Canadian Underwriter

Reinsurance Broker Perspective: Where are the Good Old Days?

July 1, 2002   by Don Alexander of Guy Carpenter Canada

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As a card-carrying member of “underwriters anonymous”, I have to constantly fight the urge to try to underwrite the reinsurance brokerage business for which I am responsible. Whenever the “urge to underwrite” threatens to overwhelm me, I try to recall the sage advice that I received some years ago in New York from Dick Blum, the then chairman of Guy Carpenter.

At the time I was president of a reinsurance company and I was berating Dick because my employer had suffered a huge loss as a result of Hurricane Andrew, a good chunk of it on business emanating from Guy Carpenter. Ever the gentleman, Dick did not point out that my company had written that business voluntarily, but what he did say struck me as being worth remembering. In essence, what this seasoned and respected reinsurance professional said was that in his experience, brokers were not very successful in predicting what would turn out to be “good business”, and what was going to be “not-so-good business”.

My own prediction track record in this regard is not particularly stellar, and the only reason why I do not own a bunch of Nortel stock purchased at $30 a share is that I had no available cash when it hit that level, which sure looked like the bottom to me. So I am not going to attempt to predict the 2002 yearend underwriting environment. Only the underwriters know what their respective risk appetites will be, and the prices that they will need to charge for insurers to access their capital. So much depends on influences that are external to our business.

Will the 2002 U.S. hurricane season be active, or will the storms once again stay offshore? Perish the thought, but will any of the predictions of new terrorism attacks come true? Will the “bears” continue to roam the world’s equity markets? Given the current political landscape in Ontario, is it realistic to expect early, meaningful reform of the auto product? The answers are “maybe, perhaps, probably, and no” – but not necessarily in that order.

Let us face it folks. If your favorite underwriter seems a little cranky these days, that is not without provocation. 2001 produced the most dismal underwriting results in recorded history for insurers and reinsurers alike. For confirmation, please refer to the frightening bar chart figures in CU’s 2002 Statistical Issue (page 14). In a somewhat twisted perspective, those horrible results are really the good news. Because it takes red ink, and lots of it, to force us to do what we have to do to achieve the necessary balance. Namely:

Keep our jobs and the dream of an eventual pension; and

Make a decent return for the owners.

Strike for profitability

So, in effect, surviving underwriters have now paid their dues, and are wholeheartedly taking the necessary action to correct what are clearly unsustainable results. I do not think that there is any question that a strong “market turn” is now well underway.

Take yearend 2001 reinsurance pricing as an example. My best guess is that reinsurance prices were up an average of 40%. There are now no more “multi-year deals” on the market. Restrictions now abound for terrorism, toxic mould, and cyber risk. Reinsurers want reams of underwriting information on even the simplest risk before they will give brokers the time of day. To structure an equitable reinsurance transaction, sophisticated analysis and financial modeling have replaced the “two-martini lunch”.

The Insurance Bureau of Canada (IBC) has reported that direct premiums written in the first quarter of 2002 were 18.0% higher than 12 months ago. Incurred losses were up 4.4% by comparison. That is the way to make money in our business. Net profits are as a result up 25.2%. So what we have is a combination of huge reinsurance price increases compounding significant primary insurance price hikes.

To me that adds up to a dream underwriting environment, very much like the one we had during the so-called “liability crisis” of the mid 1980s. The question is, what kind of a reinsurance renewal season will we have later this year? “Healthy” is the first adjective that springs to mind. I fully expect that there will be sufficient quality reinsurance capacity available to take care of the needs of Canadian insurers, but accessing it will necessitate diligent marketing efforts by your broker. Will that capacity come cheap? Not this time around.

Does all of this translate into a benign reinsurance renewal season at yearend 2002? Your guess is as good as mine, but a decade or so from now, I’m willing to bet that the underwriters of the day will be reminiscing fondly about the good old days of 2002.

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