AM Best published a report called 'The Changing Faces of Reinsurance' on 16 August.
According to the report, as severe as the events of 11 September were, the reinsurance industry's current state is the result of a focus on investment earnings rather than underwriting.
Starting in early 2001, the reinsurance market began the long road to recovery from one of the softest market cycles on record.
The combination of falling equity markets, lower interest rates and the realization that core loss reserves would not be sufficient to cover loss-cost trends prompted a review of basic underwriting premises and restored operating fundamentals.
However, the previous run-up in the stock markets lured the reinsurance community into a false sense of security and led to a general relaxation in operating standards.
The capital gains recognized from equities, which represented half of the industry's surplus, provided an earnings buffer for the deteriorating underwriting conditions.
Looking back at accident years 1997 to 2000, which no longer are propped up by a robust stock market, the damage to the industry wrought by poor underwriting practices can be seen. In 2001 alone, the U.S. reinsurance segment strengthened prior accident-year reserves by $4.1bn.
Since 11 September, there have been more than a dozen withdrawals from the market by companies that either ceased writing business voluntarily - such as Overseas Partners and Scandinavian Re -or have gone into bankruptcy, including Taisei Fire & Marine.
So venture capitalists saw opportunity in the post-11 September hardening market and quickly formed several new, highly capitalized companies to fill the capacity void.
Largely domiciled in Bermuda, these companies bring fresh, clean capital and well-recognized management teams. With the January 1 renewals, many of these start-ups have quickly achieved scale, capitalizing on the market's renewed concern for security.
But the leading reinsurers will maintain their dominant role in the landscape. As they couple influential market share with a renewed emphasis on underwriting, they should be able to further their leadership roles.
But economic, social, environmental and geopolitical events will continue to financially stress the industry, causing a further rift between the weaker and stronger reinsurers.
For a copy of the report visit the website www.bestweek.com.
