Reanalysis - Reinsurance rates - Market faces continued low rates,

Even a major catastrophe would not be enough to trigger a significant rise in reinsurance rates, rat...

Even a major catastrophe would not be enough to trigger a significant
rise in reinsurance rates, rating agency Moody's has warned.


"Even a large catastrophic event before the end of the year would not
affect prices dramatically," said managing director Ted Collins.


In its annual outlook for the industry, Moody's described the prospects
for reinsurers as negative. "Many indicators point to a near-term firming
of pricing ... but the fact remains that the reinsurance market remains
saturated and most product lines' sales are no longer expanding in real
terms," it said.


Despite limited opportunities in emerging markets, life and health and
credit reinsurance, Moody's said it was "unconvinced that a robust market
turn is on the horizon".


The rating agency claimed that overcapacity remained a problem. "To put
that capital to work reinsurers will pursue business that is adequately
rated and will underbid others seeking excess rates," it said.
"Alternative forms of risk financing will also dampen a rebound in pricing
as ceding companies take business outside the traditional risk transfer
market when excess reinsurance rates emerge."


In the European market Moody's said that deregulation in the primary
market was having a significant effect on reinsurers.


It expected that the current high levels of proportional treaty business
would decline as primary insurers were forced to improve their results and
manage risks more efficiently. In addition, consolidation, the shift to
excess of loss reinsurance and the maturity of the European insurance
markets would make it difficult for reinsurers to increase their premium
base, Moody's said.


However, Moody's did concede that the December 1999 windstorms Lothar and
Martin in Europe would result in some improvements soon, with many
insurers having found the limits of their catastrophe covers
inadequate.


In the US, Moody's believed that primary insurers were increasingly using
reinsurance as a form of arbitrage, allowing them to price their policies
more competitively. As a result, Moody's claimed that such companies were
likely to increase their retentions, anticipating better prices on their
books of business.


It added that in the soft market, reinsurers should carefully consider
their retentions (see figure): "Strategically, relying on competitors for
long-term capital may not be a wise decision because of the disclosure of
commercially sensitive information. In a mature industry where rates are
low companies require competitive advantages to procure above average
performance."


Moody's also noted the trend of US reinsurers moving to Bermuda and
admitted that over time the benefit of Bermuda's tax advantages could
contribute to greater capital generation and financial strength. However,
it noted that the business opportunities and risks resulting from such
moves put a strain on capital in the long term.


- See Arch story on p1.

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