The casualty treaty reinsurance market, unlike the property cat marketplace, is still seeing price increases in some classes of business because of the nature of the risks - risks that are often latent and can take some time to develop. Therefore, reinsurers must make sure they set aside enough reserves to cover the inevitable losses. In addition, because of increasing US litigation, higher jury awards and the accelerating inflation of the early- to mid-1980s, the casualty market incurred higher loss costs. To combat the escalating loss costs, companies resorted to cash flow underwriting to try to build up premium volume. Therefore, the casualty marketplace is still trying to play catch up in some lines of business while, across the board, rates are starting to level off.

As a consequence of these adverse developments in the casualty line of business, there have been significant changes to the reinsurance marketplace. Recently the Hartford announced it was selling its property and casualty reinsurance portfolio. One of our own companies, Endurance, purchased parts of the business. Kemper, Gerling and Scor, the big European reinsurers, have pulled out of reinsurance and there is still a lot of instability as far as European reinsurers are concerned. On the local front, Trenwick is now gone from the reinsurance market. As a result of so many large and small reinsurance companies going out of the business, some companies have put into place stricter security requirements before they will even contemplate placing their reinsurance with any company. They often require that a reinsurer have no less than an AM Best rating of A or A-. Though this requirement may have been in place before, it is now strictly enforced because no insurer wants to learn that it can't recover its reinsurance when it needs it the most.

Whereas in the past clients had as many as 15 to 20 reinsurers on their reinsurance programmes, some are now averaging about 10 reinsurers. If reinsurers are not on their security list, clients are non-renewing all business they have with them. This trend is proving to be a good thing for the Bermuda reinsurance marketplace because most of the reinsurers here are new and, consequently, are not plagued by past liabilities such as asbestos and have very strong balance sheets - two attributes that clients weigh heavily when they are looking for reinsurers. (In limited circumstance some carriers may take a programme net in lieu of taking on security risks.)

Consequently, the Bermuda market has become a new casualty treaty marketplace. The casualty treaty reinsurance marketplace is quite broad and can include the following coverages:

Umbrella - which covers losses directly above the primary casualty business, usually written in the domestic market, for example, the Hartford, AIG, and so on. Underwriters of umbrella treaty reinsurance are finding that the pricing for the underlying portfolios that support the reinsurance treaties need to improve for treaties to be more broadly accepted. Therefore, this class of business is still not at an acceptable level and underwriters are reluctant to write it. It usually attaches excess of US$1 million up to US$25 million to US$50 million and has proven to be so underpriced and therefore unprofitable that the large reinsurer Gen Re has greatly reduced its appetite in this class of business.

True excess general liability - the coverage that sits above the umbrella line and is usually provided by such companies as ACE, XL Capital and Starr Excess. Underwriters are still getting very good pricing for excess general liability treaty business and it is proving to be a much better line than the umbrella business. Underwriters are finding that once risks are written excess of US$25 million, they are seeing much better pricing from the direct writers. A reason given for this trend is that there are far fewer insurers participating in the excess liability marketplace, therefore there is not as much competition and hence prices tend to remain at better levels than the umbrella market which has too many players chasing the same business.

Catastrophe risks - include such coverages as workers' compensation cat which provides loss protection against a major event for employees, for example, an earthquake during business hours. Workers' compensation (WC) catastrophe rates are starting to level off because more players are coming into this market. The reasons they are seeing more players is because the WC market has established comfortable rates and more players have a better understanding of the concentration of employee risk that became blatantly obvious after the World Trade Center loss. Therefore, there is a better level of comfort toward writing this risk.

Clash cover - provides protection to insurers for two or more losses resulting from the same insured. Because of the number of insureds that suffered multiple losses in the terrorist attacks, rates in clash reinsurance remain at an acceptable level, as this is still a vulnerable aspect of reinsurance. It is also the area where many insurers have run into trouble because they did not take the time to truly underwrite and understand their aggregate exposures prior to 9-11.

Director's & Officer's Coverage (D&O) - Underwriters are finding the rates are significantly improving but they argue that they need to be in order for the market to play catch up for five years of very competitive D&O pricing (pricing declined on average 38 percent over this five-year period). In addition, the pricing is buoyed by the heightened awareness of how necessary D&O coverage is before board members agree to sit on boards. Corporate governance issues have also heightened the importance of purchasing D&O coverage.

Once again the Bermuda marketplace is doing what it does best, filling voids left in the global marketplace in order to provide clients with the same, if not better, level of comfort in knowing that their risks are covered. Bermuda is providing the sleep easy comfort to many who would not be able to find casualty treaty reinsurance if the new marketplace had not taken off. The underwriters here need to be careful not to make the same mistakes as some of the old highly respected reinsurers did and are now paying the price for. Who would have thought 20 years ago that we would be seeing the Hartford, Scor, Kemper and Gerling with the reinsurance problems they have today? Not many and that's what the new Bermuda casualty treaty reinsurance marketplace needs to remember. Sometimes quality over quantity is the best way to grow a book of business.

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in The Royal Gazette every Monday. Feedback crduffy@cwbda.bm