1 January 1970

Annual broker's report

Paul Markey
Chairman Aon (Bermuda) Ltd. and Aon Benfield, Bermuda

How do you see the casualty market developing in 2010 and into 2011?

The Bermuda casualty market has been an active participant in highseverity, low-frequency insurance coverage for the past 25 years, so it’s very experienced in that area. To answer specifically, based on all the directional information that we’ve seen, the casualty market has more capacity than it’s probably ever had and, in all likelihood, it’s going to be increasingly competitive and continue to have modest premium reductions, certainly in 2010 and possibly into 2011.

The difficulty we see in making projections is that, particularly from Bermuda, the tail can be anything from three to 10 years in duration and actual results historically aren’t known for a while to come.

So deterioration and things such as inflation are eventually going to have a material impact on these results, and that trend will stop and reverse, but when remains to be seen.

Are you seeing any signs?

Well, if you look at the results that are being posted through the fourth quarter and annual statistics in all parts of the global insurance marketplace, it would be impossible to see a change in the hardening of the marketplace, at least in the short term.

I think people will literally have to withdraw capacity, dividend, capital—reduce the oversupply, so to speak—to have any impact.

In which sectors of the casualty market do you see opportunities, and why?

"Underwriters in all the companies have been in these businesses by and large for decades, and there's a point where the wilingness to write business at rates minus some sort of discount will just stop. It's happened in the past in Bermuda and I expect it will happen in the future."

The opportunities within Bermuda are access to business that the casualty market has not seen in the past. The Fortune 2000 businesses are generally accessible to the global marketplace, but they don’t always make it to Bermuda. I think Aon at least is making strides to ensure that all broking hubs, as has recently been announced, will have the opportunity to see more business. So for our markets, certainly from us, they should have a broader access point to business they’ve not seen recently.

Do you have any examples?

It comes in all shapes and forms—international business or the more traditional US businesses.

Bermuda is just a strong place to seek capacity for our clients, particularly in general liability, professional liability, and a multiple source of accountants and lawyers—and I’d expect that to continue.

What do you expect to happen to rates over this year and next, and what impact will that have on the casualty market?

I’d expect rates to continue to be put under pressure. One of the things about Bermuda is that it’s a very experienced marketplace. Underwriters in all the companies have been in these businesses by and large for decades, and there’s a point where the willingness to write business at rates minus some sort of discount will just stop. It’s happened in the past in Bermuda and I expect it will happen in the future.

I don’t think we’re there yet because the results in these lines of business have been very good for the past five or six years. But rate reduction won’t continue forever, that’s clear.

Are people braced for it?

Yes, to some degree. It is a supply and demand business, so you’ve got to write some business, but at some point, the minimum premium levels will just become unsustainable.

In 2009, in light of the difficulties AIG was experiencing, insureds were expected to diversify their placements and spread their risk around more carriers. Did this diversification take place, and how do you see this trend developing over 2010 and into 2011?

I would definitely agree that diversification took place. Clients and brokers made some fundamental decisions to use a broader selection of markets and that appears to have continued. A combination of new and existing markets picked up all the needs of the casualty market and, broadly speaking, I think all markets are now behaving in a diversifying fashion.

For certain types of business, such as subscription or quota share arrangements, diversification is reasonably straightforward. There are other areas that are more difficult to diversify, other than to move from one entity to another, so that sharing is more competitive. This is more likely to be the case in primary areas, where you need tremendous servicing capabilities.

It’s going to be a complicated year. It’s certainly good to see the results of 2009, but there are a lot of hard decisions that are going to have to be made by underwriters on all fronts. Sustainability, ROE, capital—it’s very difficult. Maybe we won’t have any catastrophes, but we didn’t have any last year and that seems like a statistic that will be difficult to replicate.

Tony Bibbings
Senior vice president Artex Risk Solutions

How do you see the casualty market developing in 2010 and into 2011?

There were several significant carriers that entered the casualty market in 2008 and 2009 to take advantage of the expected dearth of capacity. However, capacity was not reduced, and the added supply coincided with a reduction in demand caused by tightening risk management budgets, tort reform and the absence of large settlements. It is easier to envision circumstances that would lead to an increase in demand rather than a reduction in supply. However, both require a stretch of the imagination, which probably means a continued soft market.

In which sectors of the casualty market do you see opportunities, and why?

There is a lot of intellectual capital here that I would like to see applied to some of the problems our clients face. As another example, I see that mortality indexes have recently been introduced as a surrogate for pandemic exposures. It would be great if we could once again be the market of choice for different, but real, needs.

What do you expect to happen to rates over this year and next, and what impact will that have on the casualty market?

Supply currently exceeds demand, but there are three options to help reduce it: consolidation, bankruptcy and the collective will of the industry.

Consolidation is difficult in high-excess casualty companies, partly because it takes years to quantify the losses related to the premiums. It is also not a good time to consolidate when share valuations affect the calculation of the price of purchasing or selling a company.

Bankruptcy is harder to effect with new companies, partly because of the time it takes to calculate losses but also because the operating requirements of buyers, regulators and rating agencies almost always mean that the companies are well capitalised with low premium-tosurplus ratios.

As for the collective will of the industry causing rates to harden, it is usually the most optimistic underwriters that determine insurance rates. As much as most in the industry see a need for rate increases, the meaningful few that want to keep market share hold more influence.

Unfortunately, it will take some currently indeterminate calamitous event to bring the supply and demand equation back into a balance, which will then cause insurance rates to shift back in the direction of increasing—or at least holding steady.

How do you see the casualty market developing in 2010 and into 2011?

"There is a lot of intellectual capital here that I would like to see applied to some of the problems our clients face."

I expect to see carriers really look at their distribution and determine who they believe is really treating them fairly through this bottom part of the cycle. In addition, I expect to see certain carriers decline to participate on some renewals where prices just get pushed too far below technical adequacy or below minimums. There will probably be a continued battle between a few of the big players for lead umbrellas on the large accounts. It tends to be ACE and Chartis, with a few others having a look every so often. The incumbent tends to retain the account, except where the pricing or terms just become too thin to support. That is when you see placements move to a new player. As we move into an upturn in pricing, it will be interesting to see if those that have picked up new lead umbrellas at this time will be able to retain them and get to a position of rate adequacy.

In which sectors of the casualty market do you see opportunities, and why?

For the big limit buyers that tend to buy strategically (i.e. they buy from the US, Bermuda, Dublin and London to stay in all markets over the cycle), there will be opportunities to bring them new players in their towers of limit. For distressed risks (i.e. those with bad losses), there will be opportunities to bring them more creative placements. Also, certain industry classes such as energy are still an opportunity.

What do you expect to happen to rates over this year and next, and what impact will that have on the casualty market?

For 2010, the market will probably be flat to down by between five percent and 10 percent. Some tough classes or distressed risks will be the exception, but in general, casualty pricing shows little sign of regaining technical adequacy. Some ‘bell weather’ industry classes, such as trucking, seem to indicate that we are near the bottom of the pricing cycle as they have fallen well below what is generally accepted as rate adequacy. Going into 2011, we may start to see some firming up in the second half if casualty reinsurers start to see the losses coming through on their quota share treaties and begin imposing tighter terms. It really is the reinsurers that will determine when pricing and terms firm up.

In 2009, in light of the difficulties AIG was experiencing, insureds were expected to diversify their placements and spread their risk around more carriers. Did this diversification take place, and how do you see this trend developing over 2010 and into 2011?

At the end of 2008 and the beginning of 2009, there was a mad rush to diversify, especially for those who had $200 million-plus of limit from AIG and maybe also $100 million from XL on the same placement. As 2009 progressed, insureds could see that they had the full security of the US government behind AIG/Chartis and they left them in key positions on placements, especially in the lead umbrella position. The higher layers, where new players emerged, were the areas that saw the most change. It would be fair to say that this issue has now all but gone away and, although people are watching the developments at Chartis, they are not actively replacing them. XL’s improved position has also led to it being on a more level playing field with the rest of the market.

James Kent
Executive vice president Willis Re Bermuda

How do you see the casualty market developing in 2010 and into 2011?

Absent a significant game-changing event, the casualty market is likely to meander along with a flat-to-downward bias for the remainder of 2010 and the beginning of 2011. With restored balance sheets, a plethora of new markets, formally ‘distressed’ players once again acceptable security and a worldwide recession, one struggles to find a reason to believe that the insurance/reinsurance market will improve any time soon. Other than that, the outlook of the casualty market is quite rosy!

In which sectors of the casualty market do you see opportunities, and why?

We expect to see a pricing environment for exposure-adjusted renewal rates trading in a minus five percent to five-plus percent range for virtually all lines of business. New business rate changes will be even more aggressively priced. Even D&O rates for tougher classes are experiencing pricing pressure. Capacity for all lines of business will likely be abundant. There was some ‘restacking’ of risk towers after the financial crisis, but the void was more than filled by current market participants’ unused capacity and/or the new capacity created by the many spin-off operations that sprouted up in August.

While no one segment of the market seems to be poised for any dramatic improvement in the near term. Specialty carriers should be able to squeeze out above-average underwriting results. Likewise, E&S carriers will also produce better-than-average results but will see their premiums retrench as the standard lines carriers continue to encroach upon their market space, rates continue to fall and receipts/sales remain under pressure.

What do you expect to happen to rates over this year and next, and what impact will that have on the casualty market?

We have seen the reinsurance market push back slightly on placements and reduce their casualty writings. That said, it has not been enough to influence the primary market, for a couple of reasons. Ceding companies are retaining more risk due to the fact that they have not fully deployed their capital. In addition to being more heavily capitalised than in previous down cycles, cedants have adopted sophisticated modelling and ERM strategies that provide justification for larger-risk positions and reduced dependency on reinsurance as an additional capital cushion. These sophisticated tools and disciplines have led to a greater understanding of underwriting risk and potential aggregation issues.

In 2009, in light of the difficulties AIG was experiencing, insureds were expected to diversify their placements and spread their risk around more carriers. Did this diversification take place, and how do you see this trend developing over 2010 and into 2011?

While it is common to hear that the reinsurance market is being disciplined, a handful of reinsurers are being linked with the prolonged soft market we are facing. On the one hand, they are getting ‘tough’ on some programmes that have experienced lower than anticipated results, but on the other, they are supporting new market entrants, albeit at below market terms. The unfortunate side effect of this support is new capacity competing in a market that already had enough supply. Ironically, some of these so-called tougher terms have forced some of the new players to be even more aggressive so as to meet or avoid the financial implications put upon them by their treaty reinsurers.

Nicholas Pascall
Chief underwriting officer American Safety Re

Seeking a balancing view, we approached underwriter Nick Pascall.

How do you see the casualty market developing in 2010 and into 2011?

Based on what I saw at the January 1 renewals, I think the market will remain fairly stable throughout 2010. There doesn’t seem to be a shortage of capacity; however, the capacity that is out there seems to be behaving relatively responsibly at the moment. And on January 1, we saw that across our portfolio of casualty business, both new and renewals, rates were flat.

Going forward into the rest of the year, I can see a period of stability. We believe there is margin in the business to make money from a reinsurance point of view. The clients are happy with the pricing they’re getting on the reinsurance side and are continuing to make a decent margin on their primary portfolio. For it to change, there would have to be a major event. It could be a property-related event that has a knock-on effect on the casualty market.

In which sectors of the casualty market do you see opportunities, and why?

In the sectors we are involved in, we are continuing to see positive results in medical malpractice. We continue to see opportunities on the reinsurance side, both with new start-up entities and also with existing carriers. The other areas we focus on are the small specialty carriers, whether they’re captives, risk retention groups or mutual companies. We tend to steer clear of the big P&C stock companies. So in all of those sectors, where there is a company that sees a need or can bring an edge to the market and set something up, those are the types of companies we support—whether their focus is the trucking business, general liability, professional liability or medical malpractice.

What do you expect to happen to rates over this year and next, and what impact will that have on the casualty market?

I think that absent any major event, rates will stay flat. I think with the effect of inflation, which is a big unknown, margins will continue to erode. Some of the bigger players, who already write lots of fairly thinly priced business, will see their margins disappear. Generally speaking, now is the time to grow selectively and then pick and consolidate the clients you want to stick with, because there is no doubt we’re in a soft market. Now is not the time to do silly things. Everyone is in a kind holding pattern at the moment. And that applies to both buyers and sellers.

In 2009, in light of the difficulties AIG was experiencing, insureds were expected to diversify their placements and spread their risk around more carriers. Did this diversification take place, and how do you see this trend developing over 2010 and into 2011?

From a reinsurance perspective, I think the knock-on effect from AIG was that reinsurance buyers wanted to syndicate their placements to avoid having all their eggs in one basket. We directly benefited from that and picked up business as a result of buyers saying, ‘we don’t really need 25 lines with one carrier; let’s diversify and stick it with three or four different people’. So the ‘AIG effect’ definitely had an impact on the reinsurance market. You’ll find now that placements, instead of being arranged with four or five reinsurers, are now placed with six or seven.