Market Effects - Part 1

Pricing

September 11th follows on:

Unicover

River Rouge, Lothar and Martin in 1999

Midwest US winter freeze and tornado losses in 2000

US St. Louis wind and hail and Hurricane Allison losses in 2001

Petrobras, Sri Lanka (and now, AZF/ Toulouse)

Fifteen years of Casualty price reductions

Reinsurers' owners and managers no longer have patience on pricing. Every program must be priced right at the next renewal. "Right" is taken to mean 15% - 25% ROE's. Some reinsurers go on to suggest every treaty must be priced right: no cross- subsidies.

Contracts with recurrent losses or with large limits for the premium offered will get large increases.

This is described as moving to the right prospective price. It is not seen as a demand for "payback", although some insurers are offering some payback to solidify relationships.

Market Effects - Part 2

Coverages

Reinsurers have taken a very critical eye on Terrorism coverage. Some will exclude it entirely on all contracts. Some are willing to offer it subject to tight sub-limits, or only on perceived innocuous accounts. Keen attention to Federal initiatives. Separately, these are opportunistic players looking to make a quick buck (or pound) selling Terrorism-only covers.

We expect all Per Risk, Per Policy and Per Life contracts will have absolute and restrictive Per Occurrence caps at their next renewals.

Downward pressure on Maximum Any One Life amounts in WC and Life contracts. Little or no retrocession protection is available for individual life exposures.

Less coverage flexibility for layered and co-insured business.

Renewed attention in Property coverages to mold, computer virus, bad faith and related exposures.

Market Effects - Part 3

Capital

By the end of September 11, reinsurers had $20Bn - $30Bn less capital (after tax) than they had on September 10.

On November 12, Reinsurers had $15Bn - $20Bn more capital than they had on September 12

• ACE


• Aon - LeStrange


• Arch - Ingrey


• Axis - Charman


• Black Diamond - Hutter


• Folksamerica


• Lloyd's (various syndicates)


• QBE


• White Mountain - Taylor


• XL


• Others

There is adequate capital to write the world's reinsurance business, other than for war and terrorism. Will it do so?

No apparent impact on near-term reinsurance pricing. Longterm impact is unclear: will depend on demand.

Market Effects - Part 4

Reinsurance Capacity

Capacity will be scarce for business that blindly accumulates with similar contracts on the same risk: Layered or loss limit property, big city business, Excess Umbrella, and Life and WC Catastrophe Covers exposed in cities or earthquake zones.

Terrorism coverage per se will only be available in small amounts and at high prices.

There will be almost no capacity for underpriced business of any kind.

"Vanilla" business, excluding terrorism, and at reinsurers' prices, will be offered at least as much capacity as before, and perhaps more.

New capital will help prevent price gouging.

Market Effects - Part 5

Primary Insurers

Many insurers will be forced to reduce the limits they offer on large and aggregating policies.

Higher reinsurance costs and increased clients' demand levels will put added pressure on Property, WC and Umbrella pricing. Expect price increases on top of 2001's increases.

A return to monitoring geographic accumulations in cities will effect individual underwriting decisions.

There will likely be significant gaps between the Terrorism coverage offered (esp. on WC and Personal Lines) and the coverage provided by reinsurers or any Federal Pool.

Some insurers have had “hiccoughs” in revenue, receivables and cash flow due to infrastructure problems in NYC.

Holborn Corporation
September 11, 2001

What had started out as a sunny, bright, beautiful day finished as a day in which the world may have changed forever.

The changes on our lives and the impact on our business are just beginning.

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