The cost of reinsurance premiums will likely rise between 30 and 300 percent this renewal season, according to the UK risk managers association (AIRMC).

Speaking to analysts during an investment conference call organised by Merrill Lynch last week, Henry Keeling, XL Re Ltd President and CEO commented on pricing and market developments in the year-end 2001 reinsurance renewal season focussing on speciality lines of marine, aviation, space and energy.

“I think it is fair to say that the speciality lines have performed very well through January 1. As with the other lines of business, the market was hardening pre-September 11 and we were seeing improvements, particularly in many of the speciality lines areas through 2001. That is now being significantly re-emphasised at January 1, 2002,” said Mr. Keeling.

He said the hardening market was really due to a combination of factors: “Firstly, in many of these speciality lines we've seen a dramatic collapse of underlying insurance capacity in many of these sectors. For example, we've seen a number of the larger Lloyd's syndicates who were putting out $150 million lines in some of these speciality areas, their gross lines have dropped to $50 million or even $25 million at January 1. Therefore the total available risk capacity has shrunk very significantly. Feeding on from that, insurance rates have been driven up in all fields and the terms and conditions under which the insurance policies have been written have also been very significantly tightened and improved.”

In addition, Mr. Keeling said reinsurance rates have increased on the excess of loss products and terms and conditions of coverage have been tightened both on those and the proportional treaties. He also said where proportional treaties may be available (which has been very difficult this year) conditions and brokerage have been reduced on these.

“So really you have a situation where these speciality lines have benefited from significantly tightening underlying insurance pricing, capacity and terms. Then overlaid on these, the market has seen continued increases in reinsurance rates which started in 2001 and have continued in 2002. So essentially you have a double leverage effect which has strongly benefited these speciality lines,” said Mr. Keeling.

Regarding the property catastrophe field, Mr. Keeling said, “I think it is fair to say that all of these lines appear to be strong and certainly the reinsurance marketplace for these lines of business is a pretty good place to be at this time.”

Mr. Keeling said his analysis was not specific to XL Re, as he had drawn comments from a number of other people in the market place saying: “One of the comments that I saw from one of the brokers was to say, during the past few years, underwriters have operated under a price-driven market and insurance buyers have often obtained the widest coverage for the lowest possible price. Now insurers will be dealing with reduced capacity and greater net risk retentions.”

Mr. Keeling continued: “In fact, it led the UK risk managers association (AIRMIC) to advise its members that most insurance premiums will be significantly higher on renewal with increases from 30 to 300 percent, depending upon the class of insurance, and financial limits will almost certainly be lower, deductibles higher, and coverage may be fragmented. I think that is definitely what the market has generally seen through this renewal season.”

However, Mr. Keeling said there have been a number of areas that have caused this renewal market to be quite late in comparison with previous years, especially on the issue of terrorism coverage, the clarification of what coverage would or would not be available.

Mr. Keeling added: “Secondly, in some of these speciality markets the reinsurers are more reliant upon retrocessional capacity than perhaps in the Property or Casualty areas. The retro capacity, particularly in London, was tough to come by and therefore there were delays in obtaining that and in getting reinsurance placements made. And I think there was a significant element of client or buyer denial. They just did not want to accept the facts that were being presented to them. They were partly shopping around, partly taking time to reanalyse their business approach or plans before they gave firm orders. So there was a significantly delayed renewal season. In fact, we are still in the process with a number of accounts. But those areas that have not yet been finished are moving ahead very quickly.”