and motor reinsurance rates remained favorable to cedents at the January 1, 2009 renewal in Europe, as they did for the first half of the year as a whole. For programs with low claims, there was no general increase in pricing. The market may be turning in the near future, though. Interest rates are at historic lows, and in addition casualty insurers will no longer be able to live off reserve releases from earlier underwriting years. Current pricing will play a greater role in future profits, consequently.

The decline in interest rates will also put upward pressure on discounted injury loss reserves, further squeezing reinsurer margins. And, bodily injury inflation — driven largely by increases in the cost of care — is outpacing reinsurance rate increases, providing further impetus for future price climbs.

Some reinsurers are already suggesting that rate increases will be necessary in January 2010 for European cedents, with a purported increase in the cost of capital joining the factors above, among other reasons. Despite these efforts, though, capacity remains abundant for most classes of casualty business in Europe. The recent downgrades of a number of reinsurers by the major rating agencies has forced cedents to adopt lower market security requirements, with little negative effect on the general availability of capacity.

There is little broad market intelligence to be gleaned from Europe’s July 1, 2009 casualty reinsurance renewal, but some signals can be interpreted from the renewal and surrounding market conditions. Casualty reinsurers may try to push prices higher at the January 1, 2010 renewal, but these efforts could be frustrated by the general abundance of capital in the market.

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