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DECEMBER 2010/JANUARY 2011

TERRORIST ATTACKS Greater threats demand sophisticated solutions

YEAR IN REVIEW The highs, lows and near-misses of 2010

Tough Guy Peter Zaffino has Guy Carpenter’s rivals in his sights

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Unlock Capital At Guy Carpenter, we have the unique people, tools and insights to help you assess your risk portfolio and capital allocations. We develop integrated strategies to optimize capital, enhance growth opportunities and maximize returns. Our innovative solutions give you the conďŹ dence to make capital management decisions that create long-term value for your business.

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Guy Carpenter‌ your key to capital ideas.

Protect. Optimize. Maximize.

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Cover image: Greg Funnell

There has been sweeping change at the top of some companies and a surprising lack of change at others

Leader attempt to retire from Everest Re. Others will point to a dearth of mergers and acquisitions as evidence of a quiet 2010. Yet this was the year UK-based broker Cooper Gay completed its audacious bid for US wholesaler Swett & Crawford, propelling it into a new broking category. We also saw Brit fi nally agree to takeover terms from private equity firms Apollo and CVC Capital Partners after months of wrangling.

It would be easy to pass off 2010 as uneventful for the (re)insurance industry. After all, reinsurers will end the year much as they started it – strongly capitalised and facing the prospect of further price declines given the lack of market-changing events.

But dismissing the year as dull would do it a gross disservice.

The industry was hit with losses in excess of $22bn in the fi rst half alone – coincidentally the amount Berkshire Hathaway paid for General Re in 1998. And while the losses did not have an impact on prices overall, they certainly had market-changing effects in specific sectors or geographies.

The coming year promises to be just as exciting. What will reinsurers do with their excess capital? Will they continue to return it to shareholders through buy-backs and special dividends, or will we see them go on an acquisition spree?

The Deepwater Horizon oil rig explosion is a case in point. Rates for insuring and reinsuring deepwater offshore drilling have skyrocketed, and the event has sparked efforts, notably from market leader Munich Re, to provide greater levels of liability coverage to such projects.

There has been sweeping change at the top of companies such as PartnerRe and Swiss Re and a surprising lack of change at others – notably Joseph Taranto’s abortive

More broker mergers seem inevitable as competition gets tough and rising service expectations put strains on smaller fi rms’ resources.

The balance of power is currently in favour of Aon Benfield, but could a further mega-merger change this?

One thing is sure: this year certainly won’t be dull.

Ben Dyson Assistant editor Global Reinsurance

GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 1

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December/ January The Guy Carpenter team, page 20

Our bumper review of the year, page 13

News

Claims

1

Leader

26 Take cover

4

News digest

8

It’s not over yet

13 News agenda

Beazley could have competition for Hardy

Take our whistlestop tour through the highs

The rise of terrorism cover, page 26

The demand for terrorism insurance is growing

Special Report 30 Moving target 32 Gulfs of plenty

People & Opinion 20 Profile 40 Diary

As Dubai, Bahrain and Qatar fight it out,

is there room for more than one leading Middle East hub?

34 Catching the wind

Bermuda is leading the ILS space

The Guy Carpenter team has come a long way together

The London market is regaining

popularity, but its tax regime remains a sticking point

35 Q&A

The QFC Authority’s Akshay Randeva defi nes Qatar’s USP

Monty would rather keep gossiping behind closed doors

Country Focus

Cedants 24 Q&A

When choosing a domicile post-Bermuda

drift, the world is truly a company’s oyster

and lows of the year that was 2010

18 Greg Wojciechowski

G LOBAL RE I NSU RANCE.COM

36 The sky’s the limit

Allianz’s Wolfgang Wopperer on ambitious submissions

Editor-in-chief Ellen Bennett Tel +44 (0)20 7618 3494 Email ellen.bennett@globalreinsurance.com

Publisher William Sanders Tel +44 (0)20 7618 3452 Email william.sanders@nqsm.com

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Finance reporter Lauren Gow Tel +44 (0)20 7618 3454 Email lauren.gow@globalreinsurance.com

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Group production editor Áine Kelly Email aine.kelly@globalreinsurance.com Deputy chief sub-editor Laura Sharp Email laura.sharp@globalreinsurance.com Art editor (group) Clayton Crabtree Email clayton.crabtree@globalreinsurance.com

Managing director Tim Whitehouse Group production manager Tricia McBride Senior production controller Gareth Kime Digital content manager Michael Sharp Head of events Debbie Kidman

38 Q&A

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Panama is ready to take on the world

Gerardo Garcia of Barents Re discusses fi nding a niche

GLOBAL REINSURANCE MAGAZINE is published 10 times a year by Newsquest Specialist Media Ltd 30 Cannon Street, London, EC4M 6YJ, UK Tel +44 (0)20 7618 3456 Fax +44 (0)20 7618 3457 www.globalreinsurance.com © Copyright Newsquest Specialist Media Ltd. All rights reserved. No part of this publication may be used, reproduced, stored in an information retrieval system or transmitted in any manner whatsoever without the express written permission of Newsquest Specialist Media Ltd. This publication has been prepared wholly upon information supplied by the contributors and whilst the publishers trust that its content will be of interest to readers, its accuracy cannot be guaranteed. The publishers are unable to accept, and hereby expressly disclaim, any liability for

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2 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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News Digest Berkley: ‘Face up to falling investm

PERILS AG RELEASES QIS5 WINDSTORM ANALYSIS Catastrophe insurance data specialist PERILS AG published a QIS5 gross property windstorm scenario for nine markets, reported Global Reinsurance.

The markets analysed include Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Switzerland and the UK. The combined QIS5 gross occurrence-based loss for all nine markets, including geographical diversification effects, amounts to €36.7bn ($50.45bn). PERILS said the quantification of natural catastrophe risk for non-life companies by QIS5 is important because it is a big driver of underwriting risk. It noted that windstorm is a particularly big risk for pan-European portfolios. (goo.gl/J6mUX) CEIOPS BACKS UK COMMISSION DISCLOSURE European regulators have supported the UK’s arrangements on commission disclosure, reported Insurance Times.

In its advice to the European Commission on the soon to be updated Insurance Mediation Directive (IMD), Ceiops backed the UK system under which commission is disclosed on request. The final IMD2, which will provide the framework for the regulation across the EU, is to go before the European parliament in the spring. Ceiops said: “The majority of members regard an ‘on request’ regime as a minimum harmonisation regime, maintaining the possibility for member states to impose stricter requirements as the best possible solution to the improvement of the transparency of remuneration.” (goo.gl/101sr) A ABOUT GOO.GL: Type the goo.gl address into your web browser to access our recommended articles from globalreinsurance.com and its sister titles

Results RGA PROFIT LEAPS 28% US life reinsurer Reinsurance Group of America (RGA) made a net profit of $377.7m for the first nine months of 2010, up 28% on the $294.7m profit it made in the same period of 2009, reported Global Reinsurance. For the third quarter alone, net profit was up 8.5% to $128.2m from $118.2m.

Net premiums increased 17% to $1.65bn from $1.41bn, while annualised return on equity for the quarter was 13%. RGA chief executive Greig Woodring said: “In addition, consolidated premiums continued to grow in line with expectations and our book value continued to benefit from consistent earnings contributions and a strengthening investment portfolio.” (goo.gl/6F0i1) MUNICH RE PROFIT TARGET UP German group Munich Re has raised its full-year 2010 profit target to €2.4bn ($3.2bn) from €2bn, after making a net profit of €1.95bn for the first nine months of the year. This compares with a profit of €1.78bn for the same period in 2009, reported Global Reinsurance. In the third quarter of 2010 alone, Munich Re made a profit of €761m, up from €650m in the same quarter of 2009. This was driven by an underwriting profit of €785m, down from 2009’s €852m, and a $2.2bn investment result. (goo.gl/ZHERJ)

‘The fact that Hardy hasn’t engaged Beazley in a conversation isn’t surprising’ Barry Cornes, Panmure Gordon

>>> see News Analysis, page 8

CANDID OBSERVATIONS As (re)insurer WR Berkley released its Q3 2010 earnings, chairman and chief executive William Berkley has called for a change to current loss-making activity by reinsurers. He predicted this will only occur when companies stop ignoring ever-falling investment returns and underwriting losses.

AMLIN PREMIUMS ON THE UP Lloyd’s insurer Amlin wrote gross premiums of £1.92bn ($3.08bn) in the 10 months to 31 October 2010, up 39.4% on the £1.37bn it wrote in the same period of 2009, reported Insurance Times. The insurer said the trading environment in the first 10 months of 2010 had been mixed, with downward pressure on rates in some areas but upward momentum in others, particularly UK fleet motor, offshore energy and marine liability. (goo.gl/cZDnb) SWISS RE CALLS TIME ON HATHAWAY LIFELINE Swiss Re has terminated the convertible perpetual capital instrument it issued to Berkshire Hathaway in 2009 to boost its flagging capital base, reported Reuters. Swiss Re did not have to repay the convertible until March 2011. The Swiss reinsurer received CHF3bn ($3.1bn) from Berkshire, controlled by billionaire investor Warren Buffett, in return for the instrument.

Offshore energy market boost expected after Deepwater oil rig disaster

FLAT PREMIUM FOR HISCOX Lloyd’s insurer Hiscox wrote £1.205bn of gross premiums in the first nine months of 2010, down slightly from the £1.212bn it wrote in the same period of 2009, reported Insurance Times. The flat premium income is a result of the company continuing to grow its local specialty lines but contract in areas where rates are challenging – mainly US property lines and big-ticket professional indemnity. But the company added it is ready to expand in offshore energy lines, where market conditions are expected to improve after the Deepwater Horizon oil rig loss. (goo.gl/H9HLv)

ILLUSTRATION: PATRICK BLOWER

Regulation

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News Digest tment returns’

ARCH TURNS IN 4% PROFIT Bermuda-based (re)insurer Arch Capital Group made a net profit of $589.1m for the fi rst nine months of 2010, up 4% on $566.4m in the same period of 2009, reported Global Reinsurance. But the fi rm’s profit for the third quarter dipped 48% to $141.6m in 2010 from $274.4m in 2009. This was in part because of a jump in foreign exchange losses to $65.3m in the third quarter of 2010, up from $19.6m in the third quarter of 2009. The increase in FX losses was mainly caused by the weakening of the US dollar against the euro, sterling and other currencies. (goo.gl/YV8jd) HANNOVER INCOME SLUMPS German reinsurer Hannover Re’s nine-month net income was down 2.4% to €582m ($784.5m) in 2010, from €596.6m in 2009, but third-quarter net income was up 40.0% to €271.4m from €163.1m, reported Post. Hannover chief Ulrich Wallin said the company’s strong Q3 earnings were a result of a €100m tax windfall announced in late October.

ASPEN ADDS TO RESERVES Bermuda-based (re)insurer Aspen Insurance Holdings increased reserves by $6.2m in the third quarter of 2010, having released $44.2m of reserves in the same period of 2009, reported Global Reinsurance.

Reserve releases for the fi rst nine months of the year were $8.8m, down sharply from the $71m released in the fi rst nine months of 2009. The reinsurance segment made an underwriting profit of $53m in the third quarter of 2010, down from $86.3m in the same period of 2009. The combined ratio rose to 80.1% from 70.1%. (goo.gl/auKz2) LANCASHIRE NET PROFITS DIP 22% TO $199M Bermuda-based, Londonlisted (re)insurance group Lancashire Holdings made a net profit of $199m for the fi rst nine months of 2010, down 22% from the $255.8m it made in the same period of 2009, reported Insurance Times.

Lancashire’s nine-month combined ratio was 65.1% in 2010, up from 51.3% in 2009.

The dip in profit and combined ratio increase were driven by first-half losses, mainly linked to the Chilean earthquake and the Deepwater Horizon oil rig explosion. But Lancashire said that despite an active Atlantic wind season, losses in the third quarter were low and the company only had minimal exposure to September’s earthquake in New Zealand. (goo.gl/7RMUg)

View from Insurance Times: Gibraltar ‘We see ILS as a natural and synergistic growth area for Bermuda’ Greg Wojciechowski, Bermuda Stock Exchange

>>> see People & Opinion, page 18 BERKLEY SLAMS MARKET William Berkley, chairman and chief executive of US property/ casualty (re)insurer WR Berkley, criticised the loss-making behaviour of the (re)insurance market in his company’s Q3 2010 earnings release, reported Global Reinsurance.

“We believe the industry is running at an operating loss with an accident year combined ratio of about 110%,” he wrote.

“Current behaviour needs to change, and it will when declining investment returns and underwriting losses can no longer be ignored.” WR Berkley made a net profit of $322.4m for the fi rst nine months of 2010, up 84% on $174.8m in the same period of 2009. (goo.gl/u4dCq)

Investment

$23 trillion The insurance industry’s total invested assets, according to Swiss Re

In a November Sigma study into the effects of the financial crisis on the insurance industry’s asset management practices, Swiss Re said that insurers, mutual funds and pension funds combined are by far the world’s biggest investors.

Life insurers are responsible for the bulk of the figure, with $19 trillion in investments, while non-life firms have $4 trillion. The four largest nations – the USA, Japan, the UK and France – held more than $14 trillion, or 60% of world insurance assets.

Motor insurers in Gibraltar have put in a better performance than their UK counterparts of late, but they face big changes as Solvency II draws nearer. While the net operating ratio of the UK motor market hovers around 120%, most insurers in Gibraltar are between 90% and 110%.

There are three reasons for this.

First, Gibraltar is a cheap territory in which to set up, and there are no taxes on investment income.

Second, many Gibraltarian insurers target niche products that are more profitable, such as taxis or haulage. And third, insurers have greater control of their broker partners; in some instances, such as Advantage and intermediary Hastings, they are sister companies.

But Gibraltar will have to make serious adaptations for Solvency II, which will require insurers to hold greater capital against their risks. Deloitte partner Ian Clark explains: “In the Solvency II world, those who suffer most will be the monoline insurers, because if you take the standard model, capital requirements will have to be typically higher. Gibraltar’s problem is: where is the capital going to come from? It could be new equity raisings, but that’s difficult in a world where the industry has low margins.”

Clark believes another option is for insurers to return to managing general agencies, where the risk is carried by the capital provider.

The final and most likely option is for reinsurance. Several reinsurers are understood to be entering Gibraltar to offer co-insurance, but also quota share and adverse development cover. Clark says: “Reinsurance is an option, but it is difficult, if you are already a heavy user of reinsurance, to provide quota share capital. However, co-insurance is very likely.”

For more news and views from the general insurance industry, visit:

.co.uk

GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 5

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News Digest Caribbean: Hurricane Tomas ravag

View from Strategic Risk: Terrorism

For more news and views from the risk management industry, visit:

.co.uk

MARKEL NABS MGA RECRUITS Markel International has made three senior appointments to its recently formed managing general agent (MGA) division, reported Insurance Times.

Jason Hodson and Jeff Clements have joined the division as underwriters. Hodson joined from rival Lloyd’s insurer Canopius’s binding authority unit, while Clements, who has 15 years’ binding authority experience, joined from Chaucer.

Markel has also appointed Warren Towner general manager of the MGA business, established in July following the reorganisation of the company’s non-marine property division. (goo.gl/yYI6C) TWO IN AT CANOPIUS Lloyd’s insurer Canopius has hired Charles Fernandez as marine property and deputy marine liability underwriter and Andrew Fowles as North American facilities underwriter, Insurance Times reported.

Fernandez joins from Brit, where he underwrote marine and energy liability and marine hull business, and was responsible for servicing and developing client relationships. Fowles joins from Novae, where he oversaw an underwriting book of predominantly North American binding authority business across a range of non-marine classes. (goo.gl/Pumdp) SUMMERS MOVES TO GUY CARPENTER James Summers quit as chief executive of Cooper Gay’s UK company and Lloyd’s division to take up a post at rival Guy Carpenter, reported Post.

Summers has been appointed global head of the company’s marine and energy specialty, effective from May 2011. He will be based in London and will report to Andrew Marcell, chief executive of global practices and head of placement strategy.

XL NAMES TOP EXECUTIVE Bermuda-based insurer XL has named Greg Hendrick executive vice president of its new strategic growth office, reported Post.

Hendrick will be responsible for leading XL’s strategic planning, focused on enhancing the company’s operational efficiencies and further growing XL’s underwriting units.

FORMER REINSURANCE CHIEF QUITS AON Andrew Appel, chief operating officer of global broker Aon, will leave the company at the year-end, but the company has no plans to replace him, reported Global Reinsurance. Appel took the post at Aon in April, after relinquishing his role as head of reinsurance broker Aon Benfield to joint chief executives Michael Bungert and Dominic Christian.

He was formerly chief executive of Aon Re Global, overseeing its merger with Benfield, which Aon acquired in August 2008. (goo.gl/pIwpY)

COURT BACKS TYSERS OVER POACHING CASE A UK High Court ruled against Lonmar Global Risks in favour of London market broker Tysers in a poaching case, reported Insurance Insider.

Lonmar had pursued its former employees Barrie West, Neil Mee and Stephen Karpus after the brokers left in 2009 to join Tysers. Mr Justice Hickenbottom dismissed all the related claims in the High Court.

NEW PRESIDENT AT VALIDUS AS REETH STEPS DOWN Bermudian (re)insurer Validus has appointed Jeff Consolino as president, effective 15 November 2010, reported Insurance Day. Consolino will continue in his role as chief financial officer and replaces George Reeth, who recently announced he will be stepping down as president.

PHOTOS: RAMON ESPINOSA/AP, GETTY IMAGES

Somalia and Yemen are more at risk from terrorist attacks than ever, revealed Maplecroft’s terror risk threat map. The East African country rose from fourth place to first in the Terrorism Risk Index, overtaking Iraq, Afghanistan and Pakistan.

Between June 2009 and June 2010, Somalia experienced 556 terrorist incidents – a total of 1,437 people were killed and a further 3,408 wounded.

The principal threat comes from the Islamist organisation al Shabaab, which has claimed responsibility for many deadly attacks, including its first major international attack in Kampala, Uganda, in July, in which 74 people were killed, reported Maplecroft.

Yemen is now placed ninth in the index, having previously been 22nd. As a result, it enters the ‘extreme’ risk category for the first time, joining 15 other countries.

From June 2009 to June 2010, Yemen suffered 109 attacks, primarily from alQaida in the Arabian Peninsula (AQAP). The group is causing growing alarm among western intelligence services as it plans more attacks abroad. AQAP were responsible for the failed printer cartridge bomb attacks in October.

Greece rose dramatically in the index, moving 33 places to 24th, overtaking Spain (27th) as the European country most at risk. Last year, Greece suffered 180 terrorist attacks. Though the attacks tended to be non-fatal, they were still highly disruptive.

No major western economies fall within the ‘high’ or ‘extreme’ risk categories, with USA, France and UK in the ‘medium risk’ and Canada and Germany in the ‘low risk’ categories.

People

6 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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News Digest ages eastern islands M&A

CHAOS IN THE CARIBBEAN Hurricane Tomas, the Atlantic’s 12th hurricane of the season, hit eastern Caribbean islands on 30 October, causing expansive damage and killing up to 41 people. The Caribbean Catastrophe Risk Insurance Facility said this triggered a total $12.8m hurricane coverage payout.

Reinsurers QBE EYES RENEWAL QBE Insurance is attempting to buy a $1.3bn, multi-year global reinsurance programme that will test the state of the market, reported Insurance Insider.

According to sources, the Australian insurer is looking to secure a three-year deal combining its international and North American protection into a single large limit cover providing horizontal and vertical protection.

A ABOUT GOO.GL: Type the goo.gl address into your web browser to access our recommended articles from globalreinsurance.com and its sister titles

EX-IPC CHIEF LAUNCHES RETRO FIRM ALISEO RE Former IPC Re chief executive James Bryce has launched Aliseo Re, a new global retrocession provider, with initial capital of $300m, Global Reinsurance reported. The company will write business from 1 January 2011.

Barbados-based Aliseo Re will operate as a monoline propertycatastrophe retrocessionnaire, providing fully collateralised retrocession products to reinsurers, on an ultimate net loss and an industry loss warranty basis.

Bryce has teamed up with Andreas Kusay, former chief executive of Manulife property catastrophe subsidiary Manufacturers P&C, to launch Aliseo Re. Bryce will be chairman, while Kusay will be president and chief executive. Manoj Karnani will be chief financial officer. A chief underwriting officer has been appointed and will join the company when the firm commences operations in Barbados. (goo.gl/RnOUD)

MUNICH RE MAKES CASH PURCHASE WITH WINDSOR German reinsurer Munich Re has acquired US healthcare giant Windsor Health Group in a strategic move to cement its position in the US Medicare market, reported Global Reinsurance. Munich Re, through its subsidiary Munich Health North America, is acquiring the entirety of Windsor for $125m in cash.

Completion of the transaction is subject to regulatory approval, which is expected to be completed at the end of the fourth quarter of 2010. Direct operating control of Windsor will be with Munich Health North America. (goo.gl/kvIUW)

‘The take-up rate for terrorism insurance is higher now than it was in the first few years after September 11’ Dr Gordon Woo, RMS

>>> see Claims, page 26

QBE ACQUIRES SECURA QBE acquired Belgian reinsurer Secura in a deal signed on 2 November. Secura will be part of QBE Europe’s reinsurance division, but will continue to operate as a separate brand domiciled in Belgium to service its continental European client base. Rating agency Standard & Poor’s has affirmed Secura’s ‘A’ financial strength rating and removed it from Creditwatch.

Secura managing director Luc Boghe said: “CBFA’s approval of the acquisition provides an excellent opportunity to develop the business to meet our clients’ increasing needs in the reinsurance market.” (goo.gl/vSOCF)

HARDY SPURNS REVISED BID FROM BEAZLEY Hardy Underwriting rejected a revised offer from Beazley, reported Insurance Times.

Beazley had proposed an offer of £3.30 ($5.17) a share in cash, up from its initial offer of £3 a share made on 6 October. But Beazley said it was informed on 12 November that Hardy would not recommend the new £3.30 a share offer “and would not even be prepared to meet Beazley to discuss it”. Beazley argues its offer would have “fully valued” Hardy, as it represents a 50% premium to Hardy’s closing price on 5 October; a 47% volume-weighted average Hardy share price over the three months before the submission of the initial proposal; and a multiple of 1.36 times Hardy’s 30 June 2010 net tangible assets a share. (goo.gl/WqRea)

TOWERS SNAPS UP EMB Consulting firm and (re) insurance brokerage Towers Watson has agreed to buy the worldwide operations of non-life insurance consultancy and software company EMB, Insurance Times reported.

The companies expect to conclude the transaction in the next 60 to 90 days, subject to closing conditions and regulatory approvals. (goo.gl/RJKz7)

BUFFETT TO BUY SUN LIFE REINSURANCE UNIT Sun Life Assurance Company of Canada, a division of Canadian life insurance group Sun Life Financial, has agreed to sell its life reinsurance unit to Berkshire Hathaway Life of Nebraska, Global Reinsurance reported. The transaction is subject to regulatory approval and is expected to close on 31 December. The sale price was not disclosed. (goo.gl/gaEFA)

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News Analysis Mergers and acquisitions

It’s not over yet Beazley’s courtship of Hardy has so far met with little success but, as Ben Dyson reports, other suitors may now come into play

Hardy Underwriting’s rejection of a second offer from fellow Lloyd’s underwriter when its own shares were undervalued. “That was the insurer Beazley seems to have poured cold water on prospects for a problem with the whole issue from the start,” he said. deal between the two companies. However, there are indications that Beazley and Horton have tried to appeal to shareholders to put further bids could be made if Beazley loses patience and walks away. pressure on Hardy to do the deal, but analysts believe this is unlikely On 15 November, Beazley revealed that Hardy had rejected an given shareholders’ concept of Hardy’s valuation. improved offer of £3.30 ($5.24) a share without discussion. Hardy “The approach was based on the idea that when the offer for Brit had similarly shunned Beazley’s previous offer of £3 a share on 11 was rejected, shareholders phoned up [Brit chief executive] Dane October. Hardy contended that both offers substantially undervalue Douetil and said: ‘What do you mean by turning this down? We would the fi rm and that the bids are an opportunistic attempt by Beazley to be very happy with it’, and assuming the same would happen with snag Hardy at a knock-down price.

Hardy,” Hitchings said. “I think that was a complete misjudgement, Hardy’s share price has been trading at low levels since the Brit and Hardy being at opposite ends of the quality spectrum.” company suffered heavy catastrophe losses to its property treaty According to Cornes, Hardy was able to reject the £3.30 so portfolio in the fi rst half of 2010. Its fi rst-half profit fell 90% to confidently because it had already gauged shareholders’ expectations £800,000 from £7.8m in the of an acceptable offer same period of 2009 as a result price. “The fact that Hardy of losses from the Chilean hasn’t engaged Beazley in Keep on moving: Hardy’s share price earthquake and the Melbourne a conversation isn’t really and Perth hailstorms in surprising,” he said. “There isn’t 6 October - 1 December 2010 Australia. an awful lot to discuss if the 300 At the time, Hardy chief figure is down at a level where executive Barbara Merry said shareholders aren’t interested.”

280 her fi rm had been hit harder Equally, Merry has been by the catastrophes than its on record as saying that she 260 peers at Lloyd’s because of its believes Hardy is highly business mix, which is 70% valuable and she is unlikely to 240 international risks and 30% let it go cheaply – if at all.

US risks. Lloyd’s insurers Beazley has said that it 220 are typically more weighted will walk away from the towards US risks. deal if it is unable to kindle 200 Before the fi rst Beazley offer, discussions with Hardy over Hardy’s shares were trading at the £3.30-a-share offer. And £2.20 – 0.86 times Hardy’s if analysts’ evaluations are fi rst-half net tangible assets correct, that looks likely to be of £2.57 a share. the case. But that may not be the end of the story.

Following the initial £3 offer, Beazley chief executive Andrew “There is a good chance there could be other offers for Hardy as a Horton said that Hardy’s shareholders “gave us the impression that result of it being perceived to be in play,” Cornes said. “I don’t think £3 a share was on the low side but they didn’t give us any impression this is necessarily the end of it.” that they didn’t want a deal to happen at all”.

There is also a slim chance that Beazley could be tempted to go He continued: “On the back of that, our board reviewed it and came back on its word and submit a higher offer. While Horton says a deal back with the price of £3.30. We think the £3.30 is a very good price. It with Hardy is not necessary for the company to achieve its strategy, is a 50% premium to the share price prior to our fi rst approach.” he clearly relishes the prospect of linking with the underwriter.

However, some analysts contend that Beazley has misjudged its “It would be nice, in that the businesses are highly complementary. attempt to buy Hardy. KBW analyst Chris Hitchings described the They would combine incredibly well because they both have an approach as “ill thought out from the start”, while Panmure Gordon underwriting culture and the lines of business complement one analyst Barrie Cornes argued that Beazley would need to offer £4 a another. Hardy tends to be more internationally focused and we tend share to attract shareholders’ interests. to be US focused. We also have similar track records of always having Hitchings said it was difficult to see why Hardy shareholders should made money for our capital providers.” accept an offer that, while higher than the current share price, is It is clearly a tough one to call. “If you read Beazley’s announcement lower than the shares would be if Lloyd’s insurers generally were [of the offer rejection], you would say it is fairly black and white that fairly valued by the market. He added that it was equally hard to see they have no intention of going higher,” Cornes said, “but we have had why Beazley’s shareholders would be happy paying a full price for the this situation before with Apollo, CVC and Brit.” GR 8 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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03/12/2010 16:32

Who provides capital when you need it most?

Since the beginning of the financial crisis, Munich Re has supported its life insurance clients throughout the world with many structured reinsurance transactions. Munich Re’s combination of exceptional financial strength and expertise in all relevant disciplines makes it your capital management partner of choice, whatever the market conditions.

To find out how we can help your life business, get in touch or visit: munichre.com

NOT IF, BUT HOW

GR_Ad_Page_ID.indd 1

29/11/2010 15:34

DATE Monday 14 March to Tuesday 15 March 2011 PLACE Doha, Qatar, VENUE Sharq Village & Spa

Join us at our next reinsurance rendezvous in Doha and discover the perfect place to ‘do business’

HO S TED B Y

I N A S S O CIATIO N W ITH

S PO NS O RED B Y

APPLY FOR AN INVITATION TO ATTEND @ WWW.GLOBALREINSURANCE.COM/QATAR If you would like more details about the event please contact | debbie.kidman@globalreinsurance.com If you are interested in exhibiting at the business bazaar please contact | jonathan.trinder@globalreinsurance.com

J U S T S OM E OF TH E C OM PA NI E S ATTE NDI NG Abu Dhabi National Takaful Co ACR ReTakaful MEA BSC Alkhaleej Takaful Insurance & Reinsurance American Appraisal (UK) Ltd AmTrust Management Services Ltd AOIC Aon Benfield Aon Qatar LLC Apex Insurance ARIG Asia Capital Re Aspen Re Assicurazioni Generali SpA AXA [Insurance] Gulf, QFC Branch Besso Ltd Capital Insurance Services Carroll London Markets Chedid Corporate Solutions, LLP (UK) CII Citigate Dewe Rogerson Clyde and Co Crescent Global Insurance Services Daman Deutsche Bahn International Doha Insurance Co (QSC) Dr Schanz, Alms & Company AG Echo Re

QatarV_GR_DecDPS.indd 2

Edward Investments Endurance EWI Risk Services FWU International Gen Re Generali Ghazal Insurance Co Global Re Group GlobeMed Ltd – Kuwait and GlobeMed Qatar LLC Gulf Reinsurance Ltd Guy Carpenter & Co Ltd Hannover ReTakaful Holman Fenwick Willan Insurance Corporation of Afghanistan Insure Plus (Subsidiary of UDC) International Insurance Consultancy Jardine Lloyd Thompson K M Dastur Reinsurance Brokers Private Ltd Kane KPMG Labuan Reinsurance Lancashire Insurance Group Libano-Suisse Sal-Insurance Company Libya Insurance Company Lloyd’s of London Lonsdale Partners Inc

Malaysian Re (Dubai) Ltd Marsh Marsh Middle East and South Africa Marsh Qatar LLC MedNet Bahrain, WLL Milli Re Munich Re Nexus Financial Services, WLL Oman Insurance Company Orient PricewaterhouseCoopers Profile Re Protection Insurance Services, WLL Q Re LLC Qatar Bima International LLC Qatar Broker International Qatar Finance Business Academy Qatar Financial Centre Authority Qatar Financial Centre Regulatory Authority Qatargas Qatar General Insurance & Reinsurance Co Qatar General Insurance Co Qatar Insurance Group Qatar National Food Security Programme Qatarlyst QBE Insurance Europe Limited (Dubai Branch)

QIC International LLC Q-Re LLC Qtel R+V Versicherung AG RFIB Middle East Sarnia Marine Insurance Brokerage Co Ltd SCR Seib Insurance and Reinsurance Company LLC Shelter Reinsurance Société Centrale de Reassurance Standard Chartered Bank Supreme Council of Health Swiss Re T’azur Tech Reinsurance Group, Inc/Hemispheric The Lyle Group Tokio Marine Middle East Ltd Underwriting Risk Service (Middle East) Ltd URS Victoria Insurance Brokers Watkins Syndicate Middle East Ltd Willis Re Zurich Insurance Company Ltd

03/12/2010 14:39

PROGRAMME HIGHLIGHTS

PROGRAMME HIGHLIGHTS

DAY O NE | Monday 14 March

DAY T WO | Tuesday 15 March

Key strategic opportunities and challenges in global (re)insurance

Qatar’s national railway – An epitome of the country’s ambitions and achievements

Graham White, Deputy Chairman, Lloyd’s of London

Dieter Hoffmann, COO, Deutsche Bahn International Management Board (in principle agreed)

Qatar’s credentials as a financial services hub: The economic environment; Qatar’s evolving FS sector; the legal framework; lifestyle issues; domestic insurance potential and untapped potential as a captive/reinsurance hub Abdulrahman Ahmed Al-Shaibi, Managing Director and Board Member of the QFCA

INTERNATIONAL REINSURERS PANEL DEBATE | The opportunities, challenges and prospects for the MENA region PANEL CHAIRMAN: Dr. Kai-Uwe Schanz, Chairman & Principal Partner, Dr Schanz Alms & Company PANELISTS: Juergen Gerhardt, CEO, Echo Re Hans Joachim Guenther, Chief Underwriting Officer Europe & Asia, Endurance Yogesh Lohiya, Chairman and Managing Director, GIC India – invited Manfred W. Seitz, MD Berkshire Hathaway Group Reinsurance Division International

CEO PANEL DEBATE | How do global trends impact on GCC insurance and reinsurance markets?

PANEL CHAIRMAN: Charles Cantlay, Chairman, Aon Benfield Re PANELISTS: Dermot Dick, CEO, Q Re Bruno Bertucci, General Manager & SEO, Generali Middle East Regional Office Bassam Hussein, General Manager, Doha Insurance Company Saad Mered, CEO, Middle East, Zurich Insurance Company

QATAR ‘CASE STUDY’ CLINICS TALENT | Recruiting, training and retaining the best CO LEADERS: Mark Greenwood, Regional Director – MENA Region, Chartered Insurance Institute [CII] and Susan Lansing, Corporate Development Director, QFBA

TAKAFUL | Understanding Islamic insurance LEADER: Osama Abdeen, CEO, Abu Dhabi National Takaful Company

REGULATION | Insurance regulation in the GCC: how local and foreign players can cope

RISK PANEL DEBATE | Risk management responses to corporate needs: Traditional risk management through insurance; non-traditional risk management through risk retention and captive insurance and the establishment of a corporate risk culture PANEL CHAIRMAN: Stephen May, CEO, Kane PANELISTS: James Portelli, Executive Vice President – Head of Strategy & Planning, Oman Insurance Ronny Vellekoop, Senior Executive Officer and Office Manager, Marsh Lee Scargall, Director of ERM, Qtel International Rahat Latif, Chairman of IRM Qatar and Risk Management Specialist, Qatargas

An economic outlook: The GCC in the global economy Dr Gerard Lyons, Chief Economist and Head of Global Research, Standard Chartered Bank

Regulatory prospects in the GCC and Qatar | Current state of affairs; lessons from the financial crisis and prospects Phillip Thorpe, Chairman and CEO, QFCRA

CLOSING PANEL DEBATE | The ingredients of a dynamic (re)insurance marketplace – how can we make it happen? Drivers for insurance growth in the GCC: criteria for choosing a location for doing insurance business in the Gulf; developing products and regional markets – challenges and opportunities and bringing buyers and sellers of insurance together PANEL CHAIRMAN: Yassir Albaharna, Chief Executive Officer, Arig PANELISTS: John Tan, CEO, Asia Capital Re Dr. Michael Bitzer, CEO, Daman Wayne Jones, Partner, Clyde & Co. Mark Randall, Director, RFIB Middle East James Sutherland, Chief Executive Officer, Qatarlyst

NETWORKING • Business bazaar • MultaQa Qatar Annual Golf Tournament • Complimentary Doha excursion

LEADER: Michael Ryan, Managing Director responsible for legal and policy matters and Deputy Chief Executive, QFCRA

NETWORKING • Business bazaar • Complimentary afternoon social event • Complimentary cocktail reception and gala dinner

REGISTER YOUR INTEREST ONLINE

WWW.GLOBALREINSURANCE.COM/QATAR If you would like more details about the event please contact | debbie.kidman@globalreinsurance.com If you are interested in exhibiting at the business bazaar please contact | jonathan.trinder@globalreinsurance.com

QatarV_GR_DecDPS.indd 3

03/12/2010 14:39

Our growth in underwriting cat bonds is equally impressive.

In a world where the volatility of the markets is surpassed only by Mother Nature herself, is it any wonder that Swiss Re is increasingly the partner of choice in underwriting cat bonds? In this business there is simply no substitute for experience, expertise and depth of resources. As a result, no one transfers more insurance-linked risks to the capital markets than Swiss Re; since the inception of the sector, Swiss Re has underwritten over USD 15 billion in cat bonds. Good news for us, yes, but even better news for our client partners. When risk is the raw material, our solutions are your opportunity.

Find out more at www.swissre.com

The essential guide to reinsurance

New publication now available!

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29/11/2010 15:35

News Agenda

2010:

Game of two halves As 2010 comes to a close, Lauren Gow reviews the many lows of the first half of the year, the relative highs of the second and the handful of near-misses (can anyone say Eyjafjallajökull?)

January 2010 must have felt like waking up late for work on a dreary morning for the global reinsurance industry. The 1 January renewals were late to start and late to fi nish, and the year began with bad weather in Europe and the UK, and grim prospects for the 12 months ahead.

While prices were still risk adequate in January, there was a defi nite sinking feeling: high levels of capitalisation – thanks to good underwriting performance, a lack of natural catastrophes in 2009 and improving investment markets – coupled with continued softening in the primary market, put further downward pressure on already falling reinsurance rates.

But January was not all doom and gloom. For many it heralded a new beginning. New York governor David Paterson announced his intention to establish the New York Insurance Exchange, which would bring buyers and sellers of complex commercial insurance together in an operation akin to Lloyd’s of London.

In addition, (re)insurance group XL Capital decided to change its name to XL Group and redomicile to Ireland from the Cayman Islands.

Treaty retrocession was back on the agenda with the entry into the market of Ceres Re – a Lloyd’s retro underwriter funded principally by German reinsurer Munich Re. Meanwhile, life insurers Sony Life and Aegon breathed new life into the Bermuda reinsurance market with a joint start-up named SA Reinsurance.

February brought good fortune, with record full-year 2009 results from reinsurers. Bermudian reinsurer Endurance’s full-year profits soared 444% to $536m from $98.6m in 2008. Munich Re’s full-year profits rose 38% to €2.56bn ($3.49bn), while Swiss Re returned to profit following $933m of losses in 2008.

But the end of February brought devastating losses, as Windstorm Xynthia blitzed its way across Europe. Forty-five people were killed and widespread damage was reported in western and northern France, Belgium and northern Germany. Initial loss estimates suggested (re)insurers could face over €1bn in costs.

Then, on 27 February, Chile experienced an 8.8 magnitude quake, which killed 800 people and destroyed 1.5 million homes.

Earthquake coverage is widespread in Chile, with 90% of property insurance policies carrying earthquake cover. Initial estimates put insured losses at over €2bn.

‘Production is not an art in our business and can be done by anyone’ Munich Re head of reinsurance The industry got a better understanding of the Torsten Jeworrek on losses in March as more accurate estimates the art of profitable placed Windstorm Xynthia’s damage bill at underwriting €1.28bn and Chile’s earthquake bill between €2bn and €8bn. Aspen reported that it could face up to $115m in fi rst-quarter catastrophe losses; Arch faced $65m; and SCOR said its combined catastrophe losses were likely to hit €157m.

In what would become the merger of 2010, Bermudian reinsurers Max Capital and Harbor Point revealed their plans to join forces and form Alterra, which the new board of directors called a “complementary merger of equals”.

Other reinsurers spent March spring cleaning, as US insurance group AIG sold its 13.8% share in Transatlantic Re. Meanwhile, Flagstone Re proposed a shift to Luxembourg from Bermuda.

“

ILLUSTRATION: DAVID LYTTLETON

Two heads are better than one The industry showed its sharing side in 2010, with several companies opting to split control between two senior figures. The merger of Max Capital and Harbor Point, for example, brought together their respective chief executives Marty Becker and John Berger.

Becker was named chairman and chief executive of the group, while Berger became vice-chairman of the group and chief executive of the reinsurance division.

In April, Aon Benfield opted to replace its chief executive Andrew Appel with a pair of co-chief

executives, Michael Bungert and Dominic Christian.

In October, Bermudian (re)insurer Aspen appointed John Cavoores as co-chief executive of its insurance division, alongside existing chief Rupert Villers.

But some companies went a different way.

The double act of executive chairman Mark Byrne and chief executive David Brown at the helm of Flagstone Re was broken up in May when Byrne opted to become a non-executive board member.

>>

GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 13

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03/12/2010 16:19

News Agenda A dark cloud of ash settled over Europe in April after an eruption from Iceland’s Iceland’s Eyjafjallajökull volcano. In a Eyjafjallajökull near miss for reinsurers, the volcano eruption had limited impact on the industry, despite PHOTO: REX FEATURES widespread global air traffic shutdowns, because affected countries closed their airspace to deal with the ash, meaning no accidents or losses.

A 7.2 magnitude earthquake hit Mexico, killing two and injuring 200 people. Once again, reinsurers received a reprieve, with Aon Benfield estimating that insured losses were around $300m.

Yet more bad news for reinsurers came as the Deepwater Horizon oilrig in the Gulf of Mexico exploded, ‘You have to look at killing 11 rig workers and injuring 17 the challenge of how others. Latest estimates put the do you make friends amount of crude oil released into the with your enemy’ ocean at 185 million gallons. The rig Aon Benfield co-chief was owned by Transocean, installed executive Dominic

by Halliburton Energy Services and Christian on mergers leased by BP. and acquisitions Despite BP being self-insured with its own captive, Jupiter, some initial estimates placed the cost to the (re) insurance industry at $3.5bn. It is expected to push up marine and energy Top 10 insurance and reinsurance rates.

GlobalReinsurance.com Property catastrophe reinsurance web stories for 2010 rates continued to soften in April renewals season, reaffi rming what 1. Munich Re to buy XL Capital? the industry had feared at the start of 2. JLT stock rises on Marsh bid rumours the year.

“

The takeover rumour mill Takeover rumours about some firms refused to go away.

One firm dogged by persistent gossip was broker Jardine Lloyd Thompson, which was linked with Aon in May and Marsh in October. Chief executive Dominic Burke has done his best to dispel the chatter, dismissing it as “laughable” back in July.

But the broker’s good performance, coupled with the fact that it is small enough to digest but large enough to make a difference for the mega-brokers, has kept the rumour mill turning.

The other firm unable to shake off takeover gossip has been XL Group. In April, analysts suggested it would be a good buy for Munich Re. In September, FBR Capital Markets analyst Bijan Moazami stoked the fire, suggesting that the company would perform better under the stewardship of Berkshire Hathaway or Fairfax Financial.

He also said of the firm’s chief: “No chief executive has a greater propensity to sell his company than Michael McGavick [pictured].”

3. Jan 1 renewals 4. Coface downgraded by S&P 5. Windstorm Xynthia leaves a trail of destruction 6. Reinsurance rates soften 7. Munich Re quizzes Swiss Re on risk management 8. Buffett ups stake in Munich Re to over $900m 9. Glacier Re closes doors to new business 10. Ceres Re launched

Aviation reinsurers suffered their fi rst loss for the fi nancial year in May, following an Afriqiyah Airways Airbus A330 crash in Libya that killed more than 100 people. Catlin was the lead insurer for the commercial jet while broker Aon placed the cover.

Staff cuts hit in June, with news of up to 50 jobs to be lost following Arthur J Gallagher’s takeover of First City. The pool of employees facing redundancy included some only recently hired by AJG. Amlin poached a team from Swiss Re to set up its own reinsurance arm in Switzerland, while billionaire Warren Buffett went shopping in India for a majority stake in a state-owned general insurance company.

Devastating floods hit southern China in mid-June, following a torrential rainstorm that caused $7.8bn of economic losses, according to Aon Benfield.

Regulation issues took the spotlight in July.

The newly elected UK coalition government took the axe to the FSA, with plans to shift its regulatory power to the Bank of England.

Chancellor of the Exchequer George Osborne said the fi nancial watchdog had failed “spectacularly”.

Aon shone a light through the Solvency II gloom by claiming the directive would boost reinsurance demand because of its efficiency as a form of capital.

The battle over the Neal Bill, which would tax premium outflows from the United States, escalated, with German ambassador to the USA Klaus Scharioth joining the European insurance and reinsurance federation, the CEA, in expressing concerns about the proposals.

Location, location, location A number of (re)insurers opted to switch domiciles in 2010 as the search for the optimum structure continued.

One notable exception, however, was Chaucer, which has opted to stay in the UK for the time being, following a review of its options.

“

‘I happen to believe they’re very happy living and doing business in paradise’ Bermuda’s former premier Ewart Brown gauges reinsurers’ feelings about the island

BERMUDA > LUXEMBOURG

Flagstone Re

CAYMAN ISLANDS > IRELAND

XL Group

14 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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03/12/2010 16:20

News Agenda Top 10 natural catastrophes for 2010

Earthquake damages New Zealand

DATA: AIR WORLDWIDE, MUNICH RE

by insured losses Date

Region

Type

27 Feb

Chile

Earthquake, tsunami

521

$8bn

26-28 Feb

Europe

Windstorm

65

$3.4bn

4 Sep

New Zealand

Earthquake

0

$1.5bn

12-16 May

USA

Severe storm

3

$1.1bn

8-13 Jan

Europe

Winter damage

0

$1bn

6-7 Mar

Australia

Severe storm

0

$920m

15-24 May

Europe

Floods

29

$230m

21-26 Jan

Haiti

Earthquake

Jul-Aug

Pakistan

Flood

1,645

Not available

14 Apr

China

Earthquake

2,700

Not available

August brought with it Glacier Re’s decision to go into run-off, less than six years after its launch. The move was prompted by its private equity owners’ frustration at the depressed state of reinsurance net asset values, according to analysts.

Reinsurers’ fi rst-half results bore the scars of the catastrophe losses in the fi rst two quarters of the year. Those with a heavy focus on catastrophe business were hardest hit, with companies such as PartnerRe, Flagstone Re and Validus posting falling profits and rising combined ratios.

“

Fatalities Insured losses

222,570

“

‘The board is always knackered, flying off to, say, Bermuda six times a year just for board meetings’ A director at a leading reinsurance group on the rigours of being based in London but domiciled elsewhere

‘Frankly, I don’t care about the elephants, on either side’ Florida insurance consumer advocate Sean M Shaw, describing the wrangling between Europe and the USA over the Neal Bill, under which the USA would tax offshore premium flows. Shaw said US consumers could expect to pay an additional $11bn-$13bn every year because of the proposed tax increase

BERMUDA > SWITZERLAND

Amlin Re

BERMUDA > SWITZERLAND

Allied World Assurance Company Holdings

“

$150m

‘I don’t think running a global insurer based in Bermuda and headquartered in Dublin is a very wise political move’ XL Group chief executive and former Republican candidate Mike McGavick on why his future lies in insurance, not politics

PHOTO: PA IMAGES

September opened with a 7.1 magnitude earthquake hitting New Zealand. Risk modelling fi rm Eqecat estimated total insured damage would be between $1.5bn and $2.5bn, and total economic damage would reach between $2.5bn and $3.5bn.

But, even when combined with the fi rst-half losses, this was not enough to turn the market. The industry’s annual visit to Monte Carlo was a tale of excess – but not the usual kind. Much discussion involved reinsurers’ excess capital and how best it should be spent.

Turning to the perennial Monte Carlo subject of rates, the consensus at the event was that prices would continue to erode outside catastrophe-hit areas in the absence of a major event.

Also in this month, reinsurance group Endurance acquired a portion of Swiss reinsurer Glacier Re’s international and US property catastrophe and global specialty reinsurance business through a quota share treaty and renewal rights purchase agreement.

Reports also emerged that former AIA fi nance boss Steve Roder was seeking up to $1bn capital to start a Hong Kong-based reinsurer. The reports said the venture would be run by former Swiss Re China chief executive Franz Josef Hahn, with Roder as fi nance chief and former White Mountains Re global risk officer Eckart Roth as chief underwriting officer.

In memoriam The reinsurance industry lost two key figures in 2010. In September, industry veteran Bob Clements died of oesophageal cancer. Clements was instrumental in forming many of the companies that dominate today’s (re)insurance landscape.

Clements set up insurance and reinsurance holding company Risk Capital Holdings, now known as Arch Capital Group, in 1995 after a 36-year career at broking powerhouse Marsh & McLennan Companies (MMC). He was named vice-chairman and president of MMC in 1992, and founded its private equity unit, MMC Capital (now known as Stone Point Capital), where he was chief executive until 1996.

More recently, Clements founded insurance broker and risk management firm Integro in 2005 and Bermuda-based insurer Ironshore in 2006. He was the chairman of both firms before his death.

The following month, Andrew Beazley (pictured), founder of Lloyd’s insurer Beazley Group, passed away, having been diagnosed with terminal cancer three years previously.

He founded Beazley Group with Nick Furlonge and Robert Hiscox in 1986. After buying out Hiscox and Furlonge, Beazley grew the company into a global operation employing 720 people.

Hiscox praised Beazley for his selfless approach. “Not only was Andrew a good liability underwriter, but he also did his bit for the industry by sitting on committees,” he said. “He is one of the few men who, when sat on a committee at Lloyd’s, is not thinking: ‘How does this affect me if I vote for this? ’”

>>

GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 15

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03/12/2010 16:20

News Agenda Insurers’ losses from natural catastrophes totalled $22bn in the first half of 2010 – more than double the average for the period since 2000, according to Munich Re

$22bn As one Lloyd’s insurer left Bermuda’s shores in October, another arrived.

Amlin completed its re-domestication from Bermuda to Switzerland, while the management of US commercial property insurer ICAT Holdings formed Paraline Group, a Bermuda-based (re)insurer underwriting international business through Lloyd’s.

At the annual Baden-Baden meeting, the industry briefly considered the importance of domicile at the symposium that precedes the event, before ploughing headlong into serious renewals discussions. The event confi rmed what Monte Carlo had suggested – that the only way for rates was down.

But the mood remained upbeat, with some reinsurers determined to focus on the positives.

“

‘There were times when I came to realise that I had blown the rating’ A former rating analyst, providing proof – were it needed – that rating agencies are fallible

November started as October ended – with reinsurers revealing the extent to which the heavy fi rst-half losses had been diluted by a benign third quarter.

There was the usual mixed bag: some catastrophe-focused fi rms suffered sharp drops in nine-month profit – such as Everest Re, Montpelier Re and PartnerRe – while others – such as Axis – posted much stronger results. However, most managed to boost shareholders’ equity, and share buy-backs continued apace.

“

‘People don’t have to agree with me. If I was right and they were wrong, I’d send them an “I told you so” T-shirt. And by all means, they could do the same to me’ Aon Benfield chairman Grahame Chilton on the finer points of debating

The reinsurance market entered December stronger and even better capitalised than before. The bad news, however, is that this strength does not bode well for rates. But the good news is that, given the lack of events, renewals are progressing ahead of schedule, according to some industry chiefs.

While the industry may face many of the same challenges at the beginning of 2011 as it did at the start of the previous year, at least it will not have to deal with the hangover of missed deadlines.

The year in people moves The year 2010 was a busy one for changes at the top. Here is Global Reinsurance’s quick guide to the most important moves.

February • Swiss Re’s former chief financial officer John Fitzpatrick joins Bermudian reinsurer Validus’s board of directors • Bermudian run-off reinsurer Alea names Jeff Rosenthal as its new chief executive, replacing Mark Cloutier.

• Endurance’s founding chief executive Ken LeStrange steps down and is replaced by David Cash.

• PartnerRe Global chairman Bruno Meyenhofer retires.

Joseph Taranto, Everest Re PHOTO: WILLIAM TAUFIC

April • Willis Capital Markets & Advisory appoints Swiss Re Capital Markets’ Bill Dubinsky as head of insurance-linked securities.

• Mark Byrne, co-founder of Flagstone Reinsurance Holdings, steps down as executive chairman, leaving the running of the company to fellow co-founder and chief executive David Brown.

• Former Wachovia chief financial officer Irene Esteves is appointed chief financial officer at XL Capital.

• Don Kramer, founder and chief executive of ‘class of 2005’ reinsurance group Ariel Holdings, is succeeded by the company’s president, George Rivaz.

May • Angelo Guagliano, president and chief executive of the newly formed Bermuda-based Alterra Insurance, announces his retirement.

• PartnerRe chief executive Patrick Thiele reveals his intention to step down at year-end. PartnerRe Global chief executive Costas Miranthis is appointed as his successor and is promoted to group chief operating officer.

July • Changes at the top of PartnerRe spark a string of people moves: Emmanuel Clarke is named chief executive of PartnerRe Global to fill the space left by Costas Miranthis, Bill Babcock succeeds outgoing chief financial officer Albert Benchimol, and Marvin Pestcoe assumes Benchimol’s other role as chief executive of PartnerRe Capital Markets.

September • Broking group Willis hires former AIG chief executive Martin Sullivan as deputy chairman, and chairman and chief executive of a new business unit, Willis Global Solutions.

October • Swiss Re overhauls its management team. Key changes included replacing outgoing chief risk officer Raj Singh with former ABN AMRO executive David Cole, and naming former Munich Re supervisory board member Thomas Wellauer as chief operating officer.

• US life reinsurer RGA reorganises its structure around three business units and promotes Paul Schuster, Paul Nitsou, Gary Comerford and Mark Showers.

• Everest Re chief operating officer and chief executive-elect Ralph Jones quits unexpectedly, forcing current chief Joseph Taranto to delay his retirement until 31 December 2012.

November • Reinsurance broker Guy Carpenter poaches Jim Summers, head of rival firm Cooper Gay’s Lloyd’s broking unit, to head its global marine and energy division.

• Aon chief operating officer and former Aon Benfield chief executive Andrew Appel quits the firm.

16 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

GR_13-16 Year Review.indd 16

03/12/2010 16:20

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Washington, DC

New York

California

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London

Brussels

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GR_Ad_Page_ID.indd 1

20/08/2010 11:54

People & Opinion RISE IN DISABILITY BENEFIT SEEKERS OECD urges governments to reform their welfare programmes strategicrisk.co.uk

For exclusive opinion and insight from Global Reinsurance and its sister publications, visit

globalreinsurance.com

UK FLOOD COSTS RISE 200% IN A DECADE ABI’s flooding conference critical of government flood defence cuts insurancetimes.co.uk

In my view Regaining momentum Bermuda is at the forefront of a resurgence of interest in insurance-linked securities.

Greg Wojciechowski explores the growing attractions of this risk diversification method What is it about 2010 that has caused the resurgence of catastrophe bonds as a form of risk transfer?

According to Reuters, the issue of AXA’s cat bond, Calypso Capital, at the start of November has pushed total 2010 issuance of cat bonds to about $3.147bn. While this is still shy of the various predictions of issuance by market participants – which varied from about $4bn to $6bn – it is still a remarkable achievement.

It follows the extended period of paralysis in the issuance of catastrophe bonds as a result of the collapse of investment bank Lehman Brothers, intricately involved in several early bond issues and the general malaise created by the global fi nancial market dislocation.

The resurgence of interest in insurance linked securities (ILS) is attributable in part to investors seeking diversification in their investment portfolios and acknowledging a lower risk correlation between the performance of these structures and the broader capital markets.

For the fi rst six months of 2010, most issuances were US wind perils, while the third quarter was marked by issuances covering European windstorms.

Another reason for the increased visibility and activity in the ILS space is that these structures are seen as a legitimate alternative risk transfer mechanisms – providing reinsurance and capital-raising alternatives.

I see listing of ILS as vital because listing the structures is what makes them more interesting to investors. Two years ago, the discussion in the market on “do we need to list?” was very different. Following the collapse of Lehman Brothers and its impact of this on the collateral structures of four

catastrophe bonds, there is recognition that enhanced disclosure and transparency could accelerate investors’ interest in ILS. Listing gives investors a greater level of comfort in investing. Exchange listings are a step towards achieving this. Throughout a period of unprecedented stress and volatility in the markets, the regulated stock markets have never failed investors. The world’s stock exchanges remained open and protected liquidity, despite pressure to close. There is a role for stock exchanges to play, to improve transparency and encourage an efficient, liquid market in ILS. The ILS market is mirroring the broader fi nancial markets, where there is a concerted

effort to overhaul how the structured products market is regulated, specifically in the USA. A move to more ILS being listed on exchanges could generate interest and increase investor demand as it makes the product more mainstream from a capital markets stance. For example, many pension funds have restrictions on investment in non-listed securities. Exchange-listing of catastrophe bonds could be the trigger that attracts more pension money and other institutional investors.

Bermuda could become a one-stop shop for ILS – the sponsors are here, the special purpose insurers (SPIs) are here and the

18 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

GR_18-19 PandO.indd 18

03/12/2010 16:22

People & Opinion SOMALIA AND YEMEN TOP TERROR RISK INDEX… … while Greece is the European country most at risk of a terror attack strategicrisk.co.uk

exchange is here. This could accelerate the convergence of the reinsurance and capital markets in Bermuda.

From a jurisdictional perspective, Bermuda has recognised the potential of this market. At the end of 2009 the Bermuda Monetary Authority (BMA), introduced regulation that streamlined the process of incorporation for SPIs, making structure formation more efficient and fast.

It is natural that Bermuda, as the world’s third largest reinsurance market and home to 1,400 insurance companies with total assets of $442bn, is involved in the growing resurgence of this product.

Many Bermuda reinsurance companies have issued cat bonds or set up special purpose vehicles such as sidecars in the past, so there is a committed interest in nurturing

Weblog Judging by this month’s top five, readers of Global Reinsurance’s website can’t get enough of people stories. Three of the top five news items relate to changes in senior positions at big-name firms.

Aon chief operating officer Andrew Appel’s plans to leave the broking behemoth at the end of the year grabbed readers’ attention. While Appel spent most of his fiveyear tenure at the firm on the consulting side of Aon’s business, he is best known to the reinsurance world as the man who presided over Aon Re Global’s merger with Benfield.

The question on many readers’ lips must be what he’ll do next.

One man whose future has been decided is former PartnerRe chief financial officer Albert Benchimol.

He has resurfaced at rival Bermudian (re)insurer Axis after announcing his planned departure from his old firm in July. Benchimol was a core

part of outgoing PartnerRe chief Patrick Thiele’s entourage: as well as keeping the firm’s finances in check, he also ran the asset management division – and so could be considered a catch for Axis.

The other big people move story was Guy Carpenter’s poaching of Cooper Gay UK chief Jim Summers to run its global marine and energy practice, which some saw as a career u-turn for the executive.

News about strategic changes also got readers clicking this month. The top story was Bermudian catastrophe reinsurer RenaissanceRe’s decision to sell most of its US primary business to QBE. Interest was also piqued

by Amlin’s decision to start writing casualty business from its Bermuda operation.

To contribute to the website, email Ben Dyson at ben.dyson@globalreinsurance.com

A move to ILS being listed on exchanges Up the ladder could increase How did you make it to where you are today? investor demand. It Total luck. I was lucky to be born into a family with great parents who made sure I was makes the product healthy, nourished, educated and loved. I was lucky to be born with reasonably good physical more mainstream and mental abilities. I was lucky to be born in the development of this market. The participants in the market understand that they can quickly and easily create a SPI while benefiting from Bermuda’s international reputation and reinsurance market.

All indicators are that 2011 will be another bumper year – our conversations with the capital markets have been hugely positive with more listings in the pipeline. If there is enough traction, we are looking for the market to be more liquid and trading in ILS to really take off. GR Greg Wojciechowski is president and chief executive of the Bermuda Stock Exchange

the US. I was lucky to marry a great woman.

I was lucky that in 1978 I started working at Prudential Reinsurance and met Paul Ingrey and Jim Stanard, who became valuable mentors.

How has the industry changed?

Every level is smarter. In 1984, there were no actuaries in brokers. Now, they have armies of actuaries, modellers and quantitative analysts.

What are the key challenges ahead?

We need the demand and supply curves to tilt in our favour. In the developed world, we have strong economic head winds and demand for insurance is going down. At the same time, the property/casualty business has never been better capitalised – not great if you are a seller.

Online top five 1. QBE BUYS RENRE’S US PORTFOLIO Bermudian firm’s insurance division under microscope 2. EX-REINSURANCE CHIEF QUITS AON COO Andrew Appel to step down at year end 3. AMLIN ENTERS CASUALTY IN BERMUDA MD says the move is a ‘natural progression’ 4. PARTNERRE CFO JUMPS SHIP TO AXIS Albert Benchimol to join Axis as CFO in January 5. COOPER GAY CHIEF RESIGNS Toby Esser steps in as Summers bows out

Equally, what are the biggest opportunities?

While still relatively small, the best opportunities are likely to be in Latin America and China.

What advice would you give to someone starting out in the industry?

Work hard and meet as many people as you can.

What is the biggest mistake you’ve made?

Falling in love with a deal because it was big and not getting the right margin for the risk.

What comes to mind when you think of contemporaries in the market?

We’re fortunate to be in a business where integrity, character and personality are still important.

What do you do to relax?

I read. I exercise a lot. I am obsessed with golf.

John Berger is chief executive, reinsurance, and vice-chairman of the board at Alterra Capital Holdings

GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 19

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Profile

Top team,

big change

Guy Carpenter has reacted to the creation of Aon Benfield and the financial crisis by beefing up its management and boosting its analytical advice. Ben Dyson finds that, just as important, the team works hard, works well, and has fun. Results are good, the company is growing and it’s also closing in on a 50:50 US/international split

L-R: Chairman Britt Newhouse, vice-chairman Richard Booth, president and chief executive of North America broking operations Chris McKeown, chief executive Peter Zaffino, president and chief executive of international operations Henry Keeling 20 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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Profile Rumour has it that reinsurance brokers hunt in packs. Some suggest that broking fi rms only send such large numbers of staff to conferences so as to encircle valued clients and prospects at cocktail parties, and shield them from predatory rivals.

So it was with trepidation that Global Reinsurance joined the entire Guy Carpenter executive committee – all 15 of them, plus a chief of staff and public relations representative – for part of their planning meeting at the broker’s UK office near the Tower of London, which it shares with Marsh, its Marsh & McLennan Companies stablemate.

The team has a formidable presence, not only because of its size, but also because the members’ roster reads like a who’s who of (re)insurance.

In addition to Carpenter stalwarts such as David Priebe, now chairman of global client development, the enlarged management team includes former XL Re chief Henry Keeling, hired in July 2009 to head up international operations, former AIG chief administrative officer Richard Booth, who joined as vice-chairman in June 2009, and former John B Collins chief executive Pat Denzer, who joined as Americas chairman after Carpenter bought his company in April 2009.

Commanding the proceedings is chief executive Peter Zaffi no, son of Salvatore Zaffi no, who ran Carpenter from 1998 to 2006 following the merger with Sedgwick Re.

Tough decisions Strong and confident though the Guy Carpenter executive team now is, one gets the impression that it has had to toughen up after getting sand kicked in its face by a bigger, stronger broker.

Aon Re Global, Guy Carpenter’s biggest rival, stole fourth-largest reinsurance broker Benfield from under its nose in November 2008 to form Aon Benfield — a wake-up call if ever there was one.

Since Peter Zaffi no took the reins of Guy Carpenter in February 2008 from David Spiller, who had succeeded Sal two years earlier, the company has been focusing its energies on top-line growth, bolstering its sales-driven culture and building up in areas where it was historically weak. Zaffi no says there have been many changes at the fi rm since he took over, and admits that the Aon Benfield merger was at least part of the reason.

“What happened externally forced some of these changes and made us think about what we wanted to do on an expedited basis,” he says. “When Aon and Benfield came together it created an international broker that was roughly

three times our size, excluding the USA, so there were things that we needed to put in place immediately in order to compete effectively.”

The sentiment is echoed by Britt Newhouse, who became Guy Carpenter chairman on the day that Zaffi no was made chief executive and, like Zaffi no, has been with the company since 2001.

According to Newhouse, while Guy Carpenter is strong in the USA, it has ambitions to derive half of its business from outside the country.

“It’s no big secret that we were interested in making acquisitions in the international business, which would have probably brought us close to the 50:50 mark pretty much overnight,” he says. “Our alternative was the eventual

‘Over the last few years we have been able to grow both organically and by acquisition despite a shrinking pie’ Paul Malvasio, Guy Carpenter

outcome, which would put us on the offence all the time. And we are on the offence, especially in Europe, the UK and Asia, much more often than our major competitors. That is an opportunity for those already in the firm or those that are joining: aside from having the nice platform and all the tools, our team sees it as a real opportunity to be on the offence more often.”

staff from its rivals. Notable recent hires include chief executive of Cooper Gay’s operation at Lloyd’s, Jim Summers, who Carpenter poached to run its global marine and energy division, and Willis Re’s Colin Kiddie, who Keeling says has accepted the position of co-chairman of Carpenter’s global specialties business in France.

The formation of Aon Benfield was not the only trigger for change at Guy Carpenter. The onset of the global fi nancial crisis in 2008 has also influenced development since Zaffi no took the helm.

“There was a confluence of events affecting the fi nancial markets, which shifted client demand from brokers towards strategic advisers, and away from simple placement of reinsurance,” Zaffi no says.

As a result, the broker is putting more emphasis on its analytical offerings from its Instrat unit, which include the risk and capital allocation tool MetaRisk, and the i-aXs exposure management platform. While these tools can be combined with the reinsurance products for which brokers are better known, this is not always the case.

“Often they are offered independently of reinsurance as part of the corporate governance or management practices we bring to the client,” says Chris McKeown, president and chief executive of Guy Carpenter’s North American broking operations. “Reinsurance is our bread and butter and we are always looking for meaningful and efficient ways for clients to buy reinsurance, but the platforms and the capabilities that we deliver and transfer to our clients are often as valuable if not more valuable to the overall relationship and strengthening our position with our clientele.”

Driving change The Aon/Benfield merger highlighted the fact that Guy Carpenter had work to do in bolstering its European and UK operations in particular. One broker source described the old Guy Carpenter as “easy to beat” in Europe.

The company itself clearly agreed: over the past 12 months, it has overhauled its European and UK operations, which has involved shedding several employees – some suggest around 60.

“We felt we had to make some changes in our organisational structure and changes in some of the people within the organisation. Those decisions weren’t easy, but they were necessary to drive change and ensure we could grasp opportunities,” says Keeling.

With the European restructuring complete, the company has set about bolstering the division with talented

Growth tactics Guy Carpenter’s strategy appears to be paying off. Despite challenging market conditions, characterised by falling reinsurance prices and declining demand for insurance and reinsurance products, the company is growing. The broker’s nine-month 2010 revenues of $791m were 8% up on the $731m it brought in during the same period the previous year.

Carpenter attributed 5% of this growth to acquisitions and 1% to currency effects, leaving an underlying organic growth rate of 2%. In the third quarter alone, organic growth was 3%.

“Over the last few years we have been able to grow both organically and by acquisition, despite a shrinking pie,” says chief fi nancial officer Paul Malvasio. “While we have grown the GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 21

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Profile revenues, we have also increased our overall margins, which is quite an accomplishment when you think about what the last three years have been like in any industry.”

Although it has bolstered its position, Guy Carpenter faces several challenges, including differentiating itself from its main rivals. Guy Carpenter is not the only one of the big three to notice the greater demand for consultancy services and so emphasises its advisory capabilities alongside more traditional reinsurance placing services. Aon Benfield, for example, describes itself on its website as a “trusted advocate” and trumpets its $100m+ a year investment in analytics. Willis Re, meanwhile, now describes itself not as a broker but as “one of the world’s leading reinsurance advisers”.

Equally, both rivals have their own range of analytical tools. Aon Benfield offers the ReMetrica dynamic fi nancial analysis and capital modelling software and the ImpactOnDemand risk exposure measurement tool. While shunning the fancy brand names of its rivals, Willis Re’s range of tools includes risk evaluation, model interpretation and risk decision-making.

Zaffi no is dismissive of other brokers’ efforts, however. “It is easy to point to having portfolio management tools. It’s easy to say you have the full array. But can you execute? Can you really drive the solutions for clients?” he asks. “We have a collaborative global structure.

Our competitors say the same thing, but their structures appear to be more siloed and don’t support collaboration as well as ours.

“Our global infrastructure is defi ned by sharing best practices, working together and fi nding ways to use the expertise of the organisation irrespective of where you are in the world. We do that, and that is unique.”

Priebe adds: “What really differentiates us is the fact that we work incredibly well together. We have fun together. We work hard together. That is seen and felt by our customers and our prospects, and that is why we are winning; that is what is going to enable us to continue to win for our clients.”

Targeted approach As Guy Carpenter is bulking up, in part by acquiring smaller businesses and poaching teams and individuals from rival fi rms, maintaining this cohesiveness is a challenge in itself.

Zaffi no contends this is possible through careful selection.

“We have passed on acquisitions and hires where we did not feel we could integrate them into the culture

Newhouse: It’s no big secret that we were interested in making international acquisitions

and create a team environment,” he says. “We are not just going to bring in revenue to grow at the expense of teamwork, because that would undo what we have worked so hard to build.”

If it is to see off its rivals and achieve its aim of a 50:50 US to international split, Guy Carpenter must also maintain growth in a declining market. To this end, the company sees opportunities for new business where brokers have typically not played.

One target is continental Europe, where the trend in some countries, particularly Germany, is to buy reinsurance from source rather than through brokers. While acknowledging this will be tough to crack, not least because of the longstanding nature of the direct cedant/reinsurer relationships in these areas, Keeling believes brokers’ offerings can benefit buyers.

“First, we bring technology, analytics, consultancy and advisory services that the direct writers either don’t or can’t bring today,” he says.

“Secondly we have global resources and networking that we can apply in a more seamless manner than most of the direct writers.”

He adds: “The broker market share around the world is increasing incrementally. That is happening for a reason: the broker brings a greater value to the client than the direct writers ultimately do.”

Breaking new ground The European Commission’s forthcoming Solvency II capital adequacy directive is also helping

Guy Carpenter break into direct relationships. “A lot of the small- and medium-sized mutual companies are beginning to ask whether they should widen their network of professional advisers, and that is invariably bringing us into a conversation,” says Guy Carpenter’s chief executive of European operations, Nick Frankland. “We have had a couple of notable successes in Germany recently on just that case.”

Another typically broker-free area that Guy Carpenter is aiming to break into is life reinsurance. In September, the company hired former PartnerRe life reinsurance head Franck Pinette as chief executive of European life reinsurance, reporting to Frankland.

As in non-life, consultancy and advice around Solvency II is proving a way in for the broker.

“Many property/casualty companies are in fact owned by life companies, and the property/casualty solvency

‘The broker market share is increasing incrementally.

The broker brings a greater value that the direct writers ultimately do’ Henry Keeling, Guy Carpenter

requirements are going to be much more onerous,” says Frankland. “The life company parents are going to have to fully understand the consequences for them. There is a justification for us to move into the life market.”

Never say never Guy Carpenter has not yet reached its 50:50 goal, and though Zaffi no will not be drawn on when it will happen, he says progress is being made. He attributes most of the 3% organic growth seen in the third quarter to international operations.

While Guy Carpenter missed out on buying Benfield, Zaffi no denies that the company needs to buy its way to international success.

“Never say never, but we don’t need to do an acquisition to be successful and execute on our strategy,” he says. “We think we can continue to grow organically and make the right investments to be able to add value to clients by providing fully integrated solutions. Doing that well will give us opportunities for growth over time.” GR

22 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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Cedants

Q&A with

Wolfgang Wopperer Allianz’s retrocession expert talks about how his success is measured, the use of alternative risk transfer mechanisms, and the greater focus on return periods, caused by Solvency II

Wolfgang Wopperer is responsible for buying retrocession for Allianz Re, the group reinsurer for German primary carrier Allianz. Members of the Allianz group buy all their reinsurance from Allianz Re, which pools the exposures and cedes any risks that exceed its appetite to other reinsurers – typically for what Allianz Re considers peak catastrophe risks, such as European windstorm and US windstorm and earthquake.

Wopperer, who is an economics graduate, started his reinsurance career on the underwriting side of the business at Frankona Re (which was bought by Employers Re, in turn absorbed by Swiss Re), mainly handling propertycatastrophe excess-of-loss business.

After eight years at a niche reinsurer, Wopperer joined Allianz, initially overseeing a team of underwriters for treaty and property/casualty reinsurance business. He made the switch to retrocession two years ago.

PHOTO: SOHEILI.EU

Q:

How would you describe the current state of the reinsurance market? Is it soft or softening?

A: I would say the US catastrophe market is softening from a very hard position. I would not call it a soft market

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Cedants – more medium to hard. Even in the non-US catastrophe markets, I would say it is medium. If there was a further single-digit rate decrease, I would still assess rates as risk-adequate.

Q:

How does Allianz Re structure its retrocession programmes?

A:

We consider two aspects. One is our risk appetite per event, which we scale down from our so-called peak scenarios from our core exposures, such as European windstorm, US hurricane or California earthquake. However, what we consider peak is not a sharp distinction.

There are some risks that are not peak for us, such as earthquakes in Portugal or Turkey for example, but where we have a lower risk appetite per event and therefore where we would want to protect ourselves more on a per-event basis.

The second aspect is our annual aggregated loss, where we also have a defi ned risk appetite. We always check alternative options for reinsurance programmes by simulating them and seeing what effect they have on our annual expected loss.

Q:

How do you choose your retrocessionnaires?

A:

We have had a sophisticated business partner management approach at Allianz Re for the past two years, where we have tried to be more strategic.

In the past, our programme was focused more on the large continental European reinsurance companies. We would ask them for capacity fi rst and then give the rest to the wider market.

We now have defi ned 12 to 15 core preferred partners, although we do use others.

We now allocate business to reinsurers much more systematically.

For example, if a partner wants access to our more plain vanilla risks, we now check that this partner is also supporting us on our more difficult programmes or is delivering some added value to us overall.

The criteria we use to choose reinsurers include the market intelligence they provide us, product input, flexibility, capacity, quoting intelligence (in other words, helping us to fi nd the right price) and security.

The most important consideration for us is continuity. However, security, capacity and quoting intelligence are also very important.

Q:

How has the fi nancial crisis affected your buying strategy?

A:

It has and it hasn’t. It has in the sense that, while we were always very sensitive to counterparty security, we are now even more sensitive to it. We still look at rating agency ratings but we also consider factors such as credit default swap [CDS] spreads if they have CDS in the market. In addition, we talk more to our large partners about their own protection, their investment strategy and their investment portfolio to get a better understanding of their position in addition to the publicly available information we receive.

However, our approach hasn’t changed in the sense that, after the fi nancial crisis, our biggest focus was on the continuity of our counterparties. We did not want to jump on every rumour or alert and change the panel. Instead, we tried to get a little bit more in-depth knowledge about the situation and deal with it more subtly, for example by saying we should be a little more careful with a particular counterparty or take a closer look to try to understand what is going on. We very much avoided breaking up business relationships.

Q: What is the state of the current market?

A: The US cat market is softening from very hard.

I would not call it soft, more medium to hard Q:

To what extent do you use alternative risk transfer mechanisms such as catastrophe bonds?

A: To a great extent. Our Advanced Risk Intermediation (ARI) team is focused on any type of non-traditional protection.

We work very closely with the team to check the pros and cons of using traditional, non-traditional or semi-traditional types of reinsurance for each protection requirement we have. Overall, up to 30% of the capacity we purchase is alternative.

Q: How will Solvency II affect your buying?

Q:

A: Solvency II will be very important and will have an effect. The fi rst impact we see, and how our group risk unit was translating Solvency II for our protection landscape, is greater focus on the more frequent return period for catastrophes – in other words, up to one-in-200 years – and to have maybe a little less focus on the more remote return periods.

A: There is no average day; it very much depends on the season. In summer, the average day is spent on several hours of analytical work – considering options for the protections we have in place, changing them, enhancing them and doing feasibility studies for additional protections.

This also includes exchanging information with the ARI team on the use of traditional and non-traditional protection.

The day also involves replying to internal group queries, for example from the group risk unit or planning control, in addition to keeping contact with counterparties and brokers.

The day looks totally different in October and November, when the whole of the time is fi lled with placement issues, conference calls with the brokers and phone calls with reinsurers, trying to steer the progress of the placements. GR

Q:

How is your success as a buyer measured?

A:

It is measured on whether we get an attractive price, enough capacity, and the extent to which we have built up a good relationship with our partners that provides us with an assurance they will support us when the market gets tougher.

There are also other soft factors such as the quality of the material we produce when making a submission.

This is somewhere we are quite ambitious: you don’t want to go to the market with sub-standard information and we would like to provide the best information among our peers. I don’t know whether we always achieve it, but the feedback we get from the market is that we at least deliver consistently good-quality information.

How would you describe an average day in the office?

FIND OUT MORE ONLINE: WHEN THE GOING GETS SOFT To read this article and for more on the softening of the market, see globalreinsurance.com, or goo.gl/wwi52

GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 25

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Claims International terrorism is fi rmly back in the news, following al-Qaeda’s recent attempt to disguise bombs as printer cartridges and up to 13 parcel bombs being sent to European targets including German chancellor Angela Merkel and Italian prime minister Silvio Berlusconi.

Had the attacks been successful, public outrage would have no doubt outweighed any (re) insurance losses. Although the attacks were foiled, through a combination of intelligence and vigilance, the industry keeps a close eye on such events.

“There’s been quite a lot of growth in insurance demand, and incidents like these highlight the threat. From an underwriting perspective, it increases the level of due diligence, but it has not had an effect on rates,” says Aon Risk Solutions executive director of terrorism Neil Henderson.

It is not clear whether the cartridge bombs were intended to explode in the air or on the ground. But, says Risk Management Solutions (RMS) catastrophe specialist Dr Gordon Woo: “The attempted attacks on the cargo planes have been on the radar for a while. All the major cargo companies are doing a great deal to counter terrorism.

“What we are seeing with the changing targets is that it is very hard to hijack a plane because of the number of people you need.

So the next best thing, from the terrorists’ point of view, is to bring it down.”

He adds: “From an insurance perspective, this would have been a huge aviation loss, but not a great property loss

The threat of terrorist attacks – both regional and global – is never far from the headlines.

But, as Tim Evershed reports, it is an evolving picture that places ever-changing demands on the reinsurance sector

Take cov

26 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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Claims as it would have been unlikely to go off over a population centre.”

The printer cartridge campaign was the latest in a number of al-Qaeda plots that have emanated from Yemen and a group known as ‘al-Qaeda in the Arabian Peninsula’ (AQAP).

“Central al-Qaeda is still perceived as the epicentre of global terrorism, but when you look at recent attacks, such as Fort Hood or the underwear bomber on Christmas Day, it is AQAP that is behind them all,” Henderson says.

Aon says it does not believe AQAP has the capability to increase the frequency of its attempts but that it has the means to continue to “be creative and seek out weak security in pursuit of a spectacular attack”.

“There are ungoverned spaces in the tribal areas of Afghanistan, Pakistan and Yemen.

The key problem in these areas is that any attempt at military action there will backfi re and will only alienate the people you need on your side,” Dr Woo says.

According to RMS, the likelihood of a full-scale terrorist plot directly correlates with the number of operatives involved in the planning.

“The execution and frequency of successful large-scale attacks are crucially dependent on terrorist social networks,” Dr Woo says.

“Too many terrorists can spoil the plot. One of the key aspects of the model is that, with the increase in surveillance, it is much harder for a large number of people to be effective.”

According to the RMS US terrorism model, the probability of a planned attack being foiled is twice as high for a cell size of three compared with a lone terrorist. If the cell has 10 operatives, the probability is as high as 95%.

However, Dr Woo acknowledges the pressure on the security services to counter these plots. “We are very much living in a world where the public expectation is of faultless security.”

The European parcel bombs were a reminder that al-Qaeda is not the only terrorist group out there, although it is possibly the only one with ambitions to strike globally rather than regionally.

The Greek parcels are believed to be the work of a far-left group, while the threat posed by the Real IRA was recently raised to Tier 1 level in the UK. Elsewhere, Columbian guerrilla group FARC is still active, while both

ver GR_26-27 Claims.indd 27

the Philippines and Thailand have problems with militant Islamic separatist groups.

“The links between terrorism and organised crime give cause for concern. In Mexico, there are areas that are becoming ungoverned spaces, with drug gangs running parts of the country,” Dr Woo says.

Al-Qaeda has long funded its operations with the proceeds from heroin production in Afghanistan, while its North African operation is heavily involved in drug running. FARC, meanwhile, derives its resources from cocaine.

The Bangkok effect In 2010, the standalone terrorism insurance market was hit by a loss, put at $500m, from the riots in Bangkok in May. The loss hit the terrorism market, as policy wordings have afforded broader coverage in recent times.

“Coverage is constantly evolving. Insurers are listening to what clients want and need and adapting coverage to meet these needs,” Beazley political violence underwriter Kerri O’Dwyer says.

Generally speaking, she says, coverage is available for physical damage and business interruption as a result of the following perils: ● terrorism and sabotage; ● riots, strikes, civil commotion and malicious damage; ● insurrection, revolution and rebellion; ● mutiny and coup d’état; and ● war and civil war.

“In addition, liability coverages are available for terrorism liability cover and terrorism event cancellation cover,” says O’Dwyer.

Cover for nuclear, biological, chemical or radiological events is also available in the primary and reinsurance markets.

However, the Bangkok loss has not been enough to turn a softening market and harden rates or reduce capacity.

“The insurance market is liquid because the Bangkok claim did not affect it too much, so capacity is steady,” Henderson says.

“There continues to be demand for terrorism cover and capacity is at an all-time high,” says O’Dwyer, adding that new players regularly join the market, which has an estimated value of $4bn-$5bn.

“Pricing continues to be competitive due to large capacities available. However, recent losses in Thailand and Russia have had a flattening effect.”

“The price of terrorism insurance reflects the infrequency of major successful attacks, primarily because of authorities’ ability to interdict the operations of larger terrorist cells,” Dr Woo adds. “The take-up rate for terrorism insurance is higher today than it was in the fi rst few years after September 11.”

According to Henderson, Aon is seeing growing interest for terrorism cover in countries such as Thailand, Pakistan and India, but says the UK has seen the strongest level of interest. International companies are recognising the value of cover.

“In the UK, there is a resurgent threat from the Real IRA terrorist group, but the danger they pose to the mainland is limited as they do not possess the resources the IRA used to have,” Dr Woo says. “In terms of reinsurance, they do not possess the sort threat that al-Qaeda groups do.”

Henderson says buyers of terrorism cover are becoming more sophisticated. Greater emphasis is being placed on risk assessments by ex-military or ex-police personnel.

“There’s been quite a big uplift of interest in that area. Instead of just buying insurance as part of their corporate governance strategy, companies are trying to understand more about what they are buying,” Henderson says.

One reason terrorism (re)insurance has remained affordable for buyers is state support, which is available in many western nations.

A spokesman from Swiss Re says: “It is widely acknowledged that a public-private partnership approach is essential to guarantee sustainable and robust solutions.

Governments’ main responsibility lies in the prevention and mitigation of terror attacks as well as in the defi nition of a suitable regulatory framework within which to operate.

“The insurance industry, on the other hand, manages the risk transfer and fi nancial impact of such attacks up to certain limits, beyond which governments might need to step in again.”

Expiring legislation One of the most important manifestations of this is the Terrorism Risk Insurance Act (TRIA), enacted in the USA following 9/11, which provides government-funded protection to the private reinsurance market.

TRIA is due to expire in its current form in 2014 and earlier this year insurance broker Marsh expressed its concerns over the possible non-renewal of the act.

In a statement, it said: “In the event that TRIA is discontinued and not replaced by a similar government-sponsored programme, Marsh anticipates the availability of terrorism insurance would be greatly reduced in high-risk areas, such as business districts in major metropolitan areas.

“Marsh also anticipates that pricing for terrorism insurance would dramatically increase in these high-risk areas. This would have a profoundly negative impact on those businesses with the greatest need for protection against terrorism risks.”

Others are more relaxed about the future of the programme. O’Dwyer says: “There is a school of thought that TRIA will not be extended beyond the current expiry date, due to Obama’s lack of support and the availability of cover in the open market.

“In reality, it will continue, as it is a cheap and efficient way of accessing terrorism cover and has the support of large insurance institutions.” GR

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30: Moving target 32: Gulf of plenty 34: Catching the wind 35: Q&A with Akshay Randeva

Zurich feels the benefit as businesses turn from Bermuda to Europe

The fruits of the maturing Middle East market

History, talent pool and capital conditions mean a Lloyd’s renaissance

SPECIAL REPORT: DOMICILES

The QFC Authority’s director of strategy with the view from Qatar

Welcome homes What influences a business’s choice of domicile, and where are the most popular homelands post-Bermuda drift?

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Special Report: Domiciles The reinsurance domicile debate is raging once again. Uncertainty over US tax rules and Solvency II is causing a ‘Bermuda drift’ to European centres such as Zurich, which has prime conditions for hub status

Moving target The Bermuda versus London debate is long over. Now it is Bermuda and London versus Zurich, Dublin, Luxembourg and even the Netherlands.

Companies carrying out group restructuring activities ahead of Solvency II and seeking tax and capital efficiencies are increasingly aware that the world is their oyster – particularly if they can maintain underwriting operations in all the key markets for international (re)insurance.

Choice of domicile was a hot topic at the industry’s meeting in Baden-Baden in October, as European reinsurance buyers, brokers and reinsurers gathered to discuss renewal rates and terms.

The Guy Carpenter-hosted symposium chose to focus on the relative merits of (re)insurance hubs in Bermuda, London and Europe, highlighting the drivers behind new centres such as Zurich and exploring the advantages of a global multi-line strategy.

“Every group must have its own vision of the optimum domicile structure based on its history and legacy,” said SCOR Global P&C chief executive Victor Peignet, contributing to the symposium debate ‘Does domicile matter?’.

“However, this structure is not fi xed but is a moving target, and the successful groups will be those that make the right choices at the right times. They will have geared their company structure to their optimum domiciles, with sufficient flexibility to adapt their vision, and to change and manage their structure closest to the optimum at all times.”

‘Just being in a place doesn’t mean anything … it’s what you do in the domiciles where you are’

Bermuda shift A few years ago, everyone was talking about the decisions of a number of London insurers to move their domicile to Bermuda. At the time, the moves by traditional Lloyd’s fi rms such as Hiscox, Kiln, Hardy and Omega inflamed the London versus Bermuda debate and made many fearful that London was losing its edge as a result of the UK’s uncompetitive tax regime.

But the moves were strategic and in no way intended to suggest the

John Berger, Alterra

companies were looking to reduce their London presence. “What they were looking for was an optimal place to deposit their assets for underwriting,” Deloitte insurance partner Ian Clark explains.

“What Lloyd’s allowed was to hold your assets overseas and to secure a letter of credit on them to underwrite in the UK. If you held your assets in the UK, you were subject to UK tax and if you held your assets in Bermuda, you were subject to a much lower level of tax. Provided Lloyd’s could get its hands on the assets when needed, it was w agnostic as to where these bus businesses were domiciled.”

Bermuda drift Ber Now all talk is of a ‘Bermuda drift’, where companies are keeping their whe opera operations on the island but moving their headquarters elsewhere.

Ma Many recent moves have seen traffic going one way, from Bermuda or Cayman to European centres, Zurich in particular. Ace was one of the early movers – choosing to redomesticate from Cayman to Zurich in 2008, while fellow Bermudian heavyweight h XL chose a path from Cayman to Dublin. fr It is telling that both fi rms are still strongly associated with Bermuda, while Brit Insurance is Ber still considered a London market fi rm despite its redomicile to the Netherlands.

And the only home Ne for Swiss Re has to be Switzerland, despite des the global reinsurer’s decision to redomesticate to dec Luxembourg.

Lux It I is the feet on the ground that count, not n where a holding company is based, thinks t Alterra chief executive of reinsurance John Berger. Speaking at i the Baden-Baden symposium, he said domicile was not important. “It is what you are doing around the world and what markets you are in. Just being in a place doesn’t mean anything ... it’s what

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Special Report: Domiciles you do in the domiciles where you are.

“To a degree, the choice of domicile can be largely irrelevant, as what will effectively determine the level of success for any organisation is the quality of its leadership, its underwriting talent and the overall fi nancial strength of the company.”

One city that continues to attract company headquarters and operational centres is Zurich. Allied World and Amlin have taken the route set out

by Ace, in redomiciling their legal carrier to Zurich and setting up reinsurance operations there. Other fi rms – including Catlin, Tokio Marine and Novae – have not moved their holding company, but have set up dedicated reinsurance businesses in Zurich to access European business.

Even within Switzerland, Munich Re has moved its headquarters from Geneva to Zurich to, it said in 2009, deliberately take “full advantage of the opportunities offered by the Swiss reinsurance and labour market” and to “exploit the advantages of Zurich as one of the central fi nancial and insurance marketplaces in Europe, while at the same time enhancing client proximity”.

Looks like a hub Zurich has all the hallmarks of a successful reinsurance hub: well-developed infrastructure and transportation, an existing reinsurance market with brokers and service providers, access to a pool of French, German and English-speaking (re)insurance talent, a sophisticated regulatory regime, favourable tax conditions and all the softer qualities that attract senior industry executives, including excellent schools and low personal taxes.

“The economic substance, quality of regulation and business values of the headquarters’ domicile become part of your global brand,” said Swiss Re European division head Martin Albers, speaking at the Baden-Baden domicile debate. “Switzerland is a world-renowned financial centre with great benefits and strengths, including a highly developed and reliable infrastructure, excellent talent, an open market and a close relationship with the EU.” While not all domicile decisions are based purely on tax – if they were, all companies would opt for zero-tax regimes – Switzerland has one of the more favourable tax environments in Europe. “Switzerland remains a very attractive territory from a company’s tax perspective,” PricewaterhouseCoopers tax partner Colin Graham says. “It remains possible for groups to structure in cantons in Switzerland and to achieve

very low effective tax rates. And from ma US tax perspective, Switzerland has good tax treaties and is not seen in the same me light as such territories as Bermuda.””

Continental relationships Access to business is another important ant driver behind the decisions to set up in Zurich. A large proportion of Continental ental European business does not find its way to the London or international markets. This strongly relationshipfocused market, which still places a lot of business on a proportional basis with the big direct reinsurers, prefers to do business with its reinsurance partners on home turf.

A Bermudian company, with its perceived cultural differences (a stronger focus on catastrophe excess-of-loss being one example) is unlikely to get much of a look-in. But an international company, with its holding company or European operations in Zurich, has a much better bet.

“We’re seeing a lot of businesses thinking about where they should

‘From a US tax perspective, Switzerland has good tax treaties and is not seen in the same light as such territories as Bermuda’ Colin Graham, PricewaterhouseCoopers

be positioned to maximise their distribution,” Deloitte partner Stephen Ross says. “In the reinsurance market, that used to be about having an operation in Lloyd’s and in Bermuda.

Over the past year, we’ve seen the requirements for many of these businesses to access European markets to establish operations in Switzerland.

“That’s what we’ve seen over the past year with Amlin, Catlin, Tokio, Aspen and others,” he continues. “That is very much a distribution play – a recognition that you’re unable to access European business as effectively from Bermuda and London as you would be if you were based in Zurich.”

European risks and take advantage of opportunities in the European reinsurance market, including those created as a result of the coming Solvency II regime.

While Switzerland is not part of the EU, it is widely expected to be one of the fi rst countries to gain equivalency with the new regime and has developed its Swiss Solvency Test with that in mind.

In July, the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops) recommended Switzerland, along with Bermuda and the USA, to be considered for a fi rst wave equivalence assessment. It is the fi rst time Ceiops has set out the countries it considers important.

With Solvency II pushing groups in Europe to consider restructuring their businesses and convert subsidiaries into branches, this is also encouraging many to look at the pros and cons of changing their domicile. “Domicile is very much an area of discussion in boardrooms at the moment based on my fi rm’s experience,” Graham says.

“This is driven by a desire for capital efficiency and Solvency II has been a more recent catalyst.”

The group capital rules in Solvency II are a further encouragement for companies to look at a simpler structure, continues Graham. “Solvency II encourages you to reduce the number of legal entities you have for capital reasons. Once you start to look at that type of restructuring and thinking about where your operations and capital are going to be based, that drives a further decision around where you want the group domicile to be.” GR

Solvency II as catalyst Many of the recent movers to Zurich note Solvency II among their reasons for setting up shop there. In a statement, Catlin said the formation of its Zurich business – Catlin Re Switzerland – was to underwrite speciality high-quality

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Special Report: Domiciles Premium growth in the Middle East has continued to climb despite the downturn, with personal lines activity alongside mega-projects in construction, energy and engineering. As the market matures, what opportunities will it bring?

Gulf of plenty The Middle East market – in particular the countries of the Gulf Cooperation Council (GCC) – has continued to prove a draw for international (re)insurance companies. It has many of the characteristics that make it a popular emerging market domicile for (re)insurers, including low taxes, ease of set-up, comparable legal systems and supportive regulatory frameworks.

As Dubai, Bahrain and Qatar continue to battle it out to emerge as the region’s pre-eminent hub, each is developing its own unique characteristics, while markets such as Saudi Arabia are becoming important for takaful (insurance that observes Islamic law) risks.

Although the region’s total premium volume remains very small – at less than 1% of global premiums – its rapid growth and huge projects in construction, engineering and energy, plus continued investment, are drawing attention from international (re)insurers.

Despite the high-profi le problems affecting Dubai during the fi nancial crisis – when it received a $10bn bail-out from sister emirate Abu Dhabi and witnessed a considerable slowing down of construction activity – the rest of the region has continued to prosper.

“If you look at what happened last year when there were a lot of headlines about Dubai and its fi nancial problems, the GCC market still grew by 6% when other emerging markets such as Eastern Europe had a significant decline,” says AM Best general manager of analytics Vasilis Katsipis. “Despite the belief that these markets are driven mainly by the major projects – the energy and construction activity taking place – there is also a very big part of business coming out of personal lines.”

Compulsory covers drive growth He points to the introduction of compulsory covers – primarily motor and healthcare – in the United Arab Emirates (UAE) and Saudi Arabia as driving significant premium growth.

While the growth of personal lines will affect how much risk is ceded on to (re)insurers, with primary carriers retaining more risk in these classes, the overall growth has seen many of the global (re)insurers open branch offices in the region.

Many of the government-funded projects in Abu Dhabi are continuing as planned in 2010. These include the Dolphin Gas scheme, which involves shipping and processing Qatari liquefied natural gas for use in Abu Dhabi, Dubai and Oman. The Khalifa Port and Industrial Zone, the emirate’s $25bn Mazdar carbon neutral town and the UAE nuclear authority are other ambitious energy schemes, while the $35bn Yas and Saadiyat Island developments are ceding the property pipeline.

GCC-wide link worth $100bn Such mega-projects can also be seen in other parts of the region, including the $80bn King Abdullah Economic City and the 40km Qatar-Bahrain Friendship Causeway (QBFC), due to be completed after 2014. The QBFC is part of a $100bn master plan to link all six GCC members (the UAE, Bahrain, Kuwait, Saudi Arabia, Oman and Qatar) by 2017, including a 2,000km GCC rail project, stretching from the Kuwait-Iraq border to Oman.

“If you look at the King Abdullah City in Saudi Arabia and other projects fi nanced by the government, all the major projects are still going on,” Willis Re regional director, Middle East and North Africa, Ahmed Rajab says. “The risks are still good in the Middle East and North Africa despite the fact that rates are going down.”

Although the region has seen a slowdown, reflecting in part reduced infrastructure spending, AM Best believes that, in general, insurance companies operating in the GCC member countries are well capitalised and able to resist further shocks. In its report GCC – Rich in Potential, But

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Special Report: Domiciles Hurdles Remain – the rating agency notes that future economic prospects for the region are deemed to be better than in many developed markets.

Premium rates in the region remain soft in 2010, partly a reflection of the highly competitive market. Fierce competition “remains one of the biggest challenges to companies operating in the market,” notes Yvette Essen, author of the AM Best report and head of market analysis for the company’s global fi nancial services division. Increasing competition is expected to help fuel mergers and acquisitions activity in the region, with some local insurers partnering with foreign entities.

Consolidation of the primary market has become a key feature, with insurers such as GIG, Medgulf Group and Salama taking on a broader regional stance.

Whether the emergence of larger, better-capitalised groups will result in more risk-adjusted pricing in the region has yet to be seen.

For the big risks, pricing has remained relatively stable, as the major (re)insurance players apply their pricing models. “In lines where there have been very significant cession ratios – that is, the local companies have kept a small part of the risk – it has helped the rates remain more stable than if they were net retained,” Katsipis says. “As the impact of compulsory covers wears off – and because these risks are mainly net retained – that’s where you’re going to see a greater emphasis on competitive pricing and where you will see the highest decline in pricing.”

Adverse weather potential The soft rates are also partly a reflection of the low catastrophe exposure and relatively benign loss experience.

Nevertheless, recent claims include a spate of attritional fi re losses, while hailstorms, a cyclone in Oman and flash floods have been notable weatherrelated events. Cyclone Phet brought heavy flooding to Muscat when it made landfall in June and is the second significant storm in recent years, following Cyclone Gonu in 2007.

It is a common misconception that the region is entirely devoid of cat activity, notes Rajab, and the potential for adverse weather should affect how (re)insurers approach the region.

“There is defi nitely some climate change happening in the region and we have witnessed huge floods in Jeddah and Riyadh, which we haven’t witnessed in the past,” he says. “Are they just one occurrence or are they going to happen more often given the Arabian Peninsula is between the monsoon and the

Mediterranean climate? On the earthquake side, Iran is a major earthquake region and what everyone thinks of is a major earthquake in Iran, which could impact the Emirates.”

Start-ups focus on region A number of start-up reinsurers have also been established, with a focus on regional risks. Some of these are backed by international players and investors, including sovereign wealth funds. In 2008, Arch Re and Gulf Investment Corporation (GIC) set up Dubai-based Gulf Re, while Bahrain-based ACR Takaful was a joint venture between Dubai Group Khazanah Nasional Berhad and ACR Capital Holdings.

The latest to come to market is Underwriting Risk Services, a joint venture between Validus-owned Talbot Underwriting and ADNIC (Abu Dhabi National Insurance Company). Other start-ups include Al Fajer Re (Kuwait), Saudi Re and Oman Re.

market, thinks Katsipis. “The headline cession ratio will probably come down because there will be proportionally less big ticket insurance like engineering and energy and proportionally more personal lines, which is net retained.

For reinsurers, it will still remain a significant emerging market but if they want to access the growth of the market, they will probably have to access the personal lines of business.”

For international (re)insurers considering the merits of geographical diversification, there will be some benefits – particularly under Solvency II – in having a globally diversified book of business. But the bigger benefit from writing business in the GCC comes from diversification of earnings, thinks Katsipis. “Is [geographic diversification from the GCC] significant for someone like Munich Re, Swiss Re or SCOR? It’s positive, but the absolute impact on their capitalisation is minimal because it’s an emerging market.”

Which hub will triumph?

‘The headline cession ratio will probably come down as there will be proportionally less big ticket insurance and proportionally more personal lines’ Vasilis Katsipis, AM Best

While 2010 has seen no new companies come to the table, there is growing premium for existing players.

“We see an uptick again on the major projects because the economies are starting to accelerate their growth and there is an increased emphasis from the primary carriers on the personal lines,” Katsipis says. “On the one hand, the reinsurance cession has been very high and that’s why many reinsurers establish themselves or try to become more local from their international positions. On the other hand, there is a lack of expertise in the local market to accept these risks.”

As the primary market develops and retains more risk – driven largely by the growth of personal lines – (re)insurers will need to adapt their approach to the

As newcomers to the region size up the merits of the competing insurance hubs, it is clear each is developing its own USP. The Dubai International Financial Centre, Qatar Financial Centre and Bahrain Financial Harbour have each introduced internationallyrecognised legal systems and principles-based regulation. They boast speedy set-up times and have developed infrastructures to cope with international business, including global brokers, service providers and technology platforms.

“Dubai was the fi rst one and has made some pretty good strides in developing an international hub,” Katsipis says. “On the other hand, Bahrain has the greater history behind it and Qatar is making strides to develop its regulatory system.”

He considers that, ultimately, three hubs may be “two too many”. At the same time, changing distribution channels and the growth of centres in South East Asia will mean the GCC is used less to access business outside the region as business is increasingly retained locally.

“In the medium term, you’re going to be looking at one hub for activity and the other two being of lesser importance, and the focus of the companies will be 90% on the Middle Eastern business in the Gulf than global,” he says. GR

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Special Report: Domiciles With its square mile of talent and changing attitude to reform, could London – and Lloyd’s in particular – be the main beneficiary of the Solvency II era?

Catching the wind A few years ago, many were writing off Lloyd’s and the London market. Efforts to reform the business and introduce much-needed automation were stagnating, businesses were relocating to lower-tax domiciles such as Bermuda and the market was reeling from major catastrophes and growing legacy issues.

Today, Lloyd’s is where everybody wants to be. Recent entrants have come from Europe – including turnkey operators SCOR, Skuld and Chubb – although the steady trickle of Bermuda fi rms has also continued, including Allied World and hotly tipped White Mountains, which is reported to be establishing a syndicate for a 2011 start.

Lloyd’s 320-year history and its concentration of talent and expertise have helped to establish one of the world’s best infrastructures for (re)insurance.

Still the home of insurance Lloyd’s director of performance management Tom Bolt drew attention to London’s benefits during a debate on domiciles at the Baden-Baden symposium in October.

“Choosing domicile is increasingly a short-term decision,” he said. “What’s important in the long term is market access and that is what London offers. We may or may not be the domicile of choice, but London is still the home of insurance.

London has the largest international insurance market in the world, with a gross written premium of £245bn.

“We have something that our nearest competitors – New York and Tokyo – can’t match, which is intimacy. In our patch of the Square Mile, there are 50,000 insurance professionals.”

Nevertheless, the market has its demons, including failed technology initiatives and a lack of overall discipline. The turning point for Lloyd’s came four years ago. A £3.8bn ($7bn) deal with Berkshire Hathaway in October 2006 saw the resolution of Equitas, the organisation formed to handle the market’s 1992 and prioryear liabilities. The deal, along with the market’s business process reform efforts and Central Fund strengthening, saw Lloyd’s upgraded to A+ by Standard & Poor’s in April 2007.

The managing director of Lloyd’s insurer Antares, Stephen Redmond, says: “The genuine benefits Lloyd’s has are its security ratings, its global licences and the ease with which business is transacted, even if there remains a traditional nature to it. The market discipline witnessed in the past eight years in particular, through very expensive global natural catastrophes, has demonstrated the robustness of the Lloyd’s model.”

Looking forward, not back The market’s earlier success with contract certainty and more recent endeavours with technology, including the Lloyd’s Exchange and endorsement pilot, which went live in September, have helped it to shrug off past failures including the £7m Kinnect platform, shelved in 2006.

Redmond also notes efforts to improve the claims process. “I hope the legacy challenges or technological failures of the past are put to one side, and that people look forward as opposed to looking back.

“London could have been fairly criticised in the past for moving at the speed of the slowest when it comes to reform and change. We don’t have that luxury any more because there are other markets in other jurisdictions that are very willing – but not necessarily able – to pick up the pieces.”

There is concern that the UK’s corporate tax regime is putting many off at a time when London could be a key contender for international (re)insurers undergoing group restructuring ahead of Solvency II. The industry has worked hard with the government to bring down the rate of tax. In its 2010 Budget, the coalition government announced it would lower corporation tax from 28% to 24%.

Chancellor George Osborne told MPs the low rates would act as adverts for the countries that introduce them.

But Graham thinks there are still challenges ahead. “We’ve got some significant tax reform taking place in how we tax international company profits. Until we get through the next 12 to 18 months, I don’t think we’ll get any companies moving back to the UK.”

Competition from other reinsurance domiciles, in particular Bermuda, New York and Singapore, could draw capital from the market. If the mooted New York Insurance Exchange goes ahead, Redmond thinks it would inevitably be a competitor for Lloyd’s. “But one mustn’t forget there was a New York Insurance Exchange many years ago and Lloyd’s ranked alongside it. Lloyd’s continued and [the New York exchange] didn’t.”

In Baden-Baden, Bolt highlighted Lloyd’s access to other markets, with licences in more than 80 territories. “If you have a super-complicated risk in a far-out part of the world, somebody in the underwriting room will know about that place and will probably have worked on that kind of risk before,” he said. “This kind of bespoke policy and the ability to syndicate the risk is going to be more and more important.”

But changing distribution channels means (re)insurance is moving fast. Big risks are increasingly retained locally and that requires a presence on the ground. The platform Lloyd’s has set up in Singapore has 16 syndicates.

Capital and capacity Ironically, the continued interest in Lloyd’s has the potential to exacerbate the predicament. “It will chase premiums down,” Deloitte insurance partner Ian Clark says. “Lloyd’s [is looking for] new capacity to bring something new to the game.

“If someone comes into Lloyd’s from the Far East bringing business from South East Asia, that works very well. Or if another player comes in and transfers in an existing book of European business not written in Lloyd’s – that also works well. It is a signal of a good market when you get this regeneration.”

Clark predicts Lloyd’s is set to benefit from Solvency II despite uncertainty over UK corporate tax. Its main strength lies in its unique capital structure (it posts capital above that required by each syndicate) at a time when organisations around Europe are contemplating increased capital requirements. “If, as we all believe, the industry will need to hold more capital, it’s increasingly more efficient to be in Lloyd’s,” Clark says. GR

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Special Report: Domiciles

Q & A Akshay

with

Randeva

The Qatar Financial Centre Authority’s director of strategy outlines the attractions of a hub-in-waiting Q: What are some of the Gulf Cooperation Council region’s attractions for international (re)insurers?

A:

It’s a story of growing GDPs, growing population, budget surpluses and the GCC governments’ ambition to diversify economies, leading to significant investment in infrastructure and industry. In insurance, it’s about low penetration (in Qatar, 0.8% against a world average of 7%), a growing awareness of the benefits of insurance and a favourable tax and business environment.

Q:

What is driving some of the doubledigit premium growth in the region?

A: Qatar’s GDP has been growing at 14% in real terms for the past five years – it is set to grow at 16% this year alone.

You’ve got enormous investments by the GCC governments in infrastructure and industry, backed by growing awareness of risk management and insurance.

Q: Is professionalism growing in the primary market?

A:

This is definitely noticeable and is largely a result of greater demand from investors in terms of return on equity and return on assets, better trained staff and better facilities, aided by the Chartered Insurance Institute opening up in the region and ourselves opening the Qatar Finance and Business Academy (QFBA). It’s also a function of local firms expanding abroad and transferring their learning and knowledge back home.

Q: How did the financial crisis affect the region’s economy?

A:

There was definitely an impact – it’s impossible to think of the region as an

island unto itself. Coming out of the crisis, I think this region has snapped back as a whole much quicker than the rest of the world. And a large number of investors have started viewing this region not as much as an old-school source of capital but as a destination of capital because of the growth and investment opportunities.

Q: What does Qatar offer as a financial centre and how is it different from Dubai and Bahrain?

A:

There are several factors that will encourage insurance firms to establish practices in the QFC. Think of the legal and regulatory structure, the ease of setup and the growth prospects. The QFC legal environment is based on English common law, allowing 100% ownership and complete repatriation of profits. The QFC provides firms that have operations based outside the QFC, with access to the local market, allowing them to deal in local and foreign currencies.

Q: What is the rationale for the Qatarlyst electronic trading platform, and what will be the impact of the recently announced purchase of RI3K? A:

Qatarlyst is a web-based platform that can be accessed from anywhere in the world, which makes it very costeffective and ideal for multinational transactions. It shows the QFC Authority is leading the industry as a whole.

The purchase of RI3K significantly increases the scale and the scope of the Qatarlyst business, allowing regional brokers and insurance firms to place and accept large commercial insurance risks electronically. We also expect the regional firms to benefit from RI3K’s interface with London and the

international markets. In turn, RI3K’s customers will benefit from Qatarlyst’s speedy functionality in areas such as (re)takaful claims and accounting.

The combination will help accelerate the development of the QFC and our ambition to become a hub for the GCC region and beyond.

Q: How about some of the softer business issues that might influence the choice of the GCC as a base?

A:

The region is two hours ahead of London and three hours behind India.

With superb airline networks, it is a perfect link between the West and East.

A lot of work has taken place across the region over the past decade to get the infrastructure up to speed. In Qatar, this includes the Doha Metro, which it is hoped will begin construction in 2011.

The new Doha International Airport is another asset.

Q: What construction projects are planned or under way in Doha and the wider region?

A:

There’s $87bn worth of projects currently under execution in Qatar and about $100bn in the pipeline over the next three years. The Pearl-Qatar development is a man-made island that will accommodate about 40,000 residents – phase one is almost complete.

The Lusail Development is a $5.5bn development, which will house 200,000 residents. Education City has campuses of universities such as Carnegie Mellon and Texas A&M, helping to build Qatar as a hub for developing local talent. And the Qatar-Bahrain Friendship Causeway will cut the travel time between Doha and Bahrain to 40 minutes. GR

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Country Focus

The sky’s the limit Panama may be small, but this plucky country has big plans. And, as Ben Dyson discovers, being sandwiched between Central and South America, politically stable and with similar rules to Lloyd’s, there are plenty of reasons to believe it can go all the way When outside investors and companies think of Latin America, the fi rst countries that typically spring to mind are the regional powerhouses of Brazil, Mexico or Argentina. But gutsy Panama, while economically much smaller than many of its neighbours, is aiming to reach the top of the list when it comes to reinsurance. It is planning to establish itself as a base of operations for international reinsurers’ Latin American forays.

According to Panama’s superintendent of insurance and reinsurance, Luis Della Togna, the country is already well on the way to becoming a regional reinsurance centre. Barents Re and QBE del Istmo Compañía de Reaseguros, which Della Togna says are the two largest fi rms in the region, both run their Latin American operations from Panama.

“These companies have contributed a large amount of written premium – around $360m combined,” he says.

But the country is not going to be satisfied with that.

At its peak in the mid-to-late 1980s, Panama’s reinsurance market comprised 22 companies, recalls Della Togna. However, the military

dictatorship of General Manuel Noriega, which ran from 1983 to 1989 and was brought to an end by US military intervention, prompted a number of departures, and the country is now only home to six fi rms.

Since then, military dictatorship has given way to democracy and the political situation in Panama is now stable. The

‘The idea is to make Panama a Latin American hub for international reinsurance companies’ Luis Della Togna, superintendent of insurance and reinsurance

country elected a new president, Ricardo Martinelli, last year, replacing previous president Martin Torrijos, who had run the country since 2004.

Against this background, Della Togna is determined to restore the Panamanian reinsurance market to its former glory. “The idea is to make

Panama a Latin American hub for international reinsurance companies,” he says.

Bigger and better Panama is certainly not going to win any contests for size. It is the 12th-largest economy just in the Latin America and Caribbean region, measured by 2009 GDP. Only three countries – Trinidad and Tobago, Jamaica and the Bahamas – are below it on the list.

But it is growing. Brazil’s and Mexico’s GDPs both fell in 2009, according to Swiss Re’s Sigma study ‘World Insurance in 2009’, while Argentina posted modest growth of 0.9%. Panama’s GDP, on the other hand, increased by 1.5% in real terms. Della Togna says he is expecting Panama’s GDP to have grown by 6.5% in 2010.

The country also has many attractive features for reinsurers. The country’s insurance market is well established.

One of Panama’s 29 insurers, Compañía Internacional de Seguros, celebrated its 100th year in business in 2010.

And the insurance industry is growing too. Della Togna says that the country’s premium volume has doubled over the past five years to around £1bn, and that 2010 premium volume is 11.5% up on the previous year’s. He adds that six new insurance companies have set up in Panama over the past three years.

“We believe they have been taking advantage of the growth in the economy and the industrial sector,” Della Togna says. “They have brought innovation and new ways of doing insurance

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Country Focus business, contributing to the dynamic growth of insurance in Panama.”

There is also plenty of potential for future growth. Insurance penetration (premiums as a percentage of GDP) in Panama is 3.5%, compared with 8% in the USA and 7.6% in Europe, according to the Swiss Re study.

Equally, insurance density (insurance premiums per person) in Panama is $245, compared with $3,710 in the USA and $1,861 in Europe.

Move over, Brazil In addition to political stability, a number of development projects are providing a boost for the economy and more insurable risks, both of which should prove attractive to reinsurers.

One notable project is the $6bn enlargement of the Panama Canal, which will allow it to accommodate larger vessels. Work on the Panama Metro subway system is expected to begin in January 2011.

According to Della Togna, there is a slew of other developments under way, ranging from government-funded projects, such as new ports and roads, to new private developments such as hotels, offices and apartment blocks.

But it is unlikely that reinsurance companies would set up in Panama solely to write local business. The real pull for the big global groups is likely to be access to the other Latin American markets. Brazil has grabbed most of the headlines on this front. In April 2008, after 11 years of waiting, the country fi nally ended the monopoly of state-run reinsurer IRB-Brasil Re and opened the market to foreign competition.

While this, coupled with the country’s size and standing in Latin America, could make Brazil a popular choice to set up a springboard into the region, Della Togna believes Panama has a number of features that could prove equally attractive to reinsurers.

For one, Panama’s official currency, the Balboa, is pegged to the US dollar, and the dollar itself is legal tender in the country. Not only does this put global reinsurers on familiar territory and remove the spectre of foreign exchange risk, but it also adds a degree of stability that some rival countries arguably lack.

Also, the stability of the political and regulatory regime is a feature that not all other Latin American countries can offer.

In addition, Panama’s geographic location – it is situated on the thin strip of land joining Central and South America – puts the other countries in the region within easy reach. “We have a central transport hub with fl ight connections to every major city in

COUNTRY FOCUS

Panama

Latin America,” says Gerardo Garcia, general director and chief underwriting officer of Barents Re, Panama’s largest reinsurer. “In less than two-and-a-half hours, you can access more than half of Latin America.”

A further attraction is that, unlike many countries in the world, where reinsurance rules are an adjunct to insurance legislation, Panama has separate and specific reinsurance regulation. Some global fi rms at least should fi nd the rules similar – they draw on those established by Lloyd’s of London in 1994, following the decision to allow companies to become members of the insurance market in addition to the wealthy individuals that had previously made up its membership.

What global firms want The country is planning to revise its reinsurance law to make it more attractive to international reinsurers.

“We expect to be ready with a new insurance law at the beginning of 2011, and as soon as we are fi nished with that, we will start on the new reinsurance law,” Della Togna says. “We expect we will have a new reinsurance law by the end of 2011.”

Garcia adds: “The focus on the reinsurance law will be to facilitate the conducting of reinsurance business and the opening of MGAs in Panama,

and to promote Panama as a regional reinsurance hub.”

Panama is canvassing global reinsurers to fi nd out what they most want and need from a Latin American hub. Della Togna and Garcia were speaking to Global Reinsurance during a visit to London to build relationships with underwriters. Panama is hoping to boost interest from London market fi rms given the current dominance of US and European fi rms in Latin America as a whole.

“The reason for the visit is to develop a stronger working relationship with the London market, which the government feels will increase competition in the region,” Garcia says.

The more, the merrier It could be assumed that the prospect of fresh competition would be daunting to those already present in Panama.

But Garcia is convinced that more competition will be positive for Barents Re. He draws the comparison with shops selling similar items that frequently congregate on the same street or in the same area, drawing in more customers who are looking for those items and therefore boosting business for all.

“When a market becomes competitive, the market grows,” he says.

Meanwhile, Della Togna’s term as insurance and reinsurance superintendent comes to an end in 2014.

Before then, he hopes to have attracted at least an additional 10 reinsurance companies to the country, bringing in an extra $500m of premium.

Panama’s national motto is ‘Pro Mundi Beneficio’ – for the benefit of the world. If Della Togna is successful in his aims, the country’s reinsurance market would be well on the way to living up to it. GR

PANAMA COUNTRY FOCUS IS PRESENTED IN ASSOCIATION WITH:

GLOBAL REINSURANCE DECEMBER 2010/JANUARY 2011 37

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Country Focus

Q&Gerardo A with

Garcia

A:

The general director and chief underwriting officer of Panama’s largest reinsurer Barents Re gives the lowdown on his strategies and goals

We have risk matrices and systems in place. We also use analytical products from partners such as Aon Benfield to help us determine the adequate reserve-to-capital ratio, and we have a very strong actuarial team that monitors our risk-to-capital levels.

Q: How would you describe Barents Re’s strategy?

Q: In which business lines is Barents Re strongest?

A:

Barents Re is a specialist niche reinsurer. We aim to grow in niche market areas that are not necessarily the biggest premium generators but give us the best combined ratio.

We are usually described as the most innovative reinsurer in the region because of our direct development approach. In the developed world, reinsurers do not design insurance products. The broker brings you business, and you either accept it or decline it based on your underwriting criteria. In our market, it doesn’t work that way. If we did that, there would be no way for us to compete with the big global reinsurers.

We partner with insurance companies, large clients, municipalities and utilities to design a specific insurance product that provides adequate coverage for clients’ needs. We have, for example, products that cost 50 cents a month, that cover specific benefits for disability and loss of income. These products are typically tied into either banking relationships or utility services. For example, we do unemployment cover for electric companies and cable television companies.

The products developed in Latin America are specifically for countries where incomes are lower but people have need for coverage. The benefit of massmarket products is that the diversification is substantial and therefore the loss aggregate is diminished.

Q:

What are your goals?

A:

Our aim in the region is never to be the biggest reinsurer by premium

volume, but to be the most profitable with the most adequate loss ratio. Our loss ratio at the end of the year was 58%.

As we are a privately held reinsurer, most of our profits are reinvested, so we have been able to grow our capital.

This year, we plan to have an equity of slightly over $100m.

Our aim is to be the most profitable reinsurer in the region.

Our underwriting discipline and reinvestment have allowed us to have the highest rating of any regional reinsurer in Latin America, which is an A- from AM Best. We feel that we are ideally situated and we will continue to focus on innovation.

We also want to march to the beat of our own drum. We are basically a facultative reinsurer, which allows us to have total control of our underwriting process, and that has had an effect on the results we have had year after year.

In 2011, we are planning to reduce our size in terms of premium. We will increase our capital base. We don’t go after premium. We like to have a risk allocation we feel comfortable with.

Q:

A:

Barents Re is mainly a reinsurer of affinity business, financial lines, surety, civil responsibility and personal accident.

Q: Where do you see the biggest opportunities to grow?

A:

We are involved in a strategic venture to start an operation within Latin America and we are also analysing possible joint ventures with limited risk exposures on our side to develop an operation headed in Zurich and based in the MENA (Middle East and North Africa) region to underwrite specific tailored businesses in that region.

Also, Barents Re has insurance companies in some countries in Latin America and we plan to expand this reach within the next year. We are also thinking of establishing MGAs as underwriting units in London or Zurich.

Sometimes there is business from Latin America that goes to London and a broker needs to place it, but Barents Re is considered too far away.

What is the significance for you of the A- rating you were awarded in September by AM Best?

Q: Why is the MENA region particularly attractive?

A:

A:

We are the only major regional reinsurer with this level of rating because most of the reinsurers are limited in their rating scale by the sovereign ceiling of the country where they operate. It is very difficult for a reinsurer to obtain an A rating because it is several notches above the sovereign ceiling.

Q:

How do you ensure your underwriting is profitable?

It is the only region we feel has some similarities to Latin America, in terms of culture and level of development. This allows us to use what we have learned to add value and develop new products.

Q:

What is your biggest challenge?

A: Obtaining sufficient retro capacity to protect our capital base and sustain our underwriting growth. GR

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03/12/2010 16:46

Rewind

Monty It’s that time of year again – and it just feels like one long Christmas party

Game of Twister anyone?

of having to make intelligent comments about the industry, accompanied by a big picture of my mug, is not so appealing.

It pains me to say it, but we brokers are hurting at the moment, what with dwindling rates, lower demand and brutal competition. I’m alright of course – nobody would dare take my business – but I can’t help feeling that all this trouble is going to result in some serious M&A activity. There will be teams shifting around, as always, but I’m thinking bigger. I get the feeling that Guy Carpenter is still miffed that Aon got Benfield, so my money’s on MMC making a play for Willis and giving Willis Re to Carpenter. There’s always JLT as well, which everyone seems to think is on the market.

I know everyone views the Keswicks as unlikely sellers, but everyone has a price, don’t they?

What a cracker Speaking of uncomfortable, I did wince a bit during Lloyd’s performance management director Tom Bolt’s speech at the Baden-Baden symposium this year. In an effort to illustrate the tight-knit nature of the London market, he said it was possible for brokers to fold their slips into paper aeroplanes and throw them into Lloyd’s. Then he added: “Sometimes it appears they have done so.” Ouch.

The big fi lm If you’re anything like me, you’re no fan of one-time New York attorney general and scourge of the insurance industry Eliot Spitzer. How much did he end up costing brokers? It’s therefore with some delight that I notice they have made a fi lm about his little, ahem, indiscretions, called Client 9. Better yet, the makers got ex-AIG chief Hank Greenberg to put the boot in. One review says he gives Spitzer a proper tonguelashing, even blaming him for the fi nancial crisis. Good old Hank.

I’m surprised he didn’t take his baseball bat to Spitzer years ago.

The fi lm’s not released in the UK yet, but I’ll defi nitely be going.

It’s behind you …

In these tough times, it’s nice to hear someone’s doing alright – even if it is a rival. RFIB, which started out as Robert Fleming Insurance Brokers, recently celebrated its 30th year in the business, and by all accounts it’s still going strong. What’s just as pleasing to note is that this strong track record came from distinctly shaky beginnings. At one recent do, RFIB chief executive Marshall King recounted a tale of the excited RFIB broker who returned from the underwriting room 30 years ago with the company’s fi rst fully signed slip.

Only trouble was, the plonker had forgotten to allow for any brokerage on there.

Guessing games RFIB is not the only one-time shy and retiring Lloyd’s broker making a lot more noise lately. The fi rst issue of BMS’s new magazine – yes, you read that right – popped into my inbox a little while ago, stuffed full of interviews with senior executives.

I have to say, I’m not sure I’m comfortable with where all this is going. I don’t mind slagging people off under the veil of anonymity, but the thought

I don’t mind slagging people off under the veil of anonymity, but …

… and the royal toast Some of you may have noticed that Lloyd’s insurer Novae was the principal sponsor of this year’s Prince’s Trust Rock Gala in London, which took place on 17 November at the Royal Albert Hall. As mastermind of the sponsorship deal, I understand that Novae chief underwriting officer Peter Matson and his wife got to sit next to Charles and Camilla for the performance, and even got to have a bit of a chinwag with the prince. How much did it cost Novae to sponsor the bash, I wonder? No doubt a princely sum. GR

40 DECEMBER 2010/JANUARY 2011 GLOBAL REINSURANCE

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