December 1, 2003 by Canadian Underwriter
The global property and casualty insurance industry at both the primary and reinsurance levels faces significant challenges in the year ahead despite the overall increase in profitability brought on by the hard market, comments Dennis Mahoney, chairman of Aon Re Global. His message was delivered to a predominantly reinsurance audience at the recently held Aon Re Canada 2003 Rendezvous.
Mahoney describes the current state of the market as the “perfect storm”. While past hard market cycles, which have occurred roughly every decade, have been driven by mega-loss experiences (such as the U.S. commercial liability crises of the mid-1980s), the latest round of price tightening was sparked by a combination of losses as well as the stock market “meltdown”. As such, insurers and reinsurers are not only facing a more volatile risk environment, with major losses emerging on the liability front through asbestos, pollution and tobacco, but they also have to contend with issues such as equity “write-downs”, low interest rates and capital depletion.
From a primary insurer perspective, there is also the risk of reinsurance “recoverables” and the fact that reinsurers are less likely to accept a loss today than has been the case in the past. As a result, Mahoney expects an escalation in disputes between insurers and reinsurers over payment as the earnings and capital pressures continue to build for both sectors. In summary, he identifies three main problems confronting the global industry: capital depletion, reserve strengthening, and reinsurance recovery. Notably, the global insurance industry lost approximately 25% of its net capital base during 2001/2 from US$690 billion to US$511.4 billion – largely due to investment market losses. Primary carriers fared the worst with a 30% decline in capital, with the reinsurance sector reflecting a 15% drop.
Furthermore, the industry has been frustrated by prior year adverse claim costs, with several of the leading primary insurers having taken reserve charges during the course of this year, Mahoney notes. Some of the more hefty reserve adjustments include General Electric/Employers Re with US$1.4 billion, AIG with US$2.8 billion, Travellers Property and Casualty Corp. with US$3.2 billion, ACE with US$2.2 billion and The Hartford group with US$2.6 billion.
The result of these precarious market conditions has been a significant increase in industry rating downgrades – particularly in the reinsurance sector, Mahoney observes. Specifically, top-ranked Munich Re received four “notches” in terms of downgrades during the course of this year, as well as SCOR, with Employers Re following up with a loss of three notches. As such, the bigger picture of the financial state of the industry is less than rosy despite two years of the hard market, he adds.