Cat Re Will Cost PlentyIf You Can Find It

"Cat capacity is significantly reduced," says Scott Machutt, director of the special risk reinsurance unit at ING Re, Minneapolis. Cat capacity was close to $1 billion industrywide and is now down to approximately $150 million, he says.

Machutt says ING Re exited the catastrophe reinsurance business in November 2001 for business reasons.

But the upward cost trend that started late last year is continuing, he adds. Whether companies buy catastrophe reinsurance coverage depends on factors such as whether their boards of directors require the purchase of such coverage.

Pricing, according to Machutt, would have increased anyway, but 9/11 created a "time warp."

Because of concentration risk, more detailed information such as concentration by zip code is needed, he says. But even here, a reinsurer needs to be careful, he adds.

A zip code listed may be for the home office and not for a branch office with a heavy density of employees, Machutt says.

Direct writers can consider options such as quota share arrangements with a higher fixed net retention per life, he continues. So, for instance, an insurer might retain $500,000 in risk rather than $250,000.

A higher net retention might be suggested that would still allow a company to attain its financial target such as an internal rate of return or gross underwriting margin, he explains.

In addition to requiring more information on concentration risk, maximum event limits are also being written into contracts, he says.

The definition of occurrence will also differ with different provisions for geographic limits and proximity of time, Machutt says. So, a contract might specify a 50 or 100-mile radius and a time limit of 24 hours, he adds.

In many cases, coverage for nuclear, chemical and biological weapons are just being excluded, Machutt says.

Cost will also depend on whether the contract has a "risk attaching" or a "losses occuring" provision, he explains. If "losses occuring," then any losses are covered only for the term of the contract, but if there is a risk attaching provision then there would be coverage for a year after the last day of the contract, Machutt adds.

If the risk attaching provision is still available in reinsurance contracts, direct writers are going to have to pay for it, he says.

Another option is the use of retrocession, says Wayne Adams, a senior vice president-sales and marketing with RGA, St. Louis.

But, at this point, it is an expensive option, he says. "There is a disconnect between reinsurance rates and retro rates," Adams adds. There are fewer players and less competition in retrocession, he explains.

The whole reinsurance risk reevaluation that is currently underway could impact the availability of reinsurance in urban areas, Adams says.

And it could lead to new ways of reducing risk such as swapping of risk concentrations, he adds.

The market for catastrophe reinsurance will return under the proper conditions, says Nick von Moltke, U.S. business leader-global life and health, with General Electric Corp.'s Employers Reinsurance Corp., Overland Park, Kan.

While it could take longer for the market to adjust to the new environment, "I would like to think that we are in a trough now," says Bob Diefenbacher, U.S. pricing leader, second vice president and actuary, Global Life and Health with ERC.

The market will adjust when data is available, he says, and since the information is out there, if it was provided today, that could be almost immediately.

Reproduced from National Underwriter Life & Health/Financial Services Edition, April 1, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.