There is an urgent need for a dramatic change in the casualty (re)insurance markets, says Emil Issavi, Aspen Re’s Head of Casualty and Executive Vice President.
“There have been seven consecutive years of rate reduction since 2004. At the same time, investment yields are close to all-time lows and do not generate sufficient returns to support underwriting at the rates they once did,” he warns.
“Casualty underwriters need to be more realistic and realise that the low interest environment could exist for a relatively long time and that prior year reserve releases may not be sustainable in future years at the same levels. Their psychology needs to change, because they can’t keep pricing casualty business as before and still achieve the same levels of profitability.”
Positive signs, but more needed
According to Brian Boornazian, the Property & Casualty industry needs to address premium rates to compensate for the lower investment returns and higher catastrophe exposures. There are early signs of a change in the market, but much more is needed to react to the fundamental changes seen in 2011.
“We’ve started to see traction in the past three to six months with large US insurers reporting increases of 5% to 6%, while loss-affected reinsurance business has seen a variety of significant increases and there is no longer talk of rate reductions. But we’ve yet to see rate increases in non-loss affected reinsurance business, which are also necessary to get the market to where it needs to be,” he says.
Casualty prices are adjusting in areas where pricing is inadequate, but they have yet to harden, adds Emil Issavi. General rate increases across all lines are needed to account for the fundamental lack of bond yields, he says.
Underwriting returns for long-tail business do not make sense, says James Few, President of Aspen Re: “Casualty business is driven by premium rates and investment returns. If investment returns collapse, underwriting rates need to reflect that. But, so far, the industry has ignored this issue.”
There are signs that some US casualty writers are seeing some rate increases, says Emil Issavi. “But the proof of the pudding is in the eating and we will have to wait another quarter or two to see if the increases can be sustained. We are now at the cusp. Just one event – for example deterioration in prior year reserves – could turn 2% increases into rises of 10%.”
It is a positive sign that primary rates are showing signs of turning but, for James Few, more is needed: “Casualty rates are back to levels seen when the market last hit the bottom of the cycle, so a few single digits are not enough, in absolute terms, after years of reductions.”
At a tipping point
According to Brian Boornazian, there are already some positive signs of change for the January 1 reinsurance renewal: “We are at a tipping point. We’ve yet to see meaningful increases but we’re no longer seeing rate decreases going down. Barring a major catastrophe, we would expect to see gradual and continued firming of property and casualty rates in 2012 and beyond.
“A variety of contributing factors (high cat losses, low casualty rates, low yields, drying up of reserve releases and revised cat models) are now coming through to support a sustained market firming that will last longer than previous cycles,” he predicts.