January 26th, 2011

2011 Reinsurance Renewal Rates: UK Motor

Posted at 1:00 AM ET

141x141jan1thumb35Reinsurance rate changes varied widely for UK motor at the January 1, 2011 renewal. The most favorable rates maintained expiring rates on income, with allowances for underlying rate increases. There were some significant increases, however, with rate-adjusted costs for reinsurance approaching 50 percent. The cedents attracting the most favorable pricing were large, well-balanced accounts with diversified distribution and long-term viability. They also placed motor as part of a motor and liability program, had histories of genuine relationship management, demonstrated claims-handling expertise and paid a significant premium into the market.

A rise in the number of quota share deals at the most recent renewal made the coming of Solvency II a concern for motor mono-lines, especially those that may have been more thinly capitalized. Capacity remained abundant, with approximately 40 markets able to write effectively unlimited business, and constraints on motor retrocession availability did not have an effect on cedents and markets.

There are two major loss issues facing the UK motor reinsurance business: periodic payment orders (PPOs) and a possible reduction in the discount rate from 2.5 percent. The gross (undiscounted) reserves are reason for concern, especially with normal life expectancy with respect to a minor (gross reserves in excess of GBP30 million). In particular, this affects reinsurers whose accounting methods prevent the discounting of reserves. Also, PPOs doubled from the end of 2009 to 2010.

Perceptions of these developments differ among reinsurers. Taking an overly pessimistic view of this systemic issue means effectively taking themselves out of the UK motor market, but some estimate that a one percentage-point reduction in the discount rate could add twenty percentage points to forty percentage points to their ultimate loss ratios. This is an issue to watch closely.

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