Beginning on November 1, and culminating with the signature of the bulk of treaties on January 1, the reinsurance renewals season has sparked more conjecture than usual this time around, coming as it does after a gruelling year for the trade and investment underwriting community.
Whether reinsurance buyers keep much of their risk for the net account, and buy mainly excess of loss (XL) cover, or share a quota of every risk that they write, they will be dealing with reinsurers that have watched some of the largest claims for many decades accumulating at their clients over the past year, as the global downturn and credit crunch have wrought billions of dollars worth of havoc on underwriters’ bottom lines.
“Whilst there appear to be improvements in some economies, we are of the opinion that the financial crisis has not yet passed,” says Thomas Rothenberger, branch manager, credit and surety reinsurance, at Ariel Re, a significant new entrant to the market. “Considering the event risk scenarios that are not uncommon at the end of each recession, and the continuously rising insolvencies, we will be carefully considering the quality of the different clients’ underwriting and their portfolios,” he stresses.
At Munich Re, which has been a reinsurance market stalwart over the past two decades, a spread of concerns is voiced by Elmar Schieder, head of financial risk department. “We are very carefully monitoring the impact of governmental actions for private business, and where the principle of shared fortunes is not applicable any more, we get out,” he says. Schieder adds that Munich Re is especially careful in countries with high loss ratios, such as Spain.
He continues: “In the political risk insurance (PRI) field, we see increasing risks and support only market leaders. Prices will go up there. Our big concern is structured trade credit (STC), where we have a problem with bank risks and commodity pre-finance and want to move out from these segments.”
Although surety underwriting is still performing well, says Schieder, Munich Re has already taken one major loss on pre-payment bonds for Korean wharves. “It is a long-term business and we see deterioration starting,” he underlines.
At Hannover Re, Jan Mueller, managing director, credit, surety and political risk, highlights that “high loss ratios have mainly hit the credit insurance industry, and are increasing in emerging markets credits, but are still at a good level in surety and pure PRI”.
Mueller believes that the bad 2008 underwriting year in credit should now be digested, but is clear that the 2009 underwriting year remains a difficult one in credit despite a slight improvement in loss ratios. “50% of our book has been affected, and 50% has not, which helps us to get through the ‘not easy’ times,” he says, adding that Hannover Re has “a clear commitment to this business”.
Among reinsurance buyers, Euler Hermes works with some 17/18 reinsurers in its treaties. “We are looking to maintain our reinsurance treaty at the same level as 2009, when we ceded 30% of our exposure,” says Benoît des Cressonnières, chief executive with Euler Hermes Re.
“The main three players will be able to get capacity again, but terms and conditions will be in line with their respective performance and actions taken in this economic climate, which has produced poor results for our industry over the past two years,” he comments.
Dan Riordan, president, surety, credit and political risk at Zurich, predicts a tough renewals market. Unlike last year, when Zurich purchased new capacity, “this year we don’t need additional capacity at our renewals”, which will be in January, he says. “We have fairly substantial limits already, at US$150mn for 15 years for PRI, and US$50mn for seven years for trade credits – and we would be pleased to keep those limits in the current environment,” he emphasises.
“Nonetheless reinsurers are there for the long run, and I don’t see the market changing much.”
Reinsurer appetite is under close scrutiny from one of the London market’s newest insurers for political risks, terrorism and trade credit, MarketForm, whose renewal period arrives in April/May, 12 months after it launched its underwriting operations in 2008.
“It was a tough time to launch an emerging markets political risk and credit book – having the word credit’ in there was difficult, as reinsurers were concerned about potential credit problems in certain countries,” recalls class underwriter Nick Robinson.
“Concluding the treaty took six weeks longer than the date at which I’d hoped to get reinsurance, but I got the line, tenor and book balance that I wanted,” he says. “We are all anticipating a tough period ahead but I hope it will work in our favour, so that there is some spare capacity allowing us to expand,” Robinson says.
The price as well as capacity offered by reinsurers will typically be determined by several factors, which Richard Wulff, group general manager, credit and surety, QBE Australia identifies as: “The way in which the book of each individual credit insurance company is performing, the level of transparency the company is providing and its ability to convey its professionalism.”
He notes that QBE has a “well-spread” reinsurance panel of just under a dozen strategic partners.
The outlook for reinsurance buyers and sellers may not be as worrisome as some may fear.
“There seem to be positive sentiments across the reinsurance market,” comments David Edwards, senior vice-president, credit, bond and political risk team at treaty broker Guy Carpenter.
“Munich Re, for example, has just reaffirmed their commitment to this class in an announcement to clients,” he comments.
Aside from Swiss Re’s retrenchment from the class last year, in a move generally ascribed to its group losses on derivatives, Edwards reports no other withdrawals.
Schieder at Munich Re’s further comments on his firm’s stance: “We continue to support our long lasting relationships and have little appetite to take everything available in the market.”
He adds that Munich Re has decided to keep capacities unchanged, but, “due to the higher capital allocated to the same portfolio because of higher loss-given default, we have to charge different prices.”
One trend that Munich Re is open to is the growing level of requests for multi-year protection, “specifically where we see little chance to earn money in 2010, but better perspectives in 2011 and 12, which is the case in credit insurance almost worldwide”, Schieder remarks.
According to Hannover Re’s Mueller, the forthcoming renewals, “will be challenging, but further hardening terms and conditions will mobilise capacity”.
He comments: “The primary client measures are showing results. Overdues and claims have been down since some months, and primary companies are showing the first results of their consolidations.
“This demonstrates that the mechanism of credit insurance worked also in the crisis, but loss ratios have to be reduced again in 2010. In addition, an efficient exposure management is indispensable on the primary and reinsurance side.”
One of the major reinsurance purchasers, Atradius, is prepared for most eventualities, says Diane Foxhall, executive manager for outwards reinsurance.
“Given the current economic situation and the impact that this is having on world trade, it would be sensible to prepare for a shrinking of reinsurance capacity.
“However, although one major player has already announced a downsizing of the capacity that it will provide to this product line, many reinsurers are doing the opposite as they anticipate a positive change in the economic cycle and quite rightly recognise the profit potential of our industry as things improve,” she adds.
Atradius has consistently ceded approximately 50% of its business to reinsurers in recent years and is involved with just over 20 reinsurers.
Watching and waiting
Edwards at Guy Carpenter believes that, “most potential reinsurance entrants are sitting on the fence and making a decision as late as they can, to make sure that the underlying trends continue”. He says that this is especially the case on the trade credit side, where the claims tally has been improving month by month.
Many market observers canvassed by GTR flagged up the new book opened in Zurich by Ariel Re, which is staffed by a number of former Swiss Re employees, who have brought with them long-standing relationships with most of the major cedants in the market.
Ariel Re has been present in the market since shortly before the annual reinsurers’ conference in Monte Carlo in September and is fully involved in 2010 renewal discussions.
Rothenberger at Ariel Re describes a scenario in which “the capital adequacy of primaries have been under pressure, at times increasing the need for reinsurance, while available reinsurance capacity remains scarce, pointing to a continuing gap between demand and supply for reinsurance”.
It is this gap, he affirms, that Ariel Re is seeking to insert itself into, having made “significant investments in both the scale and calibre of our team as well as our analytical infrastructure”.
It is a good time for reinsurers to step in, or increase their capacity, says des Cressonnières, noting that Euler Hermes has been working with another new face in the arena, a new Bermudian reinsurer, this year.
“In 2009 we are seeing the first positive impacts of the action plans structured in 2008, so it is the right time for a reinsurer to maintain or increase its lines.
“Despite the rise in bankruptcies, the loss ratios among the ceding companies are improving, and there will be more opportunities to recover losses. Moreover they have increased their premium rates by 15-30%, and improved their risk profile by cleaning their portfolios and reducing their exposure by 15-20%, especially on the worst risks. All that is missing is volume in insured turnover, which will take the loss ratios down further when economies rebound”
PRI vs trade credit
Brokers insist that reinsurers will be looking quite differently at the two streams of trade credit and PRI business, due to separate cyclical timing. “On the credit insurance side, ratios are improving now, and credit insurers are now further up the up curve than PRI insurers,” says Kit Brownlees, managing director, political, project & credit risks at Arthur J Gallagher.
Trade credit players potentially had their downturn 12 months earlier than the one now being experienced by their PRI counterparts. “The trade credit insurers saw the hardest part of their market in early to mid-2009, so while the renewals season will be very hard on the terms and conditions, we believe this will be balanced by an increase in reinsurance capacity,” comments Guy Carpenter’s Edwards.
“Reinsurers recognise how cyclical the business is, and that the biggest primary insurers have all turned their books around. With ratios improving now, 2010 should come back to within the normal range, and reinsurers are looking at an opportunity to take advantage of the change towards better times,” Edwards explains.
The cyclicality of the business is further emphasised by Euler Hermes’ des Cressonnières.
He says: “For the more committed reinsurers, credit insurance represents some 3-4% of their premium income. In a good year, it could represent as much as 8% of their profitability, or net result. But in a bad year, like 2008 and 2009, it will be much less, and could even be negative, depending on the players.”
Brokers specify that the more deal-specific PRI business stream for reinsurers is smaller, gauged by rough market estimates that annual premia received by political risk underwriters amount to around US$1bn, whereas Euler Hermes alone generates some US$1.7bn in premium income per year.
All concur that the political risk cycle lags behind, due to its longer underwriting tenors and claims waiting periods. “The deterioration of private obligors, on the STC side, during the last half of 2008 really started to come through in 2009, and so we expect some tough renewals negotiations for 2009/10,” suggests Edwards at Guy Carpenter.
Within the broad PRI category there is a further segregation that will impact on the renewals process. “Proportional, non-cancellable reinsurance buyers are longer-term underwriters, like Zurich and ACE. The shorter-term PRI underwriters, like those in the London market, buy more non-proportional XL and their reinsurance will not be affected as much, because their lines on private obligors, and so their individual losses, tend to be smaller,” he adds.
There are varying guesses as to how the PRI renewals will shape up. “People are describing 2009 as the Hurricane Andrew year for the PRI market,” notes Alastair Mole, a member of a specialty reinsurance team which has recently moved to Miller Insurance Services from Aon Benfield, pointing to events such as the huge bank reschedulings in Kazakhstan and Ukraine that will impact STC players.
“However some PRI buyers have made some smart purchases in 2009, especially in respect of RDS-driven catastrophe cover, which puts them in line to get some very cost-effective country capacity cover in 2010,” he predicts.
Gallagher’s Brownlees forecasts that “PRI players will get their reinsurance, but there may be some cutbacks in appetite and reductions in tenors following some significant claims, and there could be one or two casualties”. On the other hand, he counters: “The PRI market is now a mature market, with considerable capacity and the major players will continue to provide an attractive offering.”
One strong light in which all of the primary insurers will currently be perceived is their response to the crisis. “Our aim in the crisis was and is to encourage cedants to tighten the rules of the game, clean their portfolios, improve claims collection and keep us closely informed,” stresses Munich Re’s Schieder.
Wulff emphasises that QBE has been tightening up underwriting and prioritising work-out situations in order to avoid losses before they occur. He says: “This is recognised and appreciated by our reinsurers. The reinsurance panel would obviously like to see a return to the profitability that we enjoyed prior to the financial crisis, as would we. But we are confident that our book will perform well in the coming years.”
Ariel Re’s Rothenberger comments that there may be a few lessons learned from the crisis that credit insurers benefit from in retrospect. “Because the crisis initially hit the financial markets first, some underwriters reacted a little late with their measures. There may therefore be room for improvement to early warning systems, and reaction, in particular on the frequency side of the book, is therefore important,” he comments.
“Pricing also needs to continue to improve reflecting the actual risk over the cycle while also assuring adequate return on capital for all participants,” he says.
Reinsurers have become more professional. Wulff cites the probable maximum loss (PML) study overseen by the International Credit & Surety Insurance Association and the PanAmerican Surety Association as an obvious indicator here. “This enables better selection of ceding companies and pricing of the risk. I believe that this is the way to go and would expect reinsurers to continue on this path.”
If reinsurers do have limited capacity, they should allocate their facilities based upon ceding company performance. “In an upturn, insurers’ strategies all look the same. In a downturn, those ceding companies taking successful strategic action should be rewarded in the best way, with better terms and conditions,” says des Cressonnières.