Massive losses and nervous investors have left reinsurers floundering, so it is no surprise that premiums are rising and conditions tightening, says Sarah Goddard

Reinsurers tough it out

Massive losses and nervous investors have left reinsurers floundering, so it is no surprise that premiums are rising and conditions tightening, says Sarah Goddard

It's turning into one of the toughest renewals seasons in living memory. From the reinsurers' point of view, years of underpricing have finally culminated in a `protect and survive' mentality. With wholesale downgrades by rating agencies - including the two largest reinsurers in the world - and investment yields no longer providing a potential lifeline for profits, reinsurers have no choice but to enforce strict underwriting disciplines.

Even so, the problems ensuing from the cumulative impact of tough trading conditions and soft management during the long soft market are continuing to take their toll.

Gerling Global Re, the sixth-largest reinsurer in the world, has been forced to shut its international property and casualty operations, following a long walk around the block which failed to find a buyer. The last Gerling suitor, French-owned SCOR, has now put out a profits warning, estimating that its 2002 losses are likely to reach ¤250m (£159m). And that's during a year which was supposed to be the turning point in the market cycle, with reinsurers finally being given the opportunity to return to profit.

Closer to home, it is nigh-on impossible to find reinsurance capacity for professional indemnity covers such as directors' and officers' (D&O). This, in turn, means fewer primary insurers are offering the cover, and some British businesses are suggesting their future is increasingly uncertain as insurance dries up. The UK Chambers of Commerce has now appealed to government, saying that members may be forced to shut up shop, because of the lack of employers' and public liability covers.

And then, last week, it emerged that the three largest reinsurance companies are excluding asbestos exposures from public liability, product liability and property damage lines. All the while, terrorism is excluded.

What is going on? The simple explanation is that the world has become a riskier place, exposures are ever-growing and reinsurers are trying to create some order out of chaos. For example, last year consultancy Tillinghast-Towers Perrin suggested the asbestos personal injury bill could hit $200bn (£125bn). When these covers were first written by the reinsurance community, there was not the faintest hint of the exposures that finally came home to roost - bodily injury cases from unimpaired individuals and property damages claims from asbestos removal.

As exposures multiply, the costs need to be covered from somewhere. With the investment community unwilling to put capital into reinsurance, and courts still proving unpredictable in claims cases, it only leaves the reliable options of higher premiums and tighter conditions. It's going to be a tough renewals season.

Sarah Goddard is editor of
Global Reinsurance