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Friday, February 1, 2002
Capacity pinch

Mutual & Federal says it has finalised its reinsurance programme for this year after, what it describes as, “protracted negotiations.”

Managing director, Bruce Campbell, says, “Eventually, quality capacity could only be secured at a substantial increase on previous rates. However, our full reinsurance programme is now firmly in place.”
Direct insurers take out reinsurance with global groups who have the financial capacity to underwrite potentially catastrophic and exceptional risks.
Much higher reinsurance costs were predicted following the New York terror attacks as the major international reinsurance groups re-assessed their exposure to substantial unforeseen losses. Many groups have also predicted some failures in the international reinsurance market as the huge World Trade Centre loss follows several years of poor underwriting results. This led to fears that direct insurers from some international and local markets could experience difficulty in securing the capacity that enabled them to spread their own risks. Without access to quality capacity the ability of insurers to sustain some aspects of their risk business can be severely constrained.
In a joint statement issued late last year Mutual & Federal and Santam said that every business and individual purchasing insurance in South Africa would feel the financial consequences of New York terror attacks. Such losses are shared by the global reinsurance market, which in turn influences the premium pricing structures of the primary insurance providers.

Local insurance companies can only accept a broad range of risk business and take on large individual risks by utilising global reinsurance capacity.
Says head of Santam, Johan van Zyl, “The global reinsurance market had experienced several years of underwriting losses and were already seeking substantial rate increases.”
Mr Campbell adds that “Industrial and commercial fire rates have been severely depressed for almost a decade and appropriate correction was well overdue.
“The attack on the Twin Towers applies a huge multiplier and accelerator to this trend. The event was a tipping point and takes us into a totally different insurance landscape where new rules and new pricing structures will have to apply.”
We are about to witness a flight to quality. Limited quality reinsurance capacity is there but at a price. In a similar vain quality insurance is available at a price.
Says Mr Van Zyl, “The consequences of the extensive losses at the World Trade Centre will create serious financial strains in the reinsurance market. Rating agencies are downgrading some insurers and reinsurers. We may well see failures - perhaps not among the top tier of quality reinsurers but almost certainly among some of the smaller and more financially exposed reinsurers. It is reported that a number of Lloyds syndicates may also be in danger.”
It is expected that increased costs will impact significantly on commercial and industrial risks and to a lesser extent on the average family although they will also be subjected to increased costs. The larger the risk, the higher the demand for quality covers. “As never before you will get what you pay for. If you want quality capacity, you will have to pay a quality price.”
Following meetings in Europe ahead of the reinsurance renewal season for this year, rate increases upwards of 40% - and in some cases double and quadruple – are anticipated depending on the type of risk.
The World Trade Centre event is likely to go down as the largest single insurance loss in history, with estimates as high as US$70 billion. Insurers are now identifying new types of risk and catastrophic potential for large losses. Technical experts accept that the standard deviation of loss now appears wider than was previously thought. This will mean that the amount of risk capital to support insurance risks will have to increase. Until this takes place traditional sources of reinsurance capacity will be stretched.
Comments Mr Van Zyl, “Insurers will be far more exacting with their requirements for technical information. They will become much more disciplined in their underwriting approach coupled with risk selection.”

Copyright © Insurance Times and Investments® Vol:15.1 1st February, 2002
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