Anticipating that the recent economic downturn, as it had in prior occurrences, would result in increased claims activity, primary insurers sought rate increases. The highly competitive market environment prevented them from realizing the increases. Primary E&O rate reductions continued downward in 2009, averaging declines between 5 percent and 10 percent for insureds exhibiting no material change in exposure and loss activity. Certain sub-segments, such as small to mid-sized law firm business, are indicative of the highly competitive landscape of the E&O segment.

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Emil Metropoulos, Senior Vice President
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The global financial crisis that has unleashed havoc on credit and equity markets is the most recent casualty catastrophe (with both systemic and classic clash characteristics), and it may be the largest in recent memory … but it certainly isn’t the first. In fact, there have been many, and their frequency has increased over the past two decades, allowing financial markets little reprieve from one disaster to the next.

The stock market crash of Oct. 19, 1987, kicked off the modern casualty catastrophe age. The Dow Jones Industrial Average lost 22 percent of its value, earning the event the appellation “Black Monday.” Since then, we have endured the initial public offering (IPO) laddering and equity analyst scandals associated with the “dot-com bubble,” as well as accounting irregularities at Enron, Tyco, WorldCom, Adelphia and others. The loss of shareholders’ wealth with each of these events was profound, but none has been as severe as the one that currently has the world’s financial markets in its grasp.

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Emil Metropoulos, Senior Vice President
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Remoteness has been used to downplay the threat, causing carriers to overlook a more immediate, though less menacing, concern. A substantial loss may not imperil company operations, but it could lead to an unexpected earnings hit, the effects of which would be magnified for shareholders. Unanticipated large losses typically result in a disproportionate impact on market capitalization. Casualty clash and catastrophe protection, consequently, can be a vital tool in managing overall financial performance.

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George Carrington, Managing Director and Head of European Casualty Specialty
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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.

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Emil Metropoulos, Senior Vice President
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Consider hypothetical commercial property construction and development company “X,” which has several high-profile commercial office projects around the world. In this scenario, the company was found to have massively underestimated both development costs (due in part to negligent risk management advice received from the insurer’s environmental audit team) and projected occupancy rental returns at two important commercial office sites in a major city (e.g., London, New York, Dubai, or Shanghai).

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Emil Metropoulos, Senior Vice President
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Developed by Guy Carpenter and Arium, Ltd., Casualty Cat facilitates the study of single- and multi-peril casualty catastrophe risks in an insurer’s broader risk management plan. Through a rigorous analysis of inter-industry trading and supply chain data, carriers can assess key vulnerabilities, providing a foundation for risk transfer planning and execution.

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Emil Metropoulos, Senior Vice President
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Casualty (re)insurers do not cover standalone risks. A steep drop in stock price, product defect with recall, or other event could lead to class action lawsuits and ultimately large claims. This emergent reality, however, is difficult to address. A carrier would need to identify the many possible starting points of a liability chain reaction and follow their rapidly spreading implications throughout a portfolio. Without powerful modeling technology, this process is time-consuming, impossible to complete, and likely to miss key threats and underlying exposures. Because of the impracticality of integrated liability risk management under these conditions, most casualty (re)insurers segment their efforts to protect their capital, for example, by geography or line of business. This approach leaves gaps, some of them quite wide. An anticipated directors and officers (D&O) claim for a particular insured may arise from an event that also triggers D&O — and possibly errors and omissions (E&O) — claims for other insureds. The losses begin to mount, often in excess of carrier expectations.

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Harry Oellrich, Managing Director
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A feeding frenzy in the primary market pushed the cost of errors and omissions (E&O) insurance lower in 2008, with the exception of Financial Institutions (FI) coverage. This led to downward pressure on reinsurance rates, as well, which markets sought to resist at the January 1, 2009 renewal. A marketplace that should have been driven by the cost and availability of capital, not to mention loss history, had to cope with an additional factor that few anticipated. The changing primary market landscape led insurers to pursue market share aggressively, even at the expense of rate integrity.

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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.

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Global Reinsurance Review January 2009

Reinsurance rate increases were moderate on average at the January 1, 2009 renewal. The Guy Carpenter World Rate on Line (ROL) Index rose 8 percent, in response to the dual pressures of a financial catastrophe and the second most expensive property catastrophe year on record. The degree to which prices increased was tempered by large capital positions at the beginning of 2008, enabling carriers to absorb the year’s losses, but this is where the generalizations end. Loss history, geography, and line of business led to wide differences in pricing. Expectations of another above-average storm year and the uncertainty surrounding the credit crisis underscore the need for continued capital management discipline in the coming year.

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