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Bermuda: Industry giants warn on rate cutting

Talk at the recent World Insurance Forum in Bermuda was of battening down the hatches in readiness for a downturn already gaining momentum.

As leading lights of the (re)insurance industry (absent Lloyd's) descended on the island in early June, the focus switched to managing the down cycle and underwriting discipline, as an impressive array of senior executives debated the challenges that lie ahead.

In the event's keynote speech, Marsh senior advisor John Sinnott said he could see no change in the industry's cyclical pattern due to the dynamic nature of risk.

"The severity of the peril obviously has radically changed since 9/11, and that severity was impossible I think for anybody to anticipate. And who would have predicted the tort developments in the 1980s and 1990s, especially asbestos. Add in the corporate governance mess, and a multitude of other factors, and you have the ingredients for continued volatility in adverse directions in claims trend."

He continued: "The bottom line [is that] cycles are something we're going to have to manage our way through”.

RIMS’ Lance Ewing said the risk manager's experience had evolved from a merry-go-round to a roller coaster. "The ride is a little bit different from what we've seen in the past, and I think that ride is going to continue. I think we're going to see more spikes and valleys than we had in the past across the board, with a 20 percent increase, 50 percent increase, then a 10 percent decrease, back and forth over a period of time."

Multi-dimensional markets
Willis' chief executive of its US operation Mario Vitale described the primary market as "multi-dimensional" with a general downward trend. He said it is the "sum of a lot of micro markets", with rates fighting back against the slide in earthquake property risks, and D&O rates dropping off significantly less in the excess layer than in primary.

"The point being that in every line of business there are red zones right now. In environmental we still see a hardening market, and it's getting harder," he added.

Peter Garvey, head of Marsh in North America, said the softening was most severe in the US, concluding that in lines like D&O, where loss potential remains high, there is too much capacity chasing the business. "Gravity is forcing everybody not only to cut rates, but also to go on that downturn of market strategies as well, and now everybody's looking to achieve market share growth," he suggested.

Halting the slide
As the debate moved towards the prospects of halting the slide, Michael Morrison, the veteran vice chairman of AWAC, said: "The hard market can be sustained as long as the underwriting community can maintain discipline, though that sounds like an oxymoron."

Swiss Re chief executive John Coomber said that his chief economist constantly reminds him that the driving force behind underwriting discipline is sustained low interest rates and low returns in the assets markets. Noting that high interest rates initiated the change in behaviour that led to high combined ratios in the last soft market, Coomber said: "If you don't make an underwriting profit at the present time then you'll make a loss."

XL chief Brian O'Hara argued that the lack of high investment returns and the lingering sins of the 1990s are leading the industry towards an "underwriting market", not a true soft market. He added that growth for growth's sake should not be the mantra of insurers. "Growth is good but underwriting discipline is primary - if you can grow keeping discipline, then good, but if you can't, don't."

Axis chairman Michael Butt suggested that the spotlight shone on corporate governance by Sarbanes-Oxley could help create a shallower cycle.

O'Hara, whose XL has had its fair share of reserving issues in the last year or so, said that increased disclosure and transparency over reserves would be "mothers’ milk" to the industry - but only if it didn't lead to competitive disadvantage. "It would be nice to have a mechanism that would put pressure across the board for disclosure," he said.

Reinsurance buyers shifted the focus to pricing, the flight to quality and rating downgrade triggers in contracts.

Reg Campbell, head of reinsurance at R&SA's former Australasian operation Promina extolled the virtues of non-consensus pricing based on different security levels when shopping for cover for property catastrophe cover.

"We would basically manipulate (price) relative to security factors, so we would try to assess a price for the programme based around a notional AA reinsurer, and another price for the programme based around A+ and so on," he explained before adding that he would happily pay more for a triple A than an A-.

However, Christian Milton, who buys AIG's reinsurance disagreed, arguing that "at the end of the day, we've got to try to forge [reinsurers] into a consensus where we can build most of the programme".

"We buy a $750mn CAT programme just for the domestic risk, and another $400mn for international and another $150-200mn for personal lines. So every time you're building these kinds of programmes, in order to attract good quality markets and security, you're going to have to go for consensus pricing."

Ratings triggers have caused concerns for some reinsurers - particularly with the slew of downgrades last year. But Campbell allayed some of those fears by revealing that termination of contract only occurs in 20-30 percent of triggers.

"For a reinsurer that's moved from AA+ to AA it's just an opportunity to sit there and review and move forward. For a reinsurer that's moved from A to A- you may wish to take a more harsh decision." he concluded.

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