The casualty reinsurance market continues to be concerned about the level of primary market pricing, with that impact being felt most strongly in proportional treaties where some ceding commissions are being reduced. Reinsurance pricing is averaging flat to down by 5 percent.
The casualty primary market continues to be impacted by the economy’s downward pressure on exposures and intense industry competition in many areas. Where there is any stability of insured exposures there is more pressure on rates. Few sectors show exceptions to this trend, such as personal lines automobile liability, and some segments can be still be intensely competitive, such as those the larger insureds put out for competitive bid or some of the excess layers in an umbrella/excess tower. Loss ratios are trending up and M&A activity may increase as insurers find it increasingly difficult to grow profitably.
Program structures are seeing little change other than those driven by constraints on reinsurance budgets due to top line pressure. The question of how much capital should be allocated to casualty will be a subject of discussion throughout 2011 unless market conditions improve.
Auto and General Liability
Intense competition led to primary insurance rates in the commercial sector decreasing by an average of 5 percent to 10 percent, while flat rates or increases of up to 5 percent continued in personal auto lines. Reinsurance capacity increased slightly, while cession levels remain generally unchanged.
A drop in interest rates constrained return on equity and economic factors, particularly unemployment, reduced exposures. Business contractions, driven by global economic conditions, put pressure on general liability premium income. Meanwhile, loss ratios have been trending up slightly over the past three years.
The result is an insurance market that continues to favor consumers, putting pressure on primary insurers and, as a result, reinsurers. Smaller carriers are feeling pressure to attain their financial objectives. Given these market pressures, primary rates are likely to decrease moderately or level off through 2011.
At the January 1, 2011 reinsurance renewal, casualty clash pricing continued the moderate downward trend that has characterized the market since 2009. With transactions still being finalized at time of writing, reinsurance rates on line (ROL) are flat to down 5 percent because of factors related to primary market pricing and premium volume. The number of larger carriers securing casualty clash cover is still small, but there continues to be renewed interest.
The 2011 renewal may represent a slight acceleration from a year ago, if current expectations are met, when average ROL reductions were 2 percent, with a range of down 14 percent to up 7 percent. Treaties with loss activity sustained moderate price increases. Subject premium will outpace reinsurance premium reductions, likely by an increase of above 5 percent. Contracts which include professional lines dominated the reductions.
Premium in the underlying lines of business continues to decline, extending a trend from 2009 to 2010. Over the past year, rates fell by 3 percent to 5 percent for most carriers, some by even more. There were two key drivers behind this trend: underlying competition with lower rates and additional underlying price and expense conditions (e.g., sales and employees) resulting from the current economic climate. Premium income, consequently, continues to fall, along with volume. Some carriers are letting business go, while others are losing opportunities as a result of competitive conditions.
Nonetheless, the sector continues to generate profitable business, though some insurers are starting to see combined ratios of above 100 percent in casualty lines of business. As a result, they are walking away from accounts that are not priced sufficiently.
The structure of casualty clash reinsurance protection did not change significantly from last year. Many of the carriers purchasing clash cover continue to do so, as their underlying retentions from working layer reinsurance are either flat or up. New purchases, however, have been curtailed mostly because of a tightening of reinsurance budgets. Capacity remains stable with around a dozen markets active in this space.
For 2011, casualty clash lines will be influenced heavily by the pace and nature of the
economic recovery in the United States and around the world.
Umbrella & Excess
Primary rates on average are relatively flat (with individual accounts experiencing rate reductions of up to 10 percent). Exposure bases have stabilized since last year where we saw larger reductions in premium due to exposure reductions resulting from the economic recession. Reinsurance capacity for the business has contracted year over year with energy exposure the driver of concern along with original rate movement. Overall, the reinsurance market has a more pessimistic view of the profitability of the original business.
Revenues for underlying original insureds (manufacturing, service and distribution insureds) have begun to stabilize post-recession, leading to premium stabilizing on the insurance purchase. That said, the stabilization of exposure bases has caused increased pressure on the brates charged. In contrast to most other industries, the residential construction business is still significantly below 2007 levels, providing a huge reduction in the available business for carriers to write in this segment, creating increased competition for the remaining business.
Primary rate changes are relatively flat to slightly down in the industry right now. The offshore energy sector is experiencing rate increases (in some cases significant increases) because of the industry’s reaction to the Deepwater Horizon event. In the non-energy market, rates are flat with individual accounts experiencing reduced rates in limited situations coupled with reduced exposure base. There is generally more rate pressure on national account business.
Umbrella and excess loss ratios have trended upward for large-account lead umbrella business on average during the past few years, as older accident years have developed further. Small and middle market standard accounts have experienced stable loss ratios through the cycle in many cases due to minimum premium redundancy. The Bermuda excess liability market has experienced loss activity during the last year. The insurance loss for Deepwater Horizon, however, may not be significant, as much of the loss will be self-insured.
In 2011, look for more of the same, with pockets of increasing rates for certain classes (e.g., energy). The energy sector is changing, and industry initiatives are underway to establish facilities specifically targeted to the energy sector, which could be a major development in 2011. Insurance and reinsurance carriers are looking for niche areas of the market where less competition exists in an attempt to grow organically. Next year, we also expect to see an increase in merger and acquisition activity, as carriers continue to find it difficult to grow organically.
The reinsurance market continues to be harder than the primary insurance market,
making placements difficult. Reinsurers continue to believe that underlying loss ratios
are higher than do primary writers of the business. 2010 exhibited an uptick in loss activity. Most of the year’s loss activity has come from energy. Losses include Deepwater Horizon, the PG&E gas explosion, Massey Energy Coal disaster, Enbridge oil spill and the Kleen Energy explosion. Additionally, concerns regarding Chinese drywall claims persist, as certain cases proceed through the court system.
Reinsurance proportional capacity has constrained slightly over 2010, and we expect a continued shrinking of proportional capacity in 2011, as reinsurers continue to manage aggregate exposure to casualty. Cedents have retained more risk on average, because top line premium is declining and there is a disconnect between cedents and reinsurers on loss projections for the subject business. This has resulted in reduced ceding commissions as well.
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