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Global Losses May Trigger Price Hikes In Reinsurance Markets

U.S. insurers may face higher reinsurance prices in the upcoming renewal season as a result of catastrophes in far away places. The earthquakes in Turkey and Taiwan will be cited as reasons for shrinking capacity and an end to the long-running soft market. Add to this the combined impact of Hurricanes Floyd and Irene at home. Before long you have a case for raising the cost of reinsurance at all levels.

Already, there's been considerable firming in the retrocessional market. U.S. RE has responded with a new, multi-year retrocessional product that offers surplus relief to GAAP-filing companies in the year of a loss up to 70 percent with amortization over four years. In the present climate of shrinking retro capacity, the demand for this product is brisk. Contraction in the retro market "can be attributed to the mergers and consolidations in the industry, plus the fall-out from several markets exiting this line of business, most notably in Australia," explained Brian McGuire, Senior Vice President of U.S. RE.

During the recent Monte Carlo Rendezvous where key international writers of reinsurance gather each year, the main topic was poor underwriting results in the first six months of this year, compounded by losses from the earthquake in Turkey. "Many reinsurers said they were no longer prepared to accept soft market conditions and will push for necessary premium adjustments in the next renewal round," Mr. McGuire said.

Then came the Taiwan quake and Hurricanes Floyd and Irene in the U.S. Indicating what may be the beginning of a trend, the German reinsurer ERC Frankona told Insurance Day that a portfolio review identified about 1,000 clients where contracts need to be revised. Board member Dr. Karl Mayr stated that "we are no longer prepared to accept the soft market conditions."

In this environment, U.S.RE is advising clients to consider alternative approaches before accepting proposals for substantial price hikes in traditional reinsurance. "Remember, you're not responsible for the under-priced business that may have existed in Turkey or Taiwan. If your own loss experience is good, then you should question why you may have to bear the burden of sharing the pain," Mr. McGuire is telling clients and prospects. "We believe in the importance of focusing on our clients' ability to control expenses and are more than willing to share our ideas before renewal time. We strongly urge clients to begin discussions early so they are not penalized in terms of cost and capacity as we move closer to year end," he added.

U.S. RE became a leader in providing non-traditional approaches to reinsurance requirements in hard markets following Hurricane Hugo and the San Francisco earthquake in 1989. A good example of early preparation involves one of U.S. RE's clients anticipating that the company's catastrophe reinsurance costs are likely to increase by mid-year 2000. This client successfully employs one of U.S. RE's proprietary alternative reinsurance products for a portion of its catastrophe program. To help the client avoid increases in the overall cost of reinsurance, U.S. RE is working with the client to increase alter native capacity and concurrently shrink its traditional capacity in order to reduce its expense ratio.

This is just one of the ways U.S.RE is helping clients to obtain the reinsurance protection they need at optimal cost in what promises to become a tighter market next year.