Reinsurance rates in some lines were on the rise during the justcompleted Jan. 1 renewal season, fueled by a variety offactors–from higher catastrophe losses to the impact of thefinancial meltdown on investment income. But the hikes were by nomeans unreasonable or seen as unexpectedly high, leading players inthe field report.

One twist is that primary insurers, typically leading the way inpricing trends, have found that with balance sheets and pricing ofprimary business depressed, reinsurance is taking the point in thismarket turnaround, experts observed.

“What should have happened is that the primaries would beaffected and that would filter up to reinsurers,” explained JohnDaum, executive director for Lockton International, in its newlyopened U.S. reinsurance office, based in New York.

Umbrella business is filtering up, and prices on “anythingrelated to financial institutions,” such as directors and officersand errors and omissions coverage, “is being increaseddramatically, so that's working its way though,” he said.

Mr. Daum noted that among the exceptions is workers'compensation coverage, which is so regulated, it “doesn't filterits way up.”

Pricing on commercial auto has flattened, and so far therehaven't been wholesale rate increases on that line, he reported.Mr. Daum added, however, that “we think that's going to start tohappen in first-quarter 2009, for those who write truckingliability and commercial auto.”

Willis Re, the reinsurance broking arm of Willis Group Holdings,said the global reinsurance industry has remained “substantiallyunscathed” by the “unprecedented turmoil in the global capitalmarkets, with a capital base still largely intact and liquid.”

However, Willis anticipates that access to new capital in 2009will become more difficult and expensive in the current economicclimate.

In addition, Willis maintained that primary insurance companies,facing new capital pressures, are increasing their demand forreinsurance as they explore buy-downs and other reinsurancemechanisms to protect and enhance their capital positions, which islikely to drive up prices.

Reinsurance broker Guy Carpenter said in a report this monththat the economic turmoil is having some positive impact onreinsurance industry prices for sellers, with modest rate increasesbeing seen and demand for products growing. The broker said thatits World Rate on Line, or ROL Index, showed an 8 percent increase,calling the reinsurance rate increases “moderate on average” forJan. 1 renewals.

The upward climb was in reaction to the dual pressures of afinancial catastrophe and the second most expensiveproperty-catastrophe year on record, the report said. Thoseincreases, however, were “tempered by large capital positions” atthe start of last year, which allowed carriers to absorblosses.

The generalities, Guy Carpenter continued in its report, endthere because the combination of loss history, geography and lineof business “led to wide differences in pricing.”

The Aon Benfield insurance brokerage, a unit of Chicago-basedAon Corp., said in its “Reinsurance Market Outlook” that globalreinsurance prices firmed for Jan. 1 renewals and are expected toremain firm for the April through July renewals.

Aon Benfield said that, assuming there is only limitedadditional turbulence in the financial markets and no significantreinsured catastrophe losses occur, it expects that the Aprilthrough July reinsurance renewal market will be similar to the Jan.1 experience for buyers.

U.S. hurricane and earthquake reinsurance pricing rose modestlyfor January renewals, and pricing of other global natural perilsheld firm, the firm said.

However, U.S. hurricane-dominated programs, especially thoseexposed in the state of Florida, would likely experience moresignificant price increases than others due to the potentialinability of the Florida Hurricane Catastrophe Fund to fullyfinance its projected 2009 capacity in the uncertain municipal bondmarket, the report said.

Lockton's Mr. Daum told National Underwriter that what hashappened to the economy over the past six months is more than atrend, “it's a game-changing event in the reinsuranceindustry.”

He said that hedge funds, principally responsible for providingretrocessional capacity to the marketplace, mostly have “stoppedproviding any retrocessional protection at all for reinsurers.”This began around September, with pressure from losses of HurricaneIke and “prior to the bad news in the third and fourthquarters.”

Adam Sayers, executive director of Lockton International inLondon, added that while there has been a fairly measured hardeningin the market, “it hasn't been an across-the-board swipe ateverybody.”

Regional companies that haven't had a loss have fared prettywell and haven't seen major rate increases, he noted. “They've alsoall been able to get their programs finished. There isn't such acapacity crunch that they can't get the capacity to fill out theirprograms.”

The only programs left unfinished, he added, are “the absolutelyhuge global programs from the really big players–which is often thecase [as] they have such huge programs that there are often gapsleft in them this time of year.”

Mr. Daum added that those programs had rate increases up to 25percent. “Most of them probably would have had Ike losses,” heobserved, noting that insured losses from Hurricane Ike have grownfrom $8 billion to up to $20 billion by current estimates. “Sothat's working its way through the market fairly deeply”–especiallywith the very large insurers, he said.

Mr. Daum also pointed out that because of concerns about theircapital base primary insurers are purchasing “a lot morereinsurance…both on the top end of a program–on the cat side–andalso on the lower end.”

Primary insurers are being “much more conservative on theirpurchases today–even the smaller companies,” many of which were“heavily invested in equities,” he noted. With equity losses totheir portfolio, these insurers have no way of raising capital, “sothey go to the alternative form of capital–reinsurance–and buy morereinsurance to protect their asset base,” he explained.

Last year, primary insurers were buying less insurance andtaking more retentions. “It's counter-intuitive, especially asrates go up,” Mr. Daum observed. “People typically had beenretaining more business when rates went up, as we all knew theywere going to on Jan. 1. But because of their desire to protecttheir balance sheet, they're buying more cat reinsurance. Thecapital markets have forced them to take a step back and usereinsurance.”

Steve Skowronski, managing director-advisory services, withSMART Business Advisory and Consulting in Devon, Pa., said severalfactors are likely to influence market conditions in 2009.

One of these is underwriting results. The combined ratio for thefirst nine months of 2008 was 104.9, compared to 94.6 percent ayear ago, he said. Faced with a 10-point deterioration in theircombined ratio, this will “hopefully lead to a beginning of ahardening” for reinsurers, he added.

The deterioration, he said, was driven by large, single losses.One example was a large sugar refinery loss in Georgia, wherehighly flammable dust in a factory combusted. “So, it's not alwaysglobal cats, but it can be very large single property losses likethis–causing a ripple effect,” he explained. There also was anunprecedented collection of small catastrophes–thunderstorms, hailand firestorms, he said.

Mr. Skowronski pointed to a number of large catastrophes,including Hurricanes Gustav and Ike. He projected that HurricaneGustav losses will come in at around $7 billion and Ike will totalabout $15 billion.

“This is a year where the collective cats combined mean seriousdeterioration–and could contribute to hardening this year,” hesaid, adding that forecasters are predicting an active 2009hurricane season, with 14 named storms expected.

“All of that on top of poor investment results–putting all thistogether makes this a challenging market,” he concluded.

Mr. Skowronski also warned that the U.S. regulatory environmentwill impact the marketplace.

“There's been a significant regulatory change,” he said. “At itsDecember 2008 meeting, the [National Association of InsuranceCommissioners] adopted a new reinsurance regulatory scheme thatsoftens the [collateral] requirements on non-U.S. reinsurers doingbusiness in the U.S.”

Historically, he explained that non-U.S. reinsurers had to post100 percent collateral for their U.S. liabilities, “but now theywill undergo a financial review by the NAIC to determine where theyfall in a sliding scale of required collateral.”

As a result, a company that is highly rated may have to postminimal or no collateral for their U.S. liabilities, he added. TheNAIC also is establishing a reinsurance supervision reviewdepartment and will draft implementation plans.

Once implemented, the plan will create a single port of entry–asingle qualified state will be the sole regulator of a reinsurer,which will cut costs on the regulatory side. “This will putnon-U.S. reinsurers writing business in the U.S. on a more levelplaying field with U.S. reinsurers,” he added.

Hugo Crawley, chairman of BMS Group, an independent reinsurancebrokerage in London, observed that what's going on in the U.S.property-catastrophe arena has been affected by storm activity inthe Southeast and Midwest losses, with the results being pressuretoward higher pricing for lead reinsurers.

This is not a broad brush, he said, but rather is driven byindividual clients, “and their story and their relationship withthe markets.” Some that don't have losses, he said, are not seeingthe “wholesale increase others are predicting.”

Those with catastrophic experience against their programs areseeing increases, he said. “It isn't a broad-brush approach, suchas 10 percent increases, but there is definitely a push frommarkets in London and Bermuda to push pricing up–but more on aclient-by-client basis.”

In the professional liability arena, he said that D&O, “forthe tougher classes, like the big ticket, publicly tradedcompanies,” will see capacity issues. Professional liabilitycarriers, however, “haven't seen significant change,” Mr. Crawleysaid. “If anything it remains quite soft.”

As for the impact of the financial markets, he predicted thatfailing companies and other aspects of the upcoming recession willcause increased claim activity. So far, he noted, “we have seen $8billion in losses in the D&O market as a result of the subprimemarket disaster. That will have an impact in terms of capacity andpricing.”

He added that “if you then look at what's going on with AIG andLexington, they have been successfully hanging on to business. Sofar, we haven't seen anyone moving away from AIG.”

The effect of the financial crisis on primary insurers hasbrought on some “very difficult times for the clients we'reinvolved with,” Mr. Crawley said. “There is an issue aroundcompanies that have lost significant investment through the equitymarket and that will take time to come through in terms of howcompanies wake up to what they've got to do.”

In the direct and facultative market, he said, “as a Londonwholesaler, we're placing major schedules of excess propertycapacity, and we've seen some underwriters stop writing any newbusiness.” He added that others are “beginning to get some tractionto push prices up.”

“There have been terrific cat losses, so they've put the brakeson writing new business, which is a precursor to them thinking themarket is going to get harder in the second quarter of '09. We'rejust beginning to see rate increases,” he said.

Mr. Crowley observed, however, that “it's amazing that we canhave such significant cats in 2008 and they've been overshadowed bytwo other issues–what's going on in the recession and investmentportfolios being hit so hard.”