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2013 Reinsurance Market Report

Leaders from a number of Canadian reinsurance companies and brokerages discuss trends and issues in the market

By all accounts, January 1 Canadian reinsurance renewals passed by without causing much of a stir. Superstorm Sandy had limited impact on property renewals and 2012 was a much quieter year for CATs than 2011. Reinsurance cedings remain on a downward trend as companies retain more risk on their own. Still, the introduction of new modelling guidelines from the Office of the Superintendant of Financial Institutions (OSFI), continued low investment yields and the impact of large fires mean that some property lines could start creeping back up. Canadian Insurance Top Broker spoke to reinsurance brokers and companies to discuss what 2013 holds and what primary insurance brokers should know.


Joseph El-Sayegh, senior vice-president, property & casualty – Canada, SCOR Canada Reinsurance Company

Tim Fisher, senior vice-president and Canadian branch manager, XL Group

André Fredette, senior vice-president and chief agent, CCR Canada

Sharon Ludlow, president and CEO, Swiss Re Canada

Robert Wildbore, executive vice-president, Willis Re Canada Inc.

Matt Wolfe, senior vice-president and managing director Canada, Beach & Associates

In your opinion, what was the most significant trend or issue that you observed coming out of the 1-1 reinsurance renewals? 

Robert Wildbore: The January 1 renewal passed without any overriding issues affecting the Canadian market. Whilst some buyers would have experienced challenges in the wake of weather related losses, and despite earthquake capacity holding or slightly increasing in cost, there was no undue stress on what for many was an orderly and timely renewal. Globally, the emerging losses from Superstorm Sandy were not enough to disrupt what is a robust and healthy reinsurance market.

Joseph El-Sayegh: In the course of 2012, the insurance and reinsurance companies remained well capitalized. This situation led many insurance companies to increase their retention on the lower level of their exposure. Hence, the reinsurance market seems to be moving slowly from managing the frequency as well as severity of the insurer’s portfolio to managing the severity only. We would expect this trend to continue as more insurers are willing to put capital at risk and manage it, while leaving the peak exposures managed by the reinsurers.

Tim Fisher: Increased frequency of hail losses appears to be the new norm. There has been much debate during the last few years about whether the increased frequency of hail losses was an anomaly or the establishment of a new norm as communities grow and weather patterns change. The recurrence of significant losses during 2012, however, appears to have established increased frequency as a new norm. Pricing of the catastrophe and aggregate CAT products increased at 1-1-13 for loss-affected programs. In addition, and more importantly, insurers are starting to amend the way cover for this peril is sold to the public with separation of hail coverage from the standard perils combined with deductible and price increases designed to help insurers manage and charge more accurately for the risk transferred to them.

Matt Wolfe: The pressure to deliver net retained premium growth led many insurers to reduce their reinsurance purchases (primarily on casualty reinsurance) at a time when doing so might not make financial sense. The last few years have been a difficult time for many Canadian insurance companies: an over-abundance of capital has resulted in year-over-year rate decreases, while interest rates and investment yields are low and are expected to remain so. Reducing reinsurance purchases thus appears to many insurers to be an easy way to combat these challenges. The property catastrophe reinsurance market however remained fundamentally healthy with an increasing demand due to changes in catastrophe models, OSFI’s increasing capital requirements and the recent trend of large weather losses in Canada.

André Fredette: We experienced the loss of a number of large and profitable proportional treaties that had been on the books for a number of years. The ceding companies decided to retain these treaties for their net retention. The driving force behind this decision was the company’s excess capital position and the difficulty of growing their net portfolio in a competitive Canadian market. Also, when prices went up on bottom excess layers, more companies retained more of the risk for their net lines rather than pay the higher price.

The pressure to deliver net retained premium growth led many insurers to reduce their reinsurance purchases (primarily on casualty reinsurance) at a time when doing so might not make financial sense.” – Matt Wolfe, Beach & Associates

Sharon Ludlow: January 1, I would say, was fairly orderly. There weren’t any real disruptions in the market. There seemed to be sufficient capacity. Although, both this year and the prior year, we did see the London market, as a generalization, giving less BC quake capacity and so larger firms, like ours, certainly benefited from that in the last couple of years. 

What do you foresee as the biggest issue that will have an impact on July 1 renewals?  

Joseph El-Sayegh: July 1 is a small renewal season in the Canadian market. Mainly, the companies with US parents have their renewal dates coinciding with their group’s renewals on July 1. The expectation is that July 1 renewals should be consistent with January 1 renewals, barring major events or further impact from Superstorm Sandy on business interruption or contingent business interruption losses that would take a longer period to account for due to their nature.

Tim Fisher: Insurers and reinsurers wait for confirmation from OSFI of the updated Guideline B-9: Earthquake Exposure Sound Practices, which will require earthquake probable maximum losses (PML) to be based on worldwide or countrywide exposures as appropriate, rather than the current test which focuses on British Columbia exposure. Moving from the current requirement could increase PMLs 20 to 30%, possibly more depending on the geographic mix of a company’s portfolio. (Ed. Note: The recently released updated Guideline states that earthquake PMLs should be “estimated based on Canada-wise exposure for foreign insurers or worldwide exposure for Canadian insurers, as well as any regulatory capital requirements.”)

André Fredette: Large property fire losses and increasing concern for quake exposure will probably push property excess and catastrophe rates up. The January 1st renewal showed continued consolidation in the primary market and shrinkage in the reinsurance market. This will most likely continue for now.

Matt Wolfe: The continued contraction of ceded reinsurance premium. It is difficult to imagine a dramatic change in the state of the reinsurance marketplace between now and the 7/1-renewal season, unless of course a large property catastrophe event was to occur (the 7.7 quake in BC this past October certainly reminds us that such an event could happen at any time). The current movement toward retaining more premium (and with it more volatility) will most likely continue until: 1) the recent casualty accident year results fully develop and reach loss ratios above insurers’ planned expectations, 2) insurers no longer have the benefit of prior year reserve releases to manage their results or 3) a large property event (or a number of moderate events) occurs. 

What do you think is the most important thing primary insurance brokers should be aware of (and discussing with their clients) about recent reinsurance trends?

Tim Fisher: Primary brokers really need to be aware of the health of the reinsurance market. Reinsurance terms and conditions tightening can often start a turn in the primary market. Knowing or seeing what is happening in the industry as a whole, including reinsurance, can help the primary broker manage expectations. The primary broker should also ensure that their key carriers have a panel of strong and solvent reinsurers that can respond quickly to claims when called upon.

Robert Wildbore: In a climate where regulation and more sophisticated risk analysis demands smarter product pricing, set against a continuing low interest rate environment, the pressure on reinsurance and insurance providers to price adequately for earthquake coverage will continue to grow. Insurance brokers will no doubt be continuing to educate their clients on the value of this and other coverage. Pointing to the recent experience in countries like New Zealand and Chile, where the insurance industry is playing a pivotal role in the rebuilding of devastated communities, the value of insurance has never been greater to our livelihoods.

Matt Wolfe: The discounted commercial lines insurance rates of the last few years, low investment returns, and high net retentions mean that insurers will likely need to secure rate increases in the near future to achieve returns sufficient to retain investment capital in the insurance segment. Insurance clients should be made aware that casualty rates are likely to increase when current accident years fully mature and they should also expect to see further rate increases on catastrophe exposed property policies as insurers pass along the full burden of their growing reinsurance costs.

Sharon Ludlow: As primary company results come out, we’ll get to see whether or not there’s any more reserve redundancies left across the industry. The Insurance Bureau of Canada (IBC) is one of the organizations that study these, and certainly in the last few years they’ve noticed that there has been redundancy, generally, across the industry, but that it has been shrinking. Generally, that indicates where you are in the cycle—once they run out of reserve redundancies as a group.

The market I would say, in general, continues to be fairly flat. Both casualty, in particular, and property in some places—there are pockets where rates have been increasing in the last year or two, but those are very, very small pockets. For BC quake we have seen in the last year and continue to see deductible increasing and pricing itself increasing as the primary companies get better at allocating the price to that risk. The bigger companies are more sophisticated and they’re analyzing the data at a very granular level for BC quake exposure. They’re looking at allocating that price to those risks and they’re also increasing deductibles. … Within the last year, one of the companies took some action out in BC and effectively stopped writing in a small section or segment, because of their concern over exposure. We’ll likely see that business move around to others. As a general statement, all of the companies have been looking at BC quake more closely and aligning their pricing with the risk there more carefully in the last couple of years. We expect that to continue.

Joseph El-Sayegh: While the 2013 January 1 reinsurance renewal was a rather quiet non-event, it is important to note and understand that most of the reinsurance pricing increases took place in 2012. In addition, exposures continue to increase, thereby putting more pressure on insurance companies to buy increased reinsurance protection against major CAT events. Outside of BC, water and wind seem to be the problem. Any loss prevention and reduction measures will be welcomed by the insurance industry. While insurance companies are paying for CAT protection in respect of earthquake events, they are triggering the protections as a result of water and wind losses. The reinsurance market is becoming more sensitive to these exposures and is accounting for them in their pricing based on the high frequency of such claims. Casualty policies seem to be competitive in the market, making it challenging for reinsurers when they evaluate the pricing of the underlying product. Speculation remains that the pricing of this line of business has hit a floor in respect to pricing and may trigger limited reinsurance support.


Copyright 2013 Rogers Publishing Ltd. This article first appeared in the March 2013 edition of Canadian Insurance Top Broker magazine.

Transcontinental Media G.P.