Reinsurers face “key test” with 2005 renewals: A.M. Best

The upcoming renewal season will be a “key test” of reinsurers’ resolve to maintain price discipline, says rating agency A.M. Best.
Cedants and brokers will be expecting price softening, Specifically in the property line, despite the rash of catastrophe losses seen in the third quarter of 2004, the rater says. There may also be some expectation of more relaxed terms and conditions in casualty lines, something A.M. Best says is a concern as a specific indicator of “uneconomic” underwriting.
The rater says there is also concern that the combined ratios produced by major reinsurers, which dropped to the mid-to-low 90%-range during the hard market, is not sufficiently low to sustain underwriting profit through the cycle.
Another challenge will be maintaining risk capital. “If a reinsurer reduces volume as pricing and terms retreat, then they will feel pressure to return capital to shareholders,” A.M. Best notes. “But, since the reserve risks and asset risks associated with longer tail lines would not be likely to reduce as quickly as current premium income in a soft market, reinsurers will be challenged to “square the circle” of providing shareholders with acceptable returns on capital employed while maintaining risk-adjusted capital strength.”
At the same time, the challenge of adverse reserve development on prior year U.S. casualty business remains for reinsurers, with A.M. Best putting the reserve shortfall on such business at US$67 billion for the p&c industry.
While all of these factors would seem to auger well for pricing discipline, the cyclical nature of insurance is likely to rear its ugly head. The question will be whether rates will drop below the technically adequate rate, and 2005 renewals should provide a strong bellwether of this trend.