Rough 2003 ahead for reinsurers, says broker report

A drought in capital foreshadows a tough year ahead for reinsures, says reinsurance broker Benfield Grieg. In its report, “The Big Squeeze”, the global broker says that the flood of new capital into the market amounts to “too little, too late”.
“The key issues for the reinsurance industry can be summarized by three Cs: capital, capital and capital,” the report notes. “The influx of new capital after WTC [the September 11 terrorist attacks on the World Trade Center and other U.S. targets] appears increasingly inadequate against the massive outflow caused by falling investment markets, reserve strengthening, and escalating catastrophe losses.”
The report estimates that since 2000, US$200 billion of capital has left the market, with only US$26 billion and US$19 billion in new capital raised in 2001 and 2002 respectively.
Among the factors putting the squeeze on reinsurer results are very low interest rates, and a growing focus on capital adequacy on the part of cedants and rating agencies. Given the current investment market, reinsurers will have to aim for historically low combined ratios to achieve the returns demanded by shareholders. However, rate hardening is already showing signs of waning in many sectors.
The report predicts further reserving for asbestos and other claims, and a continued malaise in investment markets hitting results and capital availability in the year ahead. Also, reinsurance recoverables, underwriting exposures to credit risk and a worsening environment around corporate default will also plaque the market.
There are indications that sustained change has not been made despite the current tight pricing market, the report says. “First, the pricing cycle is alive and well and is already beginning to assert itself. Secondly, imperfect distribution of capital across the industry means that availability of capacity varies widely across the market. However, expectations of a prolonged hard market are already looking unrealistic.”