Growth for primary writers is extremely challenging in the current economic environment. Organic growth due to higher incomes has slowed and, in some cases, is actually negative as higher paid workforces have been declining in number. Also, economic conditions aren’t ideal for generating new insured policies. Against this need for growth, experience for most plans has been unexpectedly good. These two factors have led issuers to consider or implement higher retentions, driving marked reductions in ceded reinsurance. In this environment, reinsurers have to compete strongly to win business.

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The primary market is somewhat soft, despite increased costs. For reinsurance programs with good experience, clients are looking to keep increases to leveraged trend or less. For programs with higher than expected losses, many cedents were willing to increase retentions to keep costs down. This motivates reinsurers to compete strongly for available business despite uncertainty around the potential impacts of health insurance reform on business performance.

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Rates in this sector were very competitive on the primary side and, accordingly, cedents in this market were highly price sensitive and actively managed their reinsurance purchases. Excess of loss reinsurance renewals were generally orderly with rates in line with target loss ratios plus a reinsurer margin. Typically cedents saw excess of loss rates flat to increasing 5 percent.

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Primary insurers are operating in a competitive pricing environment with declining exposure bases putting their premium income under pressure. Particularly in the large to mid-size insured environment there is aggressive competition for new business that is preventing rate increases and in many instances resulting in rate decreases, especially if insureds have not obtained competitive bids in the last few years. In the small insured and personal lines business there is more stability and in some instances rate increases were warranted because of loss experience. The outlook for primary insurers in 2010 is for continued flat to 5 percent decreases in average rate due to a strong competitive environment, subject to remaining above minimum premiums or a substantial change in exposure bases.

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The very competitive pollution liability and combined general liability/pollution liability segment exhibited insurance rate changes that were in a range from flat to a 15 percent decrease. The competitive market led to more insurers offering coverage for non-owned disposal sites (NODS) on a blanket basis and broadened mold clean-up coverage. The cost cap segment is a smaller market exhibiting signs of hardness not seen in the other environmental segments with primary rate changes ranging from flat to 10 percent increases. Developing issues in the environmental space include Chinese drywall, global warming-related litigations and green house gas effects.

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Insurers continued to post favorable results, with the medical malpractice class generating the highest return on equity for all commercial lines. The record industry profitability was fueled by historically low claims frequency, moderate claims severity and the release of loss reserve redundancies.

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Continental Europe

Primary motor insurers in the more commoditized classes of business have attracted the most competition. As a result, the market remains flat to soft. Of significant concern is the continued rise in adverse loss development on motor third party liability (TPL) bodily injury losses due to the effects of social inflation and the new compensation levels caused by European Union (EU) harmonization, higher annuities provisions, higher awards for pain and suffering and medical inflation far exceeding salary and wage inflation.

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On the primary side, the personal accident market continued to attract new entrants globally. Despite material personal accident losses from the Colgan Air and Air France air crashes, direct rates continued to see downward pressure along with demands for larger limits. Reinsurance capacity in the personal accident segment continued to grow as a function of the new entrants in the Life/PA catastrophe space. New markets willing to write catastrophe risk were also willing to entertain per person risk.

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At the start of 2009, capacity was extremely tight, as both insurer and reinsurer capital levels and costs were in question. Cost of capital, reduced investment income, lower lapse assumptions and a lack of reserve credit collateral put tremendous pressure on pricing. As the year progressed, capital and collateral issues began to resolve and the reinsurance market saw increased activity. By the end of the year, the same forces that stalled the market were creating ample opportunity for coinsurance deals, particularly in-force transactions.

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Casualty insurers, not immune to declining exposure on which their rates are based, saw declines in premium income. The leading concerns for motor and employers liability insurers are rises in frequency and severity of bodily injury awards and a reduced ability to bolster results with prior year reserve releases or investment returns. In addition, the recessionary environment is resulting in more fraudulent claims. The pricing outlook for 2010 is more positive, but threats continue to loom on the horizon. Capacity remains abundant and the Internet promises to keep motor insurance competition sharp as price comparison websites become more prevalent. Motor reinsurance rates vary widely depending on country experience.

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