Taking on terrorism

Mark Hewett, deputy chairman of Guy Carpenter, Marsh's reinsurance broking arm, says that property catastrophe has enjoyed the biggest influx of new reinsurance capacity of all the classes of business.

Most of it is coming from Bermuda.

Reinsurance broker Benfield says that a situation of overcapacity has arisen with some risks "over 200% oversubscribed".

This additional capacity and increased competition has weakened rating increases. Groupama reinsurance manager Kelvin Phillips confirms that a "flattening out of rates" has been detected. The lack of major catastrophes in 2002 has also contributed to these pressures, he adds.

Euclidian deputy underwriter Tim Stokes says the flattening out was inevitable.

"The level of premiums that insurers were already paying was such that it would be difficult to increase them any further - it would simply make reinsurance uneconomical; insurers would retain the risk themselves," says Stokes.

Catastrophes escalate
So while a flattening of rates is good news for insurers, Benfield warns that pricing in the market has only just reached adequate levels. It adds that despite the modest number of catastrophes in 2002, the overall trend is that they are escalating in terms of both frequency and cost to the reinsurance market.

While this year may have been a good one for insurers, it is by no means certain that next year's renewals will be equally positive.

The other major part of an insurer's property reinsurance portfolio is per risk excess of loss cover. Premiums for this type of reinsurance are directly related to claims experience, says Allianz Cornhill underwriting and marketing manager Peter Adlington.

Property excess of loss has also benefited from an influx of capital, and Adlington says that while there has been some hardening of rates it is not has not been as much as expected.

So what do these changes in reinsurance premium levels mean for policyholders? Stokes says that there have yet to be changes in the primary insurance market. "While the level of reinsurance premiums is a big driver, the changes have not been big enough to transfer to primary rates."

Will the property market see a softening of rates in the future? Stokes is non-committal. "Euclidian does not plan to reduce its rates over the next 12 months.

"But should we see additional softening in the reinsurance market, we may find increased pressure to reduce rates. In the current climate the greatest pressure on rates is likely to come not from a softening reinsurance market, but from increased competition."

A further feature of this year's renewals is that reinsurers have been calling for increased amounts of data about insurers' underlying policies, and have engaged in more detailed analyses of the information they receive.

"They want as much transparency as possible in terms of primary insurance terms and coverage," says Adlington.

"They want to understand the risk and know what they are taking on."

Reinsurers' concern with their risk exposure has also seen them looking hard at the contingent covers that they are prepared to offer, such as business interruption and suppliers' extensions, says Hewett.

This inevitably means that insurers will be a lot more careful about providing these covers to their policyholders.

Terrorism has also, not surprisingly, been a big issue for reinsurers. While the market has remained consistent in its exclusion of terrorism risks, this year's renewals have shown a more relaxed attitude towards them.

Wordings debate
Adlington says reinsurers have been prepared to discuss the wording of their exclusion, which has enabled some insurers to close a theoretical gap in the cover they are able to provide to policyholders. This gap arose because the definition of terrorism used by insurers differed from that used by Pool Re - a lone `terrorist' not being covered under either policy.

Reinsurers have now agreed to cover losses that are not caused by terrorist incidents falling as defined by the Pool Re scheme, according to Adlington. This has effectively closed the gap and will enable insurers to provide policyholders with full terrorism cover.

The new terrorism reinsurance
From 1 January 2003, Pool Re is no longer a mutual insurer. It has become a treaty reinsurer. The effect is that the primary market for terrorism is now fully competitive, with individual insurers setting premiums to reflect the risk and reinsurance costs.

The maximum liability of insurers is capped per terrorist event and per year. The level of the cap is determined by each insurer's market share. Initial industry retention limits are £30m an event and £60m per year.

The insurance market was originally uncertain as to how the new arrangement would operate. But Adlington says that insurers are now feeling comfortable with rating in the free market.

"We are monitoring each other," he says.