Hard uploading, Russky Polis 3,2009

Hard uploading

  Global reinsurance witnesses an unusual situation. Contrary to previous years analysts still have difficulties with specifying the overall trend for the market. Despite the chorus of prophecies heard throughout the autumn international brokers still prefer not to  acknowledge the coming-in of the tough phase of the tariff cycle. But the favorable environment does not extend to the assignors of the developing markets. They’ve had their fill of problems of global underwriters.

In the second half of the last year international reinsurers and their clients were mostly interested in
only one question: Was it the end of the soft phase of the tariff cycle in the global reinsurance? The market expected to get the answer by the end of January. But the new-year contract renewal did not clarify the situation.  

Partially this is justified by the fact that unlike the past decade in 2008 the main factor influencing reinsurers pricing policies was not the damages and under-writing results but financial and economic crisis suffered by both assignors and reinsurers themselves.

As for damages with the exception of certain segments (such as marine insurance) their level still allowed some competition between global players through low prices. There were no major disasters in the developed regions. However small but frequent ones are in plenty: by March Munich Re analysts reckoned up that 2008 was the third in the history by the volume of insured losses caused by natural disasters. Accumulated losses and liberal prices of previous years are already clearly felt.

Annual reports of the largest reinsurers that appeared in February reflected significant increase of the aggregate ratio in life-insurance sector - even though for all it is still less than 100%. Yet the summation of these data goes on only  now and at the end of the year when there were talks on the renewal the market participants could not rely on them. Moreover the influence of the financial crisis was quite clear: it showed itself through all-fall ‘sinking’of insurers and reinsurers capitalization. Reinsurance will grow in value as a source of capital that becomes more and more expensive - this was the keynote of reinsurers official statements at the end of 2008.

Two way road

It seems that analysts yet have to determine what really happened on the market. As distinct from previous years now the key members of reinsurance market describe current level of rates on obligators extremely vaguely. According to reinsurers market has reached bottom at the end of 2008 and by January rates began to rise again. However some data indicate that the situation in obligatory segment is much more ambiguous.

As a member of the Board of Directors of Munich Reinsurance Company (Munich Re) Dr. Torsten Jeworrek said his group has registered ‘tariff cycle shift practically in all segments’ - exactly as the Munich Re predicted during September meetings in Monte Carlo . But the group managed to raise rates not in all the cases, admitted Jeworrek at a press conference in early February. ‘Participants of some markets have shown  lack of understanding of the current situation and its impact on under-writing strategy and principles of risk management’.

However it seems that while mentioning unconscientiousness of  ‘participants of some markets’ member of Munich Re Board of Directors actually meant quite a wide number of ‘party line violators’. German team as well as its key competitors registered the increase of the rates for only a very few business directions. Here included segments which suffered serious losses in 2008, primarily the North American special risk reinsurance, risk of natural disasters and risk of damage of offshore platforms in the Gulf of Mexico. Moreover rates increased in the global segment of credit risk reinsurance. In the past  this business direction was not highly loss-making but the situation may change due to global crisis in the nearest future.

(see pull-quote  ‘Fear of disasters’).

However North American obligators provide for only 24% of the Munich Re portfolio (a year before it equaled to 21%).  The share of credit risk was 12% that is by 1% higher than in 2008. 41%, i.e. major part in obligatory portfolio of German team belongs to European programs - and in Europe as admitted by  Munich Re ‘data on tariff changes were not homogeneous’. It
corresponds to the assessment of Guy Carpenter and Willis brokers, which analysts say that rates for
European risks reinsurance remain at the level of 2008 with the increase only for programs including the risks of hurricanes.

As a result Munich Re has decided to beware of the segments which tariff environment it does not like. Thus the company reduced the volume allocated to German obligators reinsurance, especially in the automobile segment. It should be noted that Hannover Re on the contrary assessed the existing rates for German motor programs reinsurance as ‘attractive’. The group says, ‘We
managed to increase tariffs on disproportionate motor third-party liability reinsurance up to 20%’. It appears that rates viewed as insufficient by Munich Re became a pleasant surprise for Hannover Re. A similar situation exists in the segment of Chinese obligators: Munich Re reduced the volume for such risks reinsurance and Hannover Re called the pricing environment in this
Asian segment ‘competitive but nonetheless promising’.

More ‘liberal’ strategy of Hannover Re in the short term has helped it to build up the portfolio: the volume of group premiums by  renegotiated contracts for 2009 grew by 3%, while for Munich Re this figure had fallen by the same 3%. Yet  Hannover reinsurer would be unlikely to demonstrate such flexibility in pricing policies if the tough phase of the cycle indeed returned as the management of the group says. One of the few reinsurers abstaining in autumn from peremptory declarations of an impending overall increase of rates during autumn negotiations was French team SCOR. Group management expected the tightening be limited to a few segments. Moderate approach to pricing worked: by January 1, SCOR had increased its premiums on obligators by 3%. Like
 Hannover Re French reinsurer underlined rate growth of the Chinese programs and like Munich Re it encounted a variety of tariff rates for European programs.

Interestingly  the second echelon reinsurers assessed the results of re-contracting as well as their ability to meet commitments  more realistically and openly than larger companies. Partner Re made an almost revolutionary revelation comparing to the statements of other companies : according to its Director General Patrick Tele the group signed contracts at rates comparable to 2008 year prices. Paris Re Group reduced the volumes for credit risks and natural disasters risks in the Gulf of Mexico reinsurance - that are the segments that saw the greatest level of rates tightening. It is obvious that French team is not sure whether it would cover the damage by these risks re-insuring them at the previous year level. Thus new-year contracts renewal demonstrate в that the reinsurance market did not move in any definite direction. Strategies of some companies contradicted each other. At that as assignors noted post factum attitude to the prices on their own services in some cases is clearly correlated with the state of  capital stock and financial results of reinsurance groups. Those who had better performance figures in general tended to treat the clients’ demands more kindly.

Raise not Reduce

Despite the fact that January renewal was not altogether ‘tough’ all the reinsurers without exceptions have high hopes for rates tightening in April and July. Supporting this
optimistic attitude groups offer the argument used in autumn: due to the financial crisis the aggregate capital of the world insurance market continues to dilute and the shareholders are not ready or even able to support the insurers with more money investments. Therefore reinsurance becomes virtually the one and only source of capital and volume. At the same time the cost of capital for reinsurers grows as well so they are forced to increase prices for their services.

The logic of this argument is impeccable and confirmed by the figures: according to Aon Benfield within the period from January to September 2008  capital stock of the leading world insurance companies fell by an average of 20%. Aggregate
capital of the reinsurance industry shrank for the year 2008 according to various estimates by 15-20%. As the financial crisis has not going to subside it is likely that the capital dilution will continue this year. Nevertheless if despite all the negative changes tariff rates increase was rather mild in January what are the chances that the market will got definitely tough
by April - July?

Not too big, says Aon Benfield. Capital demand will of course increase. But on the other hand this year we should expect the decrease of the amount of insurance premiums because of the recession. ‘Reinsurance which will all the same become more expensive will be a significant expenditure line against this background. Companies will be more careful selecting risks transferred for reinsurance and even reduce their
volumes’, concludes brokerage group. Nevertheless Aon Benfield still expects two-digit increase in tariff rates for North American risks that already became tough enough in January. Brokerage Group forecasts an increase up to 20% of rate for all business directions in the region with the exception of life insurance in a number of states. Net retention level in North American segment may grow by 25% while volumes will remain at January level or in extremis decrease by 10% (Table 1). In all other segments of the world market net retention and volume will remain the same and tariffs will grow up to 10% (Table 2) maximum.

Guy Carpenter prefers not to give precise estimates because according to the group the results of April renewal will greatly depend on the scale of natural disasters in the first quarter of the year and the financial results of the market in 2008. ‘This year meteorologists predict increased catastrophic activity which may affect the rates. Unpleasant surprise for the financial sphere such as for example large company bankruptcy may lead to destabilization of the market and force its members to require greater financial stability from their partners. Annual results are published in February and March and any unexpected news may affect the contract renewal’, says the broker’s report.
To the moment the crisis has not significantly harmed the reinsurance market: none of the key companies except for Swiss Re reported major losses or became subject to rating lowering.

This  however does not mean that the global reinsurance leaders can count on the loyalty of their clientele. ‘Ratings are no longer the ‘sacred cow’; insurers seek to diversify their portfolio,
transferred to reinsurance. This enables smaller reinsurers to participate in obligatory programs previously dominated only by market leaders’, said Willis. In the context of such competition rates are unlikely to grow actively. To keep competitive advantage reinsurers should maintain equilibrium between their own goals and possibilities of the client significantly affected by the economic crisis’, advises Willis. Simply put, not to make rates too high otherwise the client will go to a less demanding reinsurance partner. All the more given that the volume of assignment may thin out due to anticipated insurance markets stagnation.

Country of contrasts

If in the international reinsurance we can talk about preserving the intrigue concerning market development  it seems that for Russia it will be much harder to draw a general trend – there is a serious risk that it would be ‘medium temperature of the hospital’. In the aquatory of Russian risks reinsurance the pitching is same as in the global ‘reinsurance ocean’ but waves are higher. All factors affecting global markets show themselves here in even more sound form. Reduction of premium volumes? Yes! Loss increase? Yes! Problems with capital? Yes and in spades! – These are the possible replies of domestic insurance and reinsurance industry to the questions of analysts. Add to that instinctive and non-rational fear of international players of the emerging markets. The result of that is tightening of underwriting and reduction of volumes for risks admission from these markets.

According to the Director on Reinsurance of Transsib Re Anna Fadeeva these are the major changes felt in the new-year renewal of obligatory coverage in 2009. Reducing of volumes provided for Russian companies by Western retrocessionaires led to a partial change in membership of contracts concluded by Transsib Re, said Fadeyeva. According to Alexei Kovalenko, Chief of Underwriting Division of OJSC Profile Re it may be said that some companies got fully shut down from Russia . According to him  one more new feature   of the western reinsurers behavior is a more cautious attitude towards retrocessionary business - they want to see as their assignors only those companies with whome the contracts are signed directly.

As for the tariff increase many companies felt it to the full. For example Director of Open Joint-Stock Insurance Company Ingosstrakh Aleksandr Grigoryev told the press that for his company ‘Western partners raised the prices on a number of risks by 10-20%’, and for other Russian assignors by 30-50% and the increase affected virtually all major lines of business. Alexei Kovalenko agrees with this assessment: he said that the range of 20-50% fully describes the extent of price appetite increase of Western partners of Russian companies. ‘Some reinsurers have to tighten the conditions and raise rates even in case of the renewal of contract on which the reinsurer previously had positive results, - he said.

But still there were some exceptions: according to experts some extreamly nervous London underwriters offered them to raise the tariff by 80% in case of renewal. Of course in general the appreciation was not that dramatic. For example according to the  estimates of Aon Benfield broker analysts working in Prague office of Benfield  the value of proportional property reinsurance for risks for Russian assignors grew by an average of 13%. However the price now comes second as many market participants note. ‘Even if the cost of the program has not formally increased  the conditions of renewal have got worse, says Anna Fadeeva. – It has happened at the expense of other components such as quality of renewal participants, minimum of deposit premium, exemptions, etc.’

‘This year when the price seemed groundlessly excessive to me I just changed the structure of the coverage: either scale down the coverage or increased priority to fit in the financial corridor I could afford’ told one of the experts to the Russian policy (RP). It should be noted that many were ready to spare.

In Moscow office of an international broker Russian policy was proudly reported that all clients of the broker were able to renew obligatory coverage by old prices. But RP’s interlocutor had to admit that the price retention was conjugated to the change of conditions. It should be noted that much depended  on the portfolio loss ratio. For example MSK Insurance Group succeeded to obtain obligatory coverage for property risks 15% cheaper than last year, reported Alexander Petrov,Head of the Moscow Insurance Company to Russian policy. The main secret of this success lies in the fact that the group restructured its reinsurance coverage combining it for Moscow Insurance Company and MSK-Standard (formerly Standart-Reserve)portfolio.  

Besides low loss ratio for MCK portfolio to a great degree composed of mortgage insurance contracts played its role. It also may well be that exaggeration of reinsurance conditions will tell on large companies more seriously than on small ones, partly because of the fact that Russian retrocessionaires have not yet followed the western market example in price setting and partly because of the loyalty of partners. ‘We have not felt great increase of quotations in contract renewal for 2009, - says head of the reinsurance department of Paris insurance company Pavel Chernoverkhsky. According to him although most of the companies attempted to raise tariffs by 20-30% ultimately  ‘majority of insurers agreed on keeping the same price’.

Circle is broken

So the outcome of renewal-2009 looks paradoxical. On the one hand it seems that the soft phase of the market cycle has ended at the global level (and definitely ended for developing markets). But  the increase does not look dramatic on a global basis and it is likely that during April and July negotiations dire forecasts of some global reinsurers will not prove true (see Aon Benfield forecast). Although it appears that market leaders seriously believe in the virtue of self-fulfilling prophecies.

It is possible that what is happening in the market may not be the change of cycle phase but turbulence phase. Unless there exists even more audacious assumption that the cyclical development may be being replaced by some other. It seems that the unified approach of retrocessionaires to risk-taking is deluting and gets explicitly preferential, i.e. individual approach to the assignors and individual approach to entire markets. The conditions will be milder for one category and tougher for another one. And Russian assignors obviously has not got into the VIP-zone.

P ull-quote _1

No volume in one’s own country 

Business of Russian reinsurance companies continues to decline according to the results of 2008 published by Federal Insurance Supervision Service. Compared with 2007 Russian reinsurers’ premium (both single-purpose and insurance companies) decreased by 15%. Compared to 2006 the decline looks even more dramatic - by a third. This negative trend is characteristic only of Russian direction of reinsurance business – the amount of charges for domestic reinsurance risk has fallen in 2008 by 20% and by 40% relative to 2006. Over the past two years the volume of cross-border reinsurance premiums has increased by more than 60% and its growth rate exceeded 25% per year. Today Russian reinsurance market receives 15.6% of its overall premium from outside.

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Fear of disasters

North American programs of natural disasters and damage to offshore platforms risk reinsurance as well as global credit risk reinsurance programs won the title in rates growth. Chances are good that this trend will continue during April and July contracts renewal. Tariffs on North American risks insurance increased in January against fears that losses caused by upcoming Atlantic hurricane season will be above traditional. According to Guy Carpenter and Willis average increase in tariffs within these business directions increased by 11% and maximum by 35-40%.

At the same time reinsurance rate on catastrophic and offshore programs where in 2008 no major damage had been recorded compared to the previous year even declined. Fear that partial funding of FHCF (Florida Hurricane Catastrophe Fund)volumes through the municipal bonds sale in the amount of 18 billion dollars could fail, is likely to cause further tightening of rates in the second and third quarter when remaining reinsurance contracts on North American catastrophe risks are renewed.

January tariffs increase in credit risk segment was referable to uncertainty concerning the situation in financial markets. According to John Orchard who is responsible for the reinsurance of financial and political risks of Guy Carpenter proportional programs where losses have been recorded were reinsured ‘on draconian conditions’ and the rates on disproportionate programs grew by more than 100%. Loss-free programs were reinsured on a bit harder conditions and rates a but higher than last year ones. As this year the risk of companies’ bankruptcy almost in all economy segments remains high enough one can expect reinsurance credit risk rates go on growing.

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Slow-witted underwriters

‘According to our estimates further deterioration of financial market or devastating hurricane season may speed up the finishing of the tariff cycle soft phase’, - predicted member of Munich Re's Board of Directors Torsten Jeworrek in September in Monte-Carlo. There were no hurricanes in autumn but the financial market became the scene of real disasters. However the ultimate completion of the soft phase was prevented by competition. ‘Participants of some markets have demonstrated lack of understanding of the current situation and its impact on under-writing strategy and principles of risk management’, - acknowledged T. Jeworrek at a press-conference in early February.