Insurers Scramble To Spread The Risks

American Reliance Group Inc. was never a major factor in the Flori da property-insurance market. Its $26 million in premiums in 1992 ranked it well below such competitors as Prudential Insurance Co. and Allstate Insurance Co. But American Reliance is a name that few in the industry are likely to forget. The New Jersey company concentrated on insuring homes in southern Dade County. When Hurricane Andrew struck in 1992, the storm swamped American Reliance with $574 million in claims. But that wasn't the end of it. Forty-six of the company's reinsurers, including such stalwarts as Prudential and Hartford Fire Insurance Co., got stuck with $500 million ofthe tab.

Reinsurance--the business of taking on risks that primary insurance companies want to share--has become increasingly hazardous. The frequency of such disasters as Andrew is precipitating an extensive shakeout, including the departure of some of the industry's major players and the arrival of new ones, notably Kohlberg Kravis Roberts & Co. These moves could have far-ranging consequences for primary insurers and business in general.

PRICE HIKES. Reinsurers looking to exit the business include Prudential, which took a $320 million reinsurance hit last year, and thousands of "names," or individuals who provide capital in Lloyd's of London reinsurance operations. This has enabled surviving reinsurers, such as General Re and National Re, to bolster their capital bases and form new strategic alliances. "They have the option to call the shots now," says Standard & Poor's Corp. analyst Mary Anne Gangemi. As demand for reinsurance from strong carriers grows at the same time that reinsurance capacity around the globe shrinks, the major players have been able to charge higher prices and demand stricter terms. For some coverages, prices have more than doubled over the past year. Those higher prices could force up long-depressed primary-insurance rates for the property coverage of businesses and homeowners.

Higher prices, not surprisingly, have been attracting some new entrants. Last September, KKR paid $1.4 billion for America Re, Aetna Life & Casualty Co.'s reinsurance unit. To finance the purchase, KKR sold off 35% of America Re for $360 million. But the new entrants are likely to have only a modest impact on capacity, which augurs a likely boom for reinsurers.

Problems at Lloyd's have had perhaps the most severe impact on reinsurance capacity. Long a mainstay of the international reinsurance business, Lloyd's has seen poor underwriting compounded by a slew of worldwide disasters dating back to 1988, such as the Piper Alpha oil-rig explosion and the Lockerbie, Scotland, air crash. Capacity has shrunk by 25% in the past two years, as underwriting syndicates have gone out of business or merged. Coverage for catastrophe reinsurance on property is "virtually unaffordable and unavailable," says Reg E. Brown, a leading Lloyd's underwriter.

Evidence of the capacity crunch is abundant. A year ago, Aetna's vice-president for reinsurance, Richard E. Cartland, lined up $200 million in coverage easily. Today, he says, "if you can find $150 million, you're pretty lucky." Demand for reinsurance from foreign insurers, which are finding other markets closed, is also fueling a shortage. "We could use 30 to 40 more U. S. reinsurers" to handle foreign risks alone, says Bob O'Leary, president of Willcox Inc., a leading reinsurance broker.

The capacity crunch is only half the problem. Some reinsurers are setting stiff terms and commanding high prices. Those burned by losses are setting caps on what their total payout will be, instead of writing pro-rata coverage that used to cover a percentage of all losses with no ceiling. "Prices are probably up 25% overall, but in addition to that, the terms are much better," says William R. Berkley, whose insurance holdings include Signet Reinsurance Co.

The remaining reinsurance companies are also benefiting from a flight to quality among buyers, because of the failure in recent years of many marginal reinsurers. Primary insurers that used to spread the risks among many companies are now willing to place more risk with one company to build a relationship. Chubb Group once limited to 15% the amount of reinsur

ance on any of its contracts with Nac Re Corp., spreading the risk among as many companies as possible. Now, says Nac Re CEO Ronald L. Bornhuetter, Chubb often seeks 25% or more.

The rush to find reinsurance is a reversal for many primary companies that shunned reinsurance a couple of years back in order to boost their earnings. But 1992's heavy losses scared insurers and has sent them scrambling for reinsurance at a time when it is least available and most expensive. "It was inevitable that the underreinsuring by the primary companies would need to turn around," says KKR partner Saul A. Fox.

That has whetted the investment appetite not only of KKR but of such other operators as former Bass Brothers mastermind Richard Rainwater. Their prime targets are likely to be reinsurance units being spun off by major insurance conglomerates, which are eager to restore their balance sheets. Another departing player is Continental Re, a subsidiary of Continental Corp.

HIGHER ANTE. The capacity shortage could be alleviated somewhat by the huge amounts of capital being raised by the industry. With prices rising, Wall Street seems very willing to invest in the equity and debt offerings of reinsurers. In November, insurance brokers Marsh & McLennan Cos. joined with J. P. Morgan & Co. to start Mid Ocean Reinsurance Co., a Bermuda-based reinsurer with $350 million in capital. The outfit has an illustrious group of backers, including Rainwater, former Aetna President William O. Bailey, and former Fireman's Fund Insurance Co. Chairman John J. Byrne.

And on Mar. 10, Swiss-based Zurich Insurance Co. said it planned to raise about $265 million in an initial stock offering for a reinsurance-brokerage company formed by it and its Bermuda-based affiliate, Centre Re. The combined operation will have $550 million in capital, making it one of the larger participants in the market. Zurich's move "has upped the ante" for other reinsurance companies, says John H. Snyder, a senior vice-president with the rating agency A. M. Best Co.

Still, the additional capital may not be enough. With the London market decimated and other international reinsurers pulling back, demand for property reinsurance still far exceeds current supply or what might be expected to be available in the near future. That means primary insurers will either have to assume more of their own risks or pay much higher prices for the reinsurance they can obtain. Either way, that's likely to lead to higher prices for anyone--or any business--that needs insurance.