Financial success of reinsurance in previous year not expected in 2007

According to reinsurance experts who spoke at the recent NAPSLO Mid-Year Workshop, the positive financial figures most insurance and reinsurance companies saw in 2006, may not be repeated in 2007.

"If it (2007) is a rather benign year with no unexpected events that exceed the expected losses that all of us budget for, I think you will see the market continue to soften," Goodwin said.

The reinsurance experts were part of a panel, Current Perspective on Reinsurance, which was moderated by Richard M. Bouhan, Executive Director of NAPSLO. Panelists included Paul Goodwin, Munich Reinsurance America; David E. Leonard, RSUI Group, Inc.; and Mr. Leonhardt.

"In 2006, the returns were incredible, there was a lot of capacity available, and the rate increases on the property side were not as dramatic as anticipated," said Thomas Leonhardt of Towers Perrin Reinsurance. "A great year like 2006 has become the oddball and years like 2005 are going to become more of the standard with regard to catastrophes and reinsurance."

Panelists said forecasters have predicted that chances of seeing a category 3, 4, or 5 hurricane in 2007 are more than 50%, leaning toward a recurrence of 2005.  Even if the storms and other natural occurrences are fewer in 2007, prices may not drop considerably because of other factors on the horizon.

"Global warming is now a reality according to the scientific community and we are in a trend of heightened frequency and severity," said Mr. Leonard. "Reasonable underwriters will still be conservative in the amount of aggregate they assume and the amount of capital they expose, but another good year will give more capital to expose."

Following the 2001 terrorist attacks and the hurricanes of 2004 and  2005, a lot of capital came into the market through Bermuda and other sources to deal with the need for additional capacity following those unusual events. However, with fewer events taking place in 2006, there has been less need for more capital.

"A lot of the alternative mechanisms of reinsurance capacity are certainly waning to some extent," Leonhardt said. The capacity of the traditional reinsurance market is more than capable of absorbing the needs of the market today."

One of the newest forms of investment has been the use of sidecars. A reinsurance company sets up a mechanism using funds from outside investors, who agree to tie up their funds for two or three years. While initially considered to produce high returns, sidecars have lost popularity in recent years because investors may not be getting the returns they expected.

"Our view has always been that the sidecar money was driven to what they perceive to be very high returns, and I don't think they perceive 14% to be very high returns. I think they were thinking more of 20-25% returns," said Mr. Leonard.

Mr. Goodwin agreed, saying "There is a consensus in the industry now that the utilization of sidecars is done. They are just gone. They met the need and it's just not there anymore. It is a financing vehicle that has come and gone already.

Another area that added capacity to the market was the actions by the state of Florida to start the Florida Hurricane Catastrophe Fund. With the state providing reinsurance, reinsurers are now looking for other places to utilize their funds.

"Where are those reinsurers going to make it up?" Leonard asked. "They are going to go to California for the quake for that exposure, and the middle of the country for casualty."

One of the biggest changes over the past few years has been the consolidation of the market, and Mr. Goodwin noted that the number of reinsurance members of the Reinsurance Association of America has dropped by half in recent years. This was a result of mergers and acquisitions, yet he didn't think the M&A activity has hurt the market.

"To a certain point I think it has made market stronger," he said. "There are fewer players that are better positioned with more capital and it cuts down on alternatives from a buyer's perspective. As for globalization, you are spreading out risk throughout the entire world."