Best Sees Underwriting Discipline in January European Reinsurance Renewals

European January reinsurance renewals confirm A.M. Best Co.’s expectations that underwriting discipline is being maintained, despite wide capacity availability. The rating agency noted that overall premium rates have decreased moderately, with some expected increases in U.S. property lines exposed to the hurricanes in 2004.

“The January 2005 renewal season highlights that this cycle, although still moving downward, is shallower than previous cycles,” said Best. “Forthcoming renewals throughout 2005 and the first quarter of 2006 will be decisive. Traditional leading reinsurers could capitalise on their strong business position to withstand market pressure and to maintain underwriting discipline, or relatively new players—particularly those in Bermuda—could enforce price reductions to attract new business at a time of ample capacity.”

Best noted: “January renewals mainly refer to European property risks (approximately two-thirds of treaty renewals) but, as a global sector, reflect the high number of catastrophes world-wide, and prices for non-loss making treaties declined only moderately.

“In the United States, loss-making non-proportional catastrophe treaties experienced double-digit increases, whereas loss-free treaties followed a similar pattern outside the United States. In a key observation Best said it found that “casualty reinsurers are happily forgoing business when underwriting conditions (either in terms of wordings or premium rates) do not conform with their standards. Traditional reinsurers are further reducing their exposure to some European business (i.e., motor and D&O) when clients and brokers disagree with their renewal terms.” A continuation of this trend might mean that all of the calls from industry leaders on underwriting discipline are finally being heeded.

“The renewal negotiations were marked by the continued reserve strengthening in respect of U.S. liabilities (reserve strengthening has been reported by a number of reinsurers during 2004),” the bulletin continued. Best said it “believes that uncertainties about future loss patterns and claims inflation will remain in 2005, which could continue to negatively affect the current favourable accident year underwriting performance.”

It added that “the significant exposure of reinsurers to the hurricanes in the United States and the typhoons in Japan in 2004 also highlight that underwriting discipline may provide excellent results under “normal circumstances.” Increasing frequency in natural catastrophes and potential for new causes of losses (i.e., electromagnetic fields) make it more difficult to prospectively forecast underwriting results as indicated by the 2004 earnings revisions of the leading reinsurance players.”

“The stability of ratings will largely depend on reinsurers’ ability to generate sufficient earnings to absorb potential adverse loss developments from previous, as well as current, underwriting years while continuing to build their risk-adjusted capitalisation as to withstand any potential sharp falls in the underwriting cycle,” the bulletin concluded.