Last year was the costliest in the history of insurance. Financial losses for the global reinsurance industry would have been below the average since 1987, but for the terrorist attacks of September 11. Swiss Re estimates property, business interruption, liability and life insurance losses were between US30bn and $58bn for the attacks.
For the first time since the Nineties, when natural catastrophes dominated the loss picture, man-made insured losses took the lion's share last year with 70% (see graph).
Though the attacks had no direct impact on SA reinsurers, they set the stage for a hardening of rates and reassessment of risk models.
The market was already heading for price increases as a direct result of the dismal reinsurance results of the past four years, says Reinsurance Consultants & Intermediaries CEO Iain Macindoe. "Shareholders were no longer prepared to accept an unreasonable return on equity."
The 2002 renewal season was tough - the average climb in rates was above 15%, pushed by property and catastrophe business, where rates increased by over 50%.
Munich Re MD Steffen Gilbert says an average 30%-40% increase in rates, particularly for the commercial and industrial business, is needed to reverse reinsurers' past few years' negative results. But increases are more likely to remain in the 15%-20% range.
"The extent to which reinsurance capacity has really been reduced against new capital raised is the key to whether higher pricing is sustainable over the longer term," says a report by research firm Benfield Greig SA. The US attacks destroyed 13%-36% of the reinsurance capital base.
The local market, dominated mainly by the subsidiaries of international groups Swiss Re, Munich Re, Hannover Re, General Cologne and Gerling Global, managed to improve underwriting performance slightly last year, despite the effects of the attacks.
Though total reinsurance premiums have grown steadily over the years for SA-based reinsurers, profits reported by the short-term side of the business have remained trapped at levels barely acceptable to shareholders.
With steeper rates, that looks set to change.
Swiss Re grew gross premium written by 27% from R796m in 2000 to R1bn last year. For the first time since 1986, it delivered a positive underwriting result of R62m against an underwriting deficit of R2,2m in 2000, which was mainly due to the revaluation of opening technical provisions by R92m. Were it not for this change in basis, the company would have recorded an underwriting deficit of R30m.
Hannover's results perked up too. It grew gross premium written to R2,7bn, up from R1,8bn the year before. Underwriting income grew to R60m last year from R29m in 2000, because of the inclusion for the first time of pipeline premiums.
Munich Re, though, saw gross premium income shrink from R1,738bn in 2000 to R1,707bn in 2001. The underwriting loss was R39,9m, an improvement on 2000's loss of R42,8m.
"Better net income is not significantly reflected in our technical result," says Gilbert. "But the market should stabilise in 2002 and improve."
On the positive side, there was an absence of natural catastrophes in the southern African region in 2001 and a reduction in significantly large losses.
Gilbert says the challenges ahead are continuing high levels of crime, negative effects of the rand and regional currencies, higher motor claims from theft and accidents and more hail damage than usual.
Figures were not yet available for Gerling Global or GeneralCologne.
GeneralCologne MD Olaf Ziegler says the company bore the major share of the fire at Makro's Woodmead store, with claim exposure of about R124m.
Zimbabwe Re SA was hit hard by the political crisis in Zimbabwe, but MD David Dixon says it was more in sentiment than in direct costs. He says Zimbabwe Re, a small player, will shift its administration operations to SA and change its name.
The battle for market share will become fiercer this year . Accounting firm KPMG says that, for the first time this year, 86% of the short-term reinsurance market in SA, based on gross written premium, was underwritten by three reinsurers: Munich Re controlled 32%, Hannover 31% and Swiss Re 23%. In contrast, Swiss Re dominated the life market, with 43% of the life reinsurance premiums.
But reinsurers are likely to focus more on underwriting profit than on premium growth.
Efficiency will remain important. After increased expenditure on information technology in 2000, management expenses as a ratio of earned premium were 8,29%. Further big investments are unlikely and no major changes in the industry have required new systems. But retaining skilled staff has pushed up employment costs for reinsurers.
Firmer rates will improve premium income, but the effects are likely to sift through only in the 2002 results.
Consolidation in the insurance industry means fewer clients for reinsurers in future - the larger the insurer, the less risk they are likely to farm out to reinsurers.
Sub-economic insurance premiums in the primary market, especially in the commercial classes, should improve with firmer reinsurance rates. But consumers will pick up the tab.
KPMG says management expenses in the life reinsurance sector decreased from 11,77% in 1999 to 11,32% in 2000.
"This was due to the increased premium volume in health-related risk business rather than a true reduction in expenses," says KPMG partner Melanie Bosman.
With a devalued rand, foreign parents of short-term reinsurers are likely to continue to withdraw more capital from local reinsurers' reserves.
KPMG manager David Fourie estimates that property and casualty reinsurance solvency levels, worked out on an international basis that excludes foreign net assets, could drop to between 50% and 60% over the next two to three years. "International companies are trying to keep their capital in SA to a bare minimum," he says.
Gilbert says as demand for reinsurance capital outstrips supply, local reinsurers will have to satisfy shareholders' return on equity requirements to retain local capital. "We need excess capital to feed the machine to grow," he says.
Large dividends to overseas shareholders are a favourite way of redistributing excess capital.
Investment income for reinsurers will fall as excess cash is taken offshore, though Fourie says this may be balanced by premium growth.
According to KPMG, average solvency margins of short-term reinsurers internationally decreased from about 76% in 1999 to 74% in 2000. Swiss Re, with a ratio of 139%, had the highest ratio.
Macindoe says the number of reinsurers prepared to take part in African business has fallen over the past year. Shrinking markets, stagnant economic conditions, pockets of political instability, high inflation and a general devaluation of currencies has discouraged new entrants.
"Our relevance in decision-making [of the group] is dependent on what we contribute," says Swiss Re MD Alexander Weissleder. "Last year that took a knock."
The political and economic problems in Zimbabwe had been anticipated by most reinsurance companies before they came to a head last year.
In the medium term, an increase in oil exploration on the west coast of Africa should draw investment, opening up reinsurance opportunities.
But Aids continues to be a serious threat . Insurance companies have weighted their premium structures heavily in countries where infection levels are expected to rise significantly, to protect against future losses. This prices cover out of the range of most people.
"The actuarial models have developed sufficiently for us to price morbidity risk," says Swiss Re Life & Health MD Daniel Berger.
The challenge for reinsurance companies in SA remains to grow business profitably in a shrinking sector. With premiums on the up, it might be possible.