Magazine article Risk Management

Current Trends in Reinsurance

Magazine article Risk Management

Current Trends in Reinsurance

Article excerpt

Hardly anyone would question that the reinsurance industry has had its share of problems in the past few years, but 2004 has revealed some bright spots on the horizon. The first sign is that higher pricing over the last several years should finally result in improved bottom-line profitability. Strong yearly accident results in 2002 and 2003 enabled reinsurers to strengthen reserves for past liabilities in those years.

While some of the loss strengthening stems from asbestos and environmental losses, the great majority was caused by the soft market underwriting of casualty business from 1997 to 2001. In 2004, barring a significant catastrophe or further adverse development of reserves, reinsurers are expected to record even more positive results.

Reinsurers have also taken measures to replenish lost capital. Besides the supply of capital to refill depleted coffers, investors have provided funds for start-up reinsurers, particularly in tax-advantaged domiciles like Bermuda. One clear indicator of this inflow of capital is that the share of global reinsurance capital held by Bermuda companies has nearly doubled in recent years, rising from 13% in 2000 to 24% at the end of 2002.

The reinsurance industry has also benefited from a moderation of catastrophe losses in recent years. Insured catastrophe losses in 2003 totaled $17 billion, up from $14 billion in 2002. While catastrophic losses are somewhat moderate compared to years like 2001 (World Trade Center) or 1999 (European winter storms), the level of losses are multiples of those experienced in the 1970s and 1980s.

Another positive development is the improvement of stock markets in 2003, following a three-year bear market. Economic indicators appear to show that equity markets may improve in conjunction with the expectation of renewed economic growth.

More favorable news comes from the interest rate front. The Federal Reserve in the United States has signaled a potential upward shift in the discount rate. A rise in interest rates can have a double-edged impact for insurer and reinsurer finances. Higher rates lead to higher investment income, but they also imply a lower market value for companies' bond portfolios, impacting GAAP assets and equity. From a rating agency perspective, an increase in interest rates is mildly positive, since a key focus of concern in recent years has been on the earnings power of reinsurers. …

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