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Chapter 9 Reinsurance market 9/21

A season of major hurricanes can affect one sector of the market more than others, for instance, property
or offshore energy, whereas 9/11 affected many classes of business, such as property, aviation, marine,
personal accident and contingency business and led to a hardening in most classes. The reinsurance
market makes a natural reaction in such circumstances: that is to apply substantial increases in pricing
and restrictions in coverage available following the year in question and beyond.
New entrants are now attracted to the reinsurance market by the prospect of enhanced terms available,
while others withdraw totally, whether voluntarily or for reasons of insolvency.

The events of 9/11 also led directly to other critical re-evaluations of long-held underwriting practices.
One concerned the number of individual risks in purpose built, high-rise buildings (generally accepted to
be 20 storeys or more). Historically, one individual risk might have been considered as a group of three
floors within the same high-rise building.

Question 9.6

What would the rationale be for this?

So, theoretically, a building of 30 floors could be considered as ten individual risks, and written in its
entirety by one insurance company. Providing such definition of ‘any one risk’ and underwriting
guidelines had been agreed in advance by reinsurers, then those reinsurers could hardly complain if the
loss of the whole building resulted in ten single risk losses, all of which would be recoverable from
proportional or risk excess of loss protections. Until 9/11, this possibility was considered very remote
indeed and was an internationally accepted method of insuring and reinsuring such buildings.
Another re-evaluation concerned so-called target or market risks and their accumulative effect if not
controlled within a national or local reinsurance market.
Most markets, apart from the USA, operate a co-insurance system between the insurance companies
working in that national or local market. If many insurance companies participate on a co-insurance
schedule for a target or market risk, then it follows that their individual reinsurance arrangements will all
be exposed to such large risks. In the absence of special reporting requirements for such target or
market risks, any reinsurer writing a portfolio of different insurance companies within that market will be Reference copy for CII Face to Face Training
subject to a potentially large and unknown accumulation potential.
Be aware
A target or market risk could be defined as a risk that is of great importance to the national economy of the country
concerned, and often one that requires the support of all insurance companies operating in that country, and
probably overseas support as well.

Amounts vary, but a US$1 billion sum insured would be a reasonable indication of size for a target or
market risk.

D2 Soft reinsurance markets

Reinsurance is cyclical. The reinsurance market is also prone to ‘talking rates down’ if there is little
worldwide loss experience to justify the continuation of charging high premium rates and imposing
onerous terms, conditions, warranties and exclusions, together with restricted or restrictive reinsurance
coverage.

A soft market typically arises after a period where there has been little major loss activity and
Arises after a period Chapter
competitive market forces, or rather the fear of such competitive forces, cause reinsurers to reassess where there has been
their rating structures, the extent of coverage and how restrictive such coverage should be. little major loss
activity 9
Reinsurance brokers, working on behalf of their insurance company clients, may also sense a change in
reinsurer attitude and encourage their clients to seek alternative quotations from different reinsurance
markets. This places a further strain on the relationship between the insurance company and its
reinsurers. Seeds of doubt are sown in the reinsurers’ minds as to whether rates, terms and conditions
should be maintained or relaxed for the forthcoming renewal.
Example 9.4
The 2010 Atlantic hurricane and Northwest Pacific typhoon seasons were among the least damaging on record,
even though they were very active with 19 tropical storms and twelve hurricanes recorded. However, none made US
landfall – an unprecedented trend for a season with some many. As a result, property catastrophe reinsurance rates
dropped by an average of 7.5% at renewal, with further softening seen throughout the market as a whole.