Reinsurance recoverable issue moderates in 2003: Fitch

The burning issue of reinsurance recoverables appears to have moderated somewhat in 2003, notes a new report by Fitch Ratings.
The report, which takes in results from 1998-2003, finds the industry’s exposure to reinsurance grew much less in 2003 than in the previous five years. Overall, the industry’s retention ratio rose 0.2% last year, to 78.8%, following five years of decline.
And while net reinsurance recoverables grew to US$174.3 billion last year from US$171.6 billion in 2002, recoverables as a percentage of policyholder surplus dropped in 2003 to 48%, a full 11 percentage point drop over 2002. “The decline in the ratio of surplus to reinsurance recoverables was even more pronounced among large companies,” the report notes.
“Fitch believes the decline in the growth rate of the industry’s exposure to reinsurance is directly linked to the industry’s strong 2003 underwriting performance and corresponding surplus formation Because of this strong performance, comparatively fewer losses reached their excess-of-loss attachment points, producinga decline in the industry’s ceded loss ratio and a corresponding decline in reinsurance recoverables’ growth rate.”
Another trend highlighted by the study is the move away from admitted U.S. reinsurers to foreign non-admitted reinsurers. Fitch says the growth of the Bermuda market, along with aggressive growth strategies by European reinsurers, has caused this trend. In 2003, the industry placed 60.7% of its reinsurance with U.S. carriers, and 63.9% with admitted carriers. Stepping back to 1998, 71.9% of business went to U.S. carriers, and 75.5% to admitted carriers.
Nonetheless, the move to non-admitted foreign carriers has not lead to collectability issues. Overall, the percentage of overdue recoverables was up 6% in 2003, but while disputed recoverables with admitted carriers “spiked” in 2003, disputed recoverables declined significantly with non-admitted carriers.