October 2004
NEWSLETTER to clients of Knox Insurance Brokers Ltd.
From Randy Bushey, A.I.I.C.,
General Manager

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TOPIC: Observations on Pricing Dynamics

At Knox Insurance, we act as observer of the insurance industry on behalf of our clients. The "hard market" of 2002 and 2003 was the part of the market cycle characterized by reduced capacity, limited appetite by insurers, and significantly increased premiums. For many sectors this appears to be largely behind us. However, two items that we are watching closely:

  1. Every primary insurance company, in turn reinsures individual risks or segments of their book of business with reinsurers. The reinsurance market is dominated by a small number of very large players.

    2. The U.S. has recently witnessed one significant reinsurer placed by their European parent into "run-off". (This means that the company is effectively going out of business, writing no new contracts, and allowing existing contracts to expire.) Globally, the financial rating agencies have commented that the credit profile of the reinsurance industry has declined, with many reinsurers carrying lower ratings than was the norm even five years ago.

    As a result, we may see reinsurers aggressively driving premiums upward, when the primary insurers would have been satisfied with the status quo.

  2. August and September of 2004 will be remembered as a particularly punishing hurricane season, with significant human and financial loss throughout the Caribbean and the southeastern United States. Much of the primary coverage in the U.S. is carried through a government-funded pool; however, the reinsurance market is also involved for catastrophic limits. Again a handful of reinsurers will be significant participants as a result of Hurricanes Charley, Frances, Ivan and Jeanne. In 1992 Hurricane Andrew generated claims of approximately US$20 billion (adjusted to 2004 dollars). So far it is believed that this year’s hurricanes have generated damage in the United States of US$20 billion to US$22 billion, but the final price tag could grow.

This too, will likely impact property insurance rates around the globe; at least one reinsurer (second largest in the world) has already gone on record to say that their rates will reflect these hurricane-related losses.

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