You can never be quite sure what the hot topic will be in the run up to renewals on January 1 in the world of reinsurance.
This year, I suspect it will be the lack of discipline and overall falling rates seen in the realm of primary insurance – particularly in the casualty market. A mixture of grabbing for market share following the troubles at AIG combined with clients being more sensitive to pricing means that business is currently being placed at below technical pricing.
Also, after getting a fright with AIG, cedents wanted to take their eggs out of the single AIG basket, and spread the risk. From the moment AIG got into trouble there has not been one competitor offering expiring prices, let alone factoring in an increase.
This month, October, it will be one full renewal cycle of insurance. Business has been redistributed and now customers feel more comfortable that the brokers have done their job, the players who came in will have a piece of that business, and the merry-go-round is likely to stop.
What I’d like to know is are the 30 to 40% reductions in pricing all being taken as part of a measured risk to expand market share or whether it will have repercussions in the years to come?
No one knows where inflation will go from here – and what the real price is for insurance. If you would let underwriters write, on their own, without competition, they certainly price insurance higher given the low interest rate environment – but everyone is anxious about losing business.
Under Hank Greenberg, AIG was known for putting discipline in the market – but not AIG nor anyone else currently plays this role. Reinsurers are trying to put discipline into the market – but they do not seem to be able, in the current market, exert much influence.
But reinsurers, while they claim discipline, are not withdrawing en-masse from the US casualty market – one which is seen as the most under-priced. We are in a deep recession, the worst we have seen for 70 years. Inflation will most likely come in 2011 or 2012, and the underwriting that has been done at below technical pricing will dig companies into an even bigger hole.
What will turn the market? It will have to be a large catastrophe, some huge adverse development. And come it will – they always do.
Last week the reinsurance world descended on the glamorous Monte Carlo for the annual reinsurance Rendez-Vous.