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FEBRUARY 2011

In the shadow of giants Can mid-level brokers find ways to compete with the big three?

LOVE THY CEDANT

REINSURERS IN SPACE

How to keep all your business allies sweet

Launching into specialist satellite cover

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How do we keep dreams alive in an uncertain world?

If you want to build the stuff of dreams, having vision isn’t enough. You need others who share your visions — others who offer more knowledge and insight to make it all happen. As one of the world’s largest reinsurers, Munich Re has more know-how, more global reach, and more capacity to think and act in order to make the world’s biggest and most ambitious projects a reality.

To find out how to make your dreams happen, check out our website at www.munichre.com NOT IF, BUT HOW

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Cover image: Daviz

Perhaps the reinsurance market can learn something from the world of equities trading

Leader

As this month’s cover story shows, a war of words is raging between large brokers and smaller independents about who can best serve clients. But a particularly interesting shot was fi red in the debate: one source suggested that brokers with stockmarket listings are only serving their shareholders, leaving clients as second-class citizens.

This raises an important question: how do you tell if your broker is acting in your best interests?

Perhaps the reinsurance market can learn something here from the world of equities trading.

Back in November 2007, the European Commission brought the Markets in Financial Instruments Directive (MifId) into force, which enshrined in regulation the concept of ‘best execution’ – that the stockbroker trading shares on behalf of a client must achieve the best possible outcome for the client.

The concept is not confi ned to simply achieving best price. For example, a client may simply want to sell shares as quickly as possible, irrespective of price. MifId also requires brokers to demonstrate

to clients on request that they have made every effort to achieve their desired result.

Such a concept could easily be extended to the insurance and reinsurance industries. There are many parallels with Mifid’s concept of best execution. For example, cedants are not necessarily always looking for the cheapest reinsurance programme but the one that most adequately covers their risks.

(Re)insurance brokers could easily argue, as some stockbrokers did, that such a regulation is superfluous because they already make every effort to ensure they get the most appropriate deal for their clients.

After all, a broker not doing this would surely lose business rapidly.

Also, the burden of compliance could be onerous.

But such a regulation could help silence the nagging voices in clients’ heads that the brokers are in it more for themselves.

Ben Dyson Assistant editor Global Reinsurance GLOBAL REINSURANCE FEBRUARY 2011 1

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February Chaucer chiefs, page 20

G LOBAL RE I NSU RANCE.COM

Cedant talks, page 28

The final frontier, page 30

News

Cedants

1

Leader

26 Love’s labours

4

News digest

28 Q&A

8

News analysis

Aspen’s risk distribution head Robin Clark talks tactics

Munich Re’s oil spill consortium; highs and

lows of rates and renewals; implications of the World Cup in Qatar

14 News agenda

How to nurture your business relationships

Are the industry giants too big for their boots?

Lines & Risks 30 Watch this space

The sky’s the limit for satellite insurers

People & Opinion

Legal & Professional

18 Igor Best-Devereaux

34 Peacetime settlements

20 A league of their own

We must move with the times

The landmark legal cases

setting precedents for future reinsurance litigation

Chaucer’s heads know the value of

positive thinking

24 Clarke’s tale

Miller boss Graham Clarke is quietly confident

about some big growth plans

40 Diary

Country Focus 37 Dipping down under

Monty has been converted to the merits of the iPad

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

Assistant editor Ben Dyson Tel +44 (0)20 7618 3480 Email ben.dyson@globalreinsurance.com

Sales director Jonathan Trinder Tel +44 (0)20 7618 3423 Email jonathan.trinder@globalreinsurance.com

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

Business development manager Donna Penfold Tel +44 (0)20 7618 3426 Email donna.penfold@globalreinsurance.com

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

outside loss-hit areas

Subscriptions For all subscription enquiries please contact: Global Reinsurance Subscriptions, CDS Global, Tower House, Lathkill Street, Sovereign Park, Market Harborough, Leicestershire LE16 9HF Tel +44 (0)845 313 7557 Email newsquest@subscription.co.uk Annual subscription rate £269 UK • €410 Europe • $530 US/RoW Two-year subscription rate £455 UK • €697 Europe • $899 US/RoW Three-year subscription rate £599 UK • €920 Europe • $1,190 US/RoW Printed by Warners Midlands Plc ISSN 1358-7420

Rates keep falling in Australia

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 © 2011 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

the consequences of any inaccuracies, errors or omissions in such information whether occurring during the processing of such information for the publication or otherwise. No representations, whether within the meaning of the Misrepresentation Act 1967 or otherwise, warranties or endorsements of any information contained herein are given or intended and full verification of all information appearing in this publication must be sought from the respected contributor. The publication of the articles contained herein does not necessarily imply that any opinions therein are necessarily those of the publishers.

2 FEBRUARY 2011 GLOBAL REINSURANCE

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News Digest Queensland floods: Insured losses could hit $5.9bn M&A

CATALINA BUYS GLACIER Catalina Holdings, a buyer of run-off companies, has agreed to acquire Swiss reinsurer Glacier Re, which went into run-off last year. The transaction is expected to complete in the fi rst quarter of 2011, reported Global Reinsurance. “Glacier Re fits our acquisition profi le well and adds significantly to our business,” said Catalina chief executive Chris Fagan. “We continue to be very acquisitive and are seeing an increased flow of run-off acquisition opportunities.” (goo.gl/wy9yc) MUNICH SNAPS UP WINDSOR Munich Re has completed the acquisition of US Medicare provider Windsor Health Group for $131m in cash through its subsidiary Munich Health North America, reported Global Reinsurance. The deal is another step in Munich Health’s strategy to strengthen its position in the US Medicare market. Munich Re announced in October that it would acquire all shares in Windsor. (goo.gl/h10uB) 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

DISASTER ZONE DECLARED Queensland was declared a disaster zone after flood waters overwhelmed threequarters of the state in late December and early January, killing at least 20 people.

Cat modelling firm AIR Worldwide has estimated insured losses could reach A$6bn (US$5.9bn), and reinsurers are expected to foot a large portion of the bill.

CATLIN ADDS BLUE RIDGE TO ITS US PORTFOLIO Bermuda-based Catlin Group has purchased Blue Ridge Insurance Co (BRIC) from QBE Insurance Group, reported Insurance Journal. Catlin will rename the newcomer to its portfolio Catlin Indemnity Co, and expects to begin writing business through this company in the second quarter of 2011. Under the terms of the purchase agreement, all business previously written

by BRIC will be retained by QBE Insurance and all existing liabilities have been reinsured

by General Casualty Company of Wisconsin (GCW). President and chief executive of Catlin USA Richard Banas said that Catlin’s US-based insurance companies “have quadrupled in size over the past four years”. He added that the acquisition will help facilitate future growth in this part of the company’s business.

The fi rm has also confi rmed that the sale was approved by the insurance commissioner of Wisconsin.

Insurance LOCKTON HEADS TO BEIJING Broking group Lockton has been given the go-ahead from the China Insurance Regulatory Commission to open in China, reported Global Reinsurance.

The Beijing branch office will operate as a full-service broker offering specialist insurance and reinsurance services, as well as risk management expertise to China-based companies. The office will be run by Alex Jiang, who joined Lockton last year and has overseen Lockton’s wholly owned foreign enterprise licence application process in Beijing. Jiang will report to chief executive and president for Greater China, Gerry Callaghan. (goo.gl/mN6lX)

IRONSHORE EXTENDS REACH WITH EUROPE BRANCH Bermuda-based insurer Ironshore has set up a European insurance company, Ironshore Europe, based in Dublin, reported Global Reinsurance.

Fiona Marry has been appointed chief executive. She reports to Ironshore’s board, chaired

by Mark Wheeler, who is also chief executive of Ironshore International. The division will add to Ironshore’s presence in the USA, UK, Canada and Bermuda. The company received authorisation from the Central Bank of Ireland in December.

Ironshore said it has expanded in response to global demand for insurance covering complex risks. “Ironshore Europe offers a European access point for global brokers and carriers that are either existing or new clients,” Marry said in a statement.

“The result is the creation of new distribution channels to broaden the Ironshore brand to European markets.” (goo.gl/Os6qo)

ILLUSTRATION: PATRICK BLOWER PHOTO: REX FEATURES

EVEREST PICKS CROP FIRM Insurance and reinsurance company Everest Re Group has acquired Heartland Crop Insurance’s business and operations in a deal worth around $68.5m, reported Bloomberg.

Everest said it will pay $55m for the business, based in Kansas, USA, and an undisclosed amount for the agency’s assets. Everest could pay another $13.5m based on Heartland’s performance, and will ask for approval to operate as a crop insurance provider for the 2012 crop season, which starts on 1 July.

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News Digest CG UPS MEXICO STAKE Insurance broker Cooper Gay Swett & Crawford has moved to a 100% shareholding of Mexican reinsurance arm Cooper Gay Martinez del Rio after acquiring the shares of local senior executives, reported Post. The Mexico City-based business, which has been part of Cooper Gay since 1997, specialises in providing Latin American facultative and treaty reinsurance cover across Mexico, Panama, the Dominican Republic and wider central America. Cooper Gay Martinez del Rio managing director Francisco Martinez will retain his role within the business.

n

CANOPIUS TO LAUNCH NEW EUROPEAN OPERATION Canopius Group has revealed plans to establish a reinsurance underwriting platform based in Zurich, reported Post. Canopius Europe will begin by focusing on European treaty reinsurance business and will underwrite on behalf of Canopius Group’s Syndicate 4444 at Lloyd’s, subject to consents. Canopius Europe, which will open for business in mid-2011, will be led by Eric Gutiérrez, currently senior vice-president of Ace Tempest Re International and general manager of Ace Reinsurance (Switzerland). Canopius Europe will form part of Canopius’s international operating division, led by group chief underwriting officer Jim Giordano.

Reinsurance HANNOVER GETS GREEN LIGHT FOR BIG APPLE The New York State Insurance Department has allowed German reinsurer Hannover Re to qualify as an ‘eligible reinsurer’, lowering its collateral requirements, reported Global Reinsurance.

Foreign reinsurers are required to post 100% collateral against the risks they write in New York, but as an eligible reinsurer, Hannover Re only need post 20%.

Florida was the first US state to reduce collateral requirements for foreign insurers last year.

Hannover said New York’s move is significant because the state is the largest volume market in the reinsurer’s US portfolio. (goo.gl/8BdOW)

View from Insurance Times: M&A activity ‘It’s hard to fathom why technology isn’t more of a force for change’ Igor Best-Devereux, eReinsure

>>> see People & Opinion, page 18 PROFITS WARNING ISSUED Rating agency Moody’s has warned on reinsurer profitability for 2011 in the wake of broker reports indicating reinsurance prices were down around 10% at the 1 January renewals. The price cuts are, says the agency, credit negative for reinsurers as they will put pressure on underwriting margins and profitability, reported Reactions.

Moody’s vice-president James Eck said: “Unless there’s a transformational catastrophic event, we expect pricing to continue to deteriorate in 2011. The eventual ‘turn’ in the reinsurance pricing cycle may still be two or more years away.”

Food production The World Economic Forum’s Global Risk report painted a troubling picture of future food security. Swiss Re reported future agricultural production will require significant government investment. But,equally, a lack of agricultural insurance in disease and adverse weather-prone areas will leave governments open to serious risk.

Map according to food production

Map according to agricultural insurance market size

70% increase in food production is necessary to feed an expected population of 9.1 billion by 2050

Speculation that RSA Insurance could be a target for takeover is tantalising the taste buds of market analysts.

Zurich Financial and Sampo are rumoured as propective bidders, although both refuse to comment.

But the likelihood of a takeover has divided the market.

Shore Capital analyst Eamonn Flanagan is confident RSA could be a target. “It’s got good market positions in key territories and some emerging markets,” he says.

According to the Independent, one trader noted that RSA‘s failed £5bn bid for UK rival Aviva in mid2010 changed it from “predator to prey”. Flanagan believes Zurich could be one such predator. “If somebody does come for RSA, I think there’ll be a counter bid: Zurich comes through, then Allianz might show its hand. Other companies might want to have a pop at RSA but might not want to be the first.”

Panmure Gordon analyst Barrie Cornes isn’t so sure a bid is imminent. “It would be an odd time to buy RSA. The UK motor market has improved rapidly, but commercial is still very soft.”

Cornes concedes that RSA’s combined ratio – consistently around 95% – means it’s a good prospect, but its valuation will count out many potential suitors.

“The valuation argument would probably rule out an acquisition,” he says.

For Cornes, the game is wide open. Any potential bidder must convince RSA’s shareholders they are not playing a zero-sum game.

Cornes says RSA’s shareholders are not unhappy with the company’s performance, so any bid will need a serious sweetener.

“If someone were to offer 30% on the share price,” he says, “I’m sure there would be a lot of interest from the shareholders.”

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

.co.uk

DATA: GFK GEOMARKETING, SWISS RE GEO SERVICES, FAOSTAT 2009 ESTIMATIONS, SWISS RE

GLOBAL REINSURANCE FEBRUARY 2011 5

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News Digest

The world is in no position to face new shocks, weakened as it is by the financial crisis, warned the World Economic Forum’s (WEF) latest global risk analysis.

Of the 37 interconnected global risks identified by the report, the five most challenging issues are: cyber security; demographic changes; resource security; retrenchment from globalisation; and weapons of mass destruction.

The WEF identified the links between economic, political, environmental and social problems, but said government and society are less able than ever to deal with them. If so, there is surely more emphasis on the private sector to manage these risks rather than relying on governments.

The WEF also highlighted the biggest paradox of the 21st century: as the world grows together, it is also growing apart.

Globalisation has made the world more interconnected and interdependent, but there are also signs of resurgent nationalism.

To meet these challenges we need strong global governance frameworks. Yet conflicting interests are proving a major stumbling block – take the failure of the Copenhagen climate summit in December 2009.

The rapid spread of risks highlighted by the WEF suggests risk management systems need to be equally rapid at identifying and responding to threats.

Given the complexity of the risk landscape, organisations need to focus more on risk resiliency.

Rather than trying to identify risk scenarios, resources may be better spent understanding what you can do to survive. Try to understand how a risk could impact your business rather than creating the perfect risk register.

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

.co.uk

Chile: Home of the world’s most exp Claims QUAKE LOSSES REVISED Bermuda-based reinsurer PartnerRe raised its loss estimate from September’s earthquake in New Zealand to between $140m and $160m, from its initial estimate of $64m, reported Global Reinsurance. The revision is based on a review of recent information from several cedants and reflects the higher than expected number of new claims fi led in November and December, the company said. It also reflects engineering reports regarding the extent of land damage. PartnerRe now expects a total industry loss of between $4.5bn and $5bn. (goo.gl/HfrAh) WEATHER HITS INSURERS Insurers were hit with $37bn of losses from global natural disasters in 2010, rising from $22bn in 2009, according to reinsurance giant Munich Re. Last year, a total of 950 natural catastrophes were recorded, nine-tenths of which were weather-related events such as storms and floods, reported Global Reinsurance. (goo.gl/oECNb)

‘Premium for the whole market is $700m – some people are one loss away from serious trouble’ David Wade, Atrium Space

>>> see Lines & Risks, page 30

CATLIN COUNTS QUAKE LOSS Catlin revealed that losses from the New Zealand earthquake in September were $10m more than previously thought. The vast majority of losses are due to reinsurance underwritten in London and Bermuda, reported Insurance Times. Total losses from the earthquake are between $5.5bn and $6bn. (goo.gl/uI7f0) RFIB ASSESSES OZ FLOODING Reinsurers are expected to be hit with large claims following floods in Queensland, reported Global Insurance. Lloyd’s broker RFIB director of international Simon Barnes said: “That will affect the reinsurance market.

It’s going to be a big loss, especially if Brisbane is really badly hit. Suncorp and AIG buy big programmes. And there’s the question of what QBE has in the market.” (goo.gl/8e5vF)

ASPEN LOSS DEEPENS Bermuda-based (re)insurer Aspen has increased its pre-tax loss estimate from September’s earthquake in New Zealand to $53m from $20m, net of reinstatement premiums, reported Insurance Times.

The new figure equates to an after-tax loss of $47m. Aspen said its loss is consistent with a total industry loss of NZ$5.5bn (US$4.1bn) for the earthquake.

The upward revision reflects new information and is mainly down to one large domestic New Zealand cedant, which comprises approximately 81% of Aspen’s total loss estimate for this event. (goo.gl/BcauP) 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

PHOTOS: CARL COURT, REX FEATURES, GETTY IMAGES

View from Strategic Risk: Globalisation

6 FEBRUARY 2011 GLOBAL REINSURANCE

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News Digest expensive catastr ophe in 2010

CHILE QUAKE MOST COSTLY The 8.8 magnitude earthquake – and resulting tsunami – that hit Chile in February 2010 was the most expensive natural catastrophe of last year. Munich Re figures show overall losses of $30bn and insured losses of $8bn.

Regulation SOLVENCY II DATE CONFIRMED The implementation date for Solvency II has fi nally been confi rmed as 31 December 2012, reported Insurance Times. The original date was 1 November 2012. Confi rmation came with the publication of the European Commission’s Omnibus II, a document with the Solvency II regulation. Omnibus II allows the European Commission to fast-track changes to some areas of insurance supervision and regulation without going to the European Parliament. (goo.gl/vglmg)

People BAHRAIN BOSS JOINS RFIB Lloyd’s insurance and reinsurance broker RFIB has named Neil Baker divisional director of financial and professional risks, reported Global Reinsurance. He will oversee the production and placing of financial institutionrelated risks in the London and overseas markets, focusing on the Middle East and India. He has worked in Saudi Arabia and Bahrain, and was formerly deputy general manager at the Bahrain National Insurance Company. (goo.gl/hHDun)

CANTLAY QUITS AON Charlie Cantlay, chairman of reinsurance broker Aon Benfield’s UK operation and its Global ReSpecialty team, will leave the company on 1 April after 35 years with the fi rm, reported Global Reinsurance.

Aon Re, the reinsurance division of broking giant Aon, merged with fellow reinsurance broker Benfield in December 2008.

Before the merger, Cantlay chaired Aon Re’s UK business. he said: “The business is in great shape. Now is the right time for me to make this move and look at new challenges.” (goo.gl/u1bb0) ENOIZI BOWS OUT OF ARGO Julian Enoizi has resigned as chief executive of Argo’s London business, Argo International, reported Global Reinsurance.

He will step down on 4 March to pursue “other business interests”. Former PxRe chief Jeffrey Radke has been named managing director of Argo International, taking over Enoizi’s responsibility for Argo Group’s syndicate at Lloyd’s.

Enoizi resigned as chief of CNA Europe in May 2009 to become boss of Heritage Managing Agency, bought by Argo in 2008. (goo.gl/TNkU8) GUY CARP HEADS TO IBERIA Guy Carpenter has confirmed the formation of a dedicated facultative team in Iberia, reported Post. Senior vicepresident Alejandro Ramirez, senior vice-president Artur Castany and assistant vice president Antoni Galí have joined Guy Carpenter as members of the new Iberian team, which also includes vice-president Marta Mateos. Based in Madrid and Barcelona, the facultative team will be led by Ramirez, who will report to chief executive of Guy Carpenter Iberia Artur Reñé.

The group will focus on expanding Guy Carpenter’s facultative business in the region. Group head of facultative Massimo Reina said: “This is an important development for GCFac, as it not only represents a significant strengthening of our capabilities in Iberia, but is also the first stage in our push to establish a continental facultative platform.

‘We can make the decisions for the long term, rather than focusing on quarterly results’ Graham Clarke, Miller

>>> see Profile, page 24

Alternative risk transfer SCOR LAUNCHES CAT BOND French reinsurer SCOR has launched a €75m catastrophe bond that protects the company against European windstorms and Japanese earthquakes until March 2014, reported Global Reinsurance. The bond, which succeeds Atlas IV Reinsurance Ltd, provides similar geographical cover of €160m. Aon Benfield Securities managed the transaction. Standard & Poor’s has rated the issue at B-. (goo.gl/JlAaV) SWISS RE SECURES COVER Swiss Re obtained $106.5m of coverage from a cat bond issuance guarding against North Atlantic hurricanes, European windstorms, Californian and Japanese earthquakes, and Japanese typhoons for the next three years, reported Global Reinsurance. The bond, Vega Capital, gives coverage on a multi-peril, multi-event basis. (goo.gl/QRsAn) GLOBAL REINSURANCE FEBRUARY 2011 7

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News Analysis Oil rig insurance

Not so simple now Munich Re’s proposal to form a consortium to cover sudden oil spill disasters might be well intentioned, says Wyn Jenkins, but such a scheme may inevitably get caught up in political wrangling and regulatory changes on both sides of the Atlantic

Political issue The success or failure of the plan may not just be in the hands of the reinsurance industry. Since the Deepwater Horizon disaster, which could cost BP $60bn, politicians in the USA have been exploring ways of both ensuring such a disaster does not occur again and considering how the fi nancial burden is dealt with if it does.

Equally, in the UK the energy and climate change select committee has issued a report examining the robustness of oil operations in the North Sea and has issued recommendations around health and safety and inspection issues, and how drilling licences are awarded.

It has also looked at the liabilities surrounding spills. At present, a compensation scheme, the Offshore Pollution Liability Association, manages any liabilities from oil spills where individual insurance coverage is insufficient or the carrier defaults. The maximum liability of a single member of this scheme recently rose to $250m from $125m.

The select committee says this is inadequate and the scheme’s status is undermined by the fact that it is voluntary. It recommends scrapping the $250m cap on how much polluters pay for a clean-up.

The report also comments on the nature of the insurance coverage

many oil companies have in place. It notes that many large oil fi rms self-insure as the capacity is not otherwise available for them. The report says: “We recommend the government consider whether compulsory third-party insurance should become a necessary requirement for small exploration and production companies.”

Last October, the European Commission announced proposals that will mean member states issuing drilling licences will have to ensure that oil companies have the fi nancial means to pay for environmental damage. And the USA is in the process of overhauling its regulations, which could force companies to have substantial insurance coverage in place. Last July, regulators even retroactively removed the liability limitation regime for vessel owners for all claims arising on or after the date of the Deepwater Horizon incident.

Partly in response to this, Deepwater Horizon owner Transocean called for the UK government not to “take action that could raise insurance requirements to unsustainable levels, as a number of companies, particularly small ones, would be unable to pay the increased insurance rates”.

At a loss for capacity If regulators do push the oil industry towards prescriptive insurance solutions, the biggest problem will be where the capacity comes from.

The Aon Benfield-Munich Re consortium could be the only feasible solution.

But, equally, trying to predict regulators’ actions or what may emerge from a long political process will always be flawed. Commentators believe the reinsurance industry would do better to work with regulators to design a bespoke solution, or wait and see what is desired on both sides of the Atlantic.

“The problem is the industry is trying to anticipate what regulators will do,” says John Gurtenne, secretary of the joint marine liability and joint rig committees at the International Underwriting Association and the Lloyd’s Market Association. “I guess something will be thrashed out, but it can only be relevant in light of legislation. In the UK, the select committee might make recommendations, but there are no guarantees they will come to pass.”

Gurtenne believes the biggest problem will be insufficient capacity to meet regulators’ demands for coverage limits. “They can legislate all they like, but if the capacity is not in the market it cannot work,” he says. “They need to be careful in the USA not to shoot the oil industry in the foot and put the oil exploration industry out of business.

“If that happens, the people who will really suffer will be those in the USA. There is good legislation and bad – who knows what we might end up with?” GR

ILLUSTRATION: BRETT RYDER

When Munich Re last year proposed an insurance solution for oil rigs that could boost the third-party liability coverage available to US oil drilling operations to $20bn, the idea was cautiously welcomed. But the nature of the proposal has since changed. Crucially, Munich Re, which said it would be prepared to put up $2bn of capacity under the facility, has passed the baton to broker Aon Benfield. Aon is working with Guy Carpenter and Willis Re as placement advisers to turn Munich Re’s idea into something tangible.

That impartial brokers are championing the scheme and will ultimately manage the consortium increases its chances of success.

Aon Benfield has also said all energy retail brokers will be able to access the facility – known as SOSCover – on behalf of their clients.

The aim remains the same: to deliver a product that offers far larger limits for US deepwater drilling. The consortium has said it will work with the oil industry to give coverage that is “of value”, and to offer “limits on a per-well basis that have not been available before”.

Aon Benfield and Munich Re are making no further comment until they have partnerships in place and the details of the project are laid down in principle. This could take several months.

Other reinsurers remain broadly supportive, if sceptical, of the idea. Most reinsurers contacted by Global Reinsurance declined to comment, although SCOR confi rmed its support for the scheme.

8 FEBRUARY 2011 GLOBAL REINSURANCE

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24/01/2011 10:29

News Analysis Rate cuts

Ups and downs of renewals Dwindling reinsurance rates may seem like bad news for reinsurers and good news for buyers, but the reality is less simple. Ben Dyson reports that falling premiums are rebalancing the market, but could also result in less choice for cedants

“From a trusted partner perspective, the partners our clients are The consensus from reinsurance brokers is that rates fell on average trading with have the highest capital levels they have ever had,” he by between 5% and 10% at the 1 January renewals – the most says. “Although reinsurers are doing large share buy-backs, they are important renewals date in the reinsurance calendar. generally ending the year with more capital than they started with.”

Rate increases were strictly confi ned to loss-hit areas such as Chile – whose February earthquake was the year’s biggest single natural Pricing differential catastrophe insured loss – and cost the industry $8bn.

While at fi rst glance the rate cuts look like bad news for reinsurers One of the issues highlighted in the Willis Re report is the pricing and good news for buyers, some believe there are positives to be differential between insurers and reinsurers, which, despite found for the whole industry in the renewals reports. Others say the predictions to the contrary, is not believed to have narrowed. “As a rate cuts could be negative for buyers in some respects. result, primary carriers are purchasing less, particularly in casualty There can be little doubt that the price declines will disappoint lines, and reinsurers are seeing reducing premium volumes,” reinsurers. While they cannot have expected across-the-board Willis Re chief executive Peter Hearn wrote in the report. increases given their experiences and the indications of 2010 – According to Ehrhart, the 1 January renewals have at least partially despite suggestions that poor redressed the balance. “We investment returns and lower have made progress towards January 2011 renewals reserve releases would keep a closing the gap on existing Rate on line changes Capacity changes Retention changes lid on decreases – the numbers transactions,” he says. “The Personal lines: national serve as a stern reminder that a reinsurance price decreases Light -10% to flat +5% to +10% Stable to +10% soft market is well on the way. have reflected those in the Medium Flat to +10% Stable to +5% Stable It is also true that buyers primary market, and then Heavy +10% to +20% -5% to -15% -5% to -10% will celebrate the rate cuts. ceding commissions and other Personal Lines: regional Light -10% to flat +10% to +15% Stable to +10% Cheaper reinsurance in today’s terms were eased to provide Medium Flat to +15% Stable to +5% Stable harsh economic environment, another 5%-10% reduction.”

Heavy +15% to +25% -5% to -10% Stable in which insurers are also As a result, reinsurance rates Standard commercial lines suffering from rate falls and are at least keeping pace with, Light -10% to flat +5% to +10% Stable to +10% Medium Flat to +10% Stable to +5% Stable dwindling demand, will and in some cases falling faster Heavy +10% to +20% -5% to -15% Stable to -5% be welcome. than, the underlying insurance Complex commercial lines “For reinsurance buyers this prices. “This means that the Light -10% to flat +5% to +10% Stable to +10% was a very successful renewal partnership between insurers Medium Flat to +15% Stable Stable Heavy +15% to +30% -5% to -15% Stable to +20% period all over the world, even and reinsurers has been renewed.

Light: catastrophe losses cause 0%-5% decrease in reinsurer capital; Medium: catastrophe losses cause 5%-10% in catastrophe-affected areas,” They are in sync,” Ehrhart says. decrease in reinsurer capital; Heavy: catastrophe losses cause 10%-20% decrease in reinsurer capital says Aon Benfield chief strategy However, business lost Data: Aon Benfield Analytics officer Bryon Ehrhart. “In places through differing opinions such as Chile and New Zealand, about price has yet to be where you have had events, the effect on consumers and businesses regained. Several years ago, reinsurers and their customers disagreed has been limited. A lot of that has to do with the value of reinsurance. about the potential loss ratios of certain casualty business – reinsurers Most of that loss can be transferred into the international reinsurance expected loss experience to be worse than insurers did. As a result, market, where there has been a very small amount of price change insurers opted to retain the risk rather than buy reinsurance. Over related to those actual events.” time, the business has performed better than even the insurers had estimated, so they are keen to hang on to it.

Ehrhart hopes progress will also be made here. “It was a failing of Hidden pitfalls But some suggest the rate cuts could have hidden pitfalls for buyers. the reinsurance market to serve the insurers. That is recognised and In its renewals report, rival broker Willis Re points out that reinsurers’ we as brokers are working with reinsurers to address that.” returns will dwindle as a result of the rate cuts, and that any shocks While the recent renewal season may be a net positive for from underwriting or capital events could cause a spike in rates. reinsurance buyers, it could disappoint those who welcome choice.

While acknowledging that falling rates are reducing reinsurers’ Ehrhart believes the prospect of dwindling returns could prompt expected underwriting returns, Ehrhart counters that reinsurers more merger activity in the reinsurance industry. “There is room for are stronger than ever and show little sign of weakening. According two to five more significant reinsurer mergers in 2011 and 2012,” he to Aon Benfield, the reinsurers it works with are likely to report says. “The numbers will make that conclusion clearer, because the combined capital of $465bn for the full year of 2010, down slightly expected returns have again reduced. If you take 5%-10% off the top from the $470bn they had at the nine-month stage. line, that tends to have a more dramatic effect on the bottom line.” GR 10 FEBRUARY 2011 GLOBAL REINSURANCE

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News Analysis Middle East

Qatar break As the diminutive Arab emirate limbers up for the huge logistical challenge that is the 2022 World Cup, Ben Dyson assesses whether this high-profile footballing event will register on global (re)insurers’ score cards

Extensive development The stadiums are just the tip of the iceberg, however. FIFA’s evaluation of Qatar’s bid contains details of extensive development spanning property, infrastructure, transport and telecoms. The nation offered FIFA two options for accommodation and training facilities: either a traditional World Cup set-up, with venue-specific team hotels and training facilities, or a ‘team base camp’ concept.

Facilities for the more traditional proposal have been contracted but not yet built. If FIFA plumps for the team base camp approach, 54 of the 64 accommodation solutions have yet to be devised.

And that’s just the team accommodation. For spectators, Qatar plans to more than double its number of hotel rooms, adding 55,530 rooms to its existing 45,000 across the seven host cities. Of the 240 properties proposed for accommodation, only 100 already exist.

There are also construction projects under way that must be in place for the event. One big consideration is transport. There will be significant development of the transport infrastructure, based on a transport masterplan adopted in 2006.

Key to the plan are metro and rail systems, with an estimated budget of $24bn. The Qatari government has also committed to spending

$20bn on its road system over the next five years and is building a $13bn new airport to replace the existing Doha International Airport.

Premium squeeze While potentially large, there is a possibility that premium for the construction risks might not be quite enough to whet the global (re)insurance market’s appetite. Construction budgets are likely to be tight, so premiums might be squeezed to get the maximum value.

“It will be a significant construction and insurance opportunity, there’s no question,” says the broker source. “But one can expect such a high-profi le account to be cut back on.” He adds that protection will be needed while the event is running, including counter-terrorism, might attract more interest from (re)insurers.

According to FIFA’s evaluation of Qatar’s bid, the country expects insurance spend relating to its hosting of the World Cup to be $8.8m, including $200m of cover for postponement or relocation of events. But if the recent event in South Africa is anything to go by, the total spend will be many times that amount. FIFA reportedly spent $9.8bn on coverage in South Africa, including £3.2bn for stadiums, plus £3bn for other businesses.

Capital markets could also play a role. FIFA has been known to employ insurance-linked securities to cover certain World Cup-related risks.

The association issued a $260m catastrophe bond to cover the risk of the 2002 World Cup being cancelled, and followed this up with a similar structure to cover the 2006 event.

Insuring and reinsuring the wide range of development projects Qatar has in the pipeline is likely to be a big talking point of the MultaQa event next month (see below). The event will cover topics such as the drivers for insurance growth in the Gulf Cooperation Council (GCC) countries.

Meanwhile, although hosting the World Cup will be a challenge for Qatar, it is likely to rise to it. As the broker says: “I have absolutely no doubt in my mind that Qatar will spend the required amount of money and achieve its target.” GR

■ Hosted by the Qatar Financial Centre Authority, in assocation with Global Reinsurance, the fifth annual MultaQa conference takes place on 14-15 March in Doha, Qatar. The event will be attended by over 250 international senior (re)insurance executives, and will examine the prospects and challenges of growth, competition and regulation in the GCC (re)insurance market. Attendance at the event is by invitation only.

For more information, go to globalreinsurance.com/qatar.

ILLUSTRATION: BRETT RYDER

Qatar is no stranger to putting on large sporting events. It staged the Asian Games in 2006 and, as Global Reinsurance went to press, it was holding the Asian Football Confederation’s Asian Cup. Even so, news in December that football association FIFA had decided to allow Qatar to host the 2022 World Cup raised a few eyebrows. Not because anyone doubts the Middle Eastern state will do a good job; simply that the size of the event will mean a huge overhaul of this relatively small country’s infrastructure.

To put the project into perspective, while the 2006 Asian Games played host to 50,000 spectators and 20,000 athletes, there were 3.18 million attendees across the 2010 World Cup in South Africa, with average attendance per match at 49,670. “This will be like a life-changing experience for Qatar,” says a broker source.

According to FIFA’s assessment of Qatar’s bid, the nation has projected there will be around 2.9 million tickets on sale, although this may be reviewed in line with the construction schedule.

The project means plenty of opportunities for the local and global (re)insurance industry. Construction work alone is likely to involve large and complex policies.

In its bid, Qatar has envisaged spending $3bn on 12 stadiums, three of which would be renovations of existing stadiums. After the event, modular sections of the stadiums will be reused to construct 22 stadiums in developing countries.

12 FEBRUARY 2011 GLOBAL REINSURANCE

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News Agenda

Bridging the gap

The chasm between the big three brokers and the next tier is wider than ever. With great scale comes great analytics and global reach but, Ben Dyson asks, is that what all clients want? Or is there is an opportunity for smaller players to step up with a more personal and creative service?

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News Agenda It takes size and vast resources to truly make it as a reinsurance broker in today’s market. At least, that is the message from those at the top of the league tables.

“If you look at the industry as a whole from a competitive standpoint, it has very much become an oligopoly, with relatively few companies having the ability to invest in those services and capabilities that our clients are looking for brokers to provide,” Guy Carpenter’s Americas chairman Pat Denzer told Global Reinsurance last November.

Denzer was formerly president and chief executive of US reinsurance broker Collins, which Guy Carpenter – the world’s second-largest reinsurance broker – bought in April 2009. “We knew that being able to come into a platform where the scale was available, and where there was a commitment to building out scale, was important,” he says.

Aon Benfield chief strategy officer Bryon Ehrhart agrees. “A reinsurance broker needs a pretty large platform these days to do the analysis that’s needed for even a medium-sized insurer,” he says. “I’m not saying it’s impossible or hopeless, but I think it is harder now for a small broker.”

Go large There is plenty of evidence to support the ‘bigger is better’ argument. As in the insurance market, reinsurance broking is dominated by the ‘big three’ – Aon, Marsh & McLennan Companies and Willis – through their respective reinsurance broking operations Aon Benfield, Guy Carpenter and Willis Re. There is a huge gap between the top three and Cooper Gay Swett & Crawford, the fourth-largest according to rating agency AM Best’s 2010 reinsurance broker ranking, based on 2009 revenues.

The largest brokers have spent millions of dollars developing various analytical services to help their clients, the reinsurance buyers, do their jobs more effectively. Services include catastrophe modelling, capital modelling and dynamic financial analysis.

Smaller brokers can only dream of matching the spend the top three have invested in their analytical capabilities.

Aon Benfield has 450 analytics professionals – a team that dwarfs the entire reinsurance units of most of its competitors. Towers Watson’s London market reinsurance operation is 200 strong, for example, and Cooper Gay’s reinsurance team employs around 51 people.

The largest reinsurance brokers also have global reach. While some of the mid-tier brokers offer services in a number of key markets around the

world, their overseas offices cannot hope to compete with the large branch networks of the biggest fi rms. Aon, Aon Benfield’s parent, has a presence in 120 countries, for example.

When it comes to launching in new markets, the bigger brokers are likely to get there faster and in greater numbers.

“They have got the fi nancial resource to run a loss-making operation in a territory for years if they think that the long-term play is worthwhile,” Cooper Gay’s managing director of reinsurance Andrew Hitchings says.

Meanwhile, life is getting tougher at the smaller end of the broking spectrum.

More stringent regulations have increased the cost of doing business and raised the barrier to entry at the bottom end of the scale. Hitchings contends that compliance teams in particular now have to be larger, and that ensuring adherence to rules is a growing part of brokers’ day-to-day business.

“If you were a specialist niche broker operating 10 years ago, you could probably survive on a relatively small turnover and make a decent profit on it,” he says. “But the fi xed costs of trading have no doubt put a lot of pressure on a lot of small companies and in some cases made them completely unviable.”

While he says that there is no such thing as a minimum turnover for a London market broker, Hitchings believes those bringing in revenue in the low single-digit millions of pounds are likely to struggle.

Size isn’t everything But cracks in the big three’s apparent stranglehold on the market are starting to appear. For some, the biggest reinsurance brokers have simply gotten too big. The 2008 merger of Aon Benfield, for example, which cemented Aon Re’s position at the top of the pile, prompted a staff exodus from the fi rm.

Smaller London market rival Miller picked up around 38 departing Aon Benfield brokers.

One broker who made the switch from a small to large fi rm reports that while working for a smaller fi rm, they spent 90% of their time serving clients and 10% of their time on internal matters. At the larger fi rm this switched to 70% on internal matters because of the size and complexity of the bigger company.

Employees are not the only ones who are growing frustrated with the larger brokers’ business approach and slower, more impersonal service. Some buyers’ patience with the top-tier brokers also appears to be wearing thin.

“The message we have from buyers is that they are desperately trying to do

something with those other than the big brokers,” Miller’s head of facultative reinsurance Mike Papworth says.

“They are working with the big brokers because they feel they have to, not because they want to.”

Chief executive of the world’s seventhlargest broker BMS, Carl Beardmore, also detects a weariness among cedants with the large brokers’ tendency to throw their weight around.

‘The message I am getting is that clients and producers are becoming a little concerned about the sheer domination of the big guys’ Carl Beardmore, BMS

“Without wanting to sound critical of the big brokers, they, to some degree understandably, have worked very hard to get themselves into a position where they can apply a lot of leverage from a lot of directions to persuade clients to use them,” he says.

“The message I am getting very clearly from the marketplace, whether it is from clients or producers, is that they are becoming constrained and a little bit concerned about the sheer domination of the big guys, and clients in particular are questioning whether they are getting truly dispassionate advice.”

Smaller brokers believe that because of their smaller, simpler structures, they can offer a superior service than the behemoths. Being able to provide clients with a single contact that manages their business through the entire process is a big competitive advantage, they argue.

“The big three do a fantastic job, there’s no doubt,” Hitchings says. “But with personal ownership of business, you are going to walk that extra mile to get the job done for your client. Our business is a service business, and our clients expect that from us.”

Fighting back While it is true that cedants value brokers’ analytical capabilities – they received a strong vote of confidence from buyers in a recent issue of Global Reinsurance (‘Don’t treat us as just another cedant’, September 2010) – some of the smaller brokers, while acknowledging the quality of their GLOBAL REINSURANCE FEBRUARY 2011 15

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News Agenda bigger rivals’ offerings, contend that it is not necessary to spend millions of dollars to provide a good service.

For example, Cooper Gay, rather than developing analytics in-house, has formed a partnership with independent provider Underwriting Management and Actuarial Consultancy Services.

The company believes offering third-party consulting and analytics rather than in-house equivalents is a competitive advantage because of the independence of the advice.

The larger brokers are clearly relying heavily on their superior analytical capabilities as a competitive differentiator. But some firms contend that while the advisory and analytical side of broking is important, its importance is waning.

“It is not the be-all and end-all,” Hitchings says. “A lot of companies, especially now with Solvency II, are having to perform their own actuarial analysis without any input from brokers at all. Solvency II will require these companies to demonstrate that they have been through internal actuarial processes to hit the Solvency II targets.

They won’t be able to completely rely on a broker’s input; they have got to be able to do it themselves.”

Some even argue that the provision of analytics could soon shift away from reinsurance brokers altogether. Analytics and modelling are currently available at many points in the reinsurance chain – the cedant, the broker, the reinsurer, and independent third parties.

Papworth recalls that the primary insurance market was similarly served around a decade ago, but the provision of analytics shifted away from the broker towards independent professionals. He predicts the same will eventually happen in reinsurance.

“The big brokers have spent hundreds of millions of pounds and so are going to say modelling is a fundamental value add,” he says. “But any major cat programme will have the same data modelled 20 or 30 times. That has got to be incredibly inefficient. In a business that is looking for efficiencies, something has to give pretty soon.”

And although the mid-tier cannot offer the same geographical reach as their bigger rivals, such a large office network is not necessary to impress all clients.

“Overall, it must be an advantage to have that global reach, but I don’t think it is a particular differentiator in an awful lot of clients’ eyes,” Beardmore says.

Run for your money Given the dissatisfaction they detect with their larger rivals’ service, small and mid-sized brokers believe they have

an ideal opportunity to capture market share from the big three with their speedier, more personal service.

But, while cedants’ frustration with the top tier may create an opening for the smaller firms, it is not a guarantee of new business. Smaller firms will still have to fight for their share. Larger brokers will certainly not take smaller brokers’ claims of poorer service lying down.

“I think that is what they would have to say,” Aon Benfield’s Ehrhart says in response to charges that larger brokers’ service is slower and less personal. “Our teams are organised in small groups that

‘I see the demand for broker analytics growing, not shrinking. Smaller firms had better have very good relationships and very good ideas’ Bryon Ehrhart, Aon Benfield

serve clients. Our goal is for clients to feel like they have people that are specifically tied to their account and that care deeply about the results we accomplish for that account. I get comments all the time from clients about how they feel like they are the only client of our fi rm.”

While some smaller brokers argue there is a disconnect between the clientfacing teams and placing teams at larger firms, Ehrhart says this is not the case at Aon Benfield. “Generally, the person handling the relationship with the client is the person who works with the client to structure the programme and is heavily involved in driving the placement,” he says. “Our brokers are true brokers and not just relationship managers.”

He adds that Aon Benfield’s operation is structured so that brokers can spend between 90% and 95% of their time focused on client matters. He also believes cedants’ demand for broker analytics will remain for some time. “I see that demand growing, not shrinking,” he says.

As they cannot match larger brokers’ analytical and capital markets fi repower, Ehrhart believes smaller fi rms “had better have very good relationships and very good ideas. And they need to be able to convince those clients that they have good relationships with markets and that they can execute those ideas from their smaller platforms as well as some of the larger fi rms.”

Smaller brokers acknowledge that winning business from their larger rivals

will be tough. Many buyers could take the attitude that it is better the devil you know. “Just as it is safer to buy IBM computers, it is perceived to be far more difficult to use an unknown or smaller brand because you just don’t know what the service is going to be like,” Papworth says. “You accept the mediocrity knowing that it’s safe rather than going with the new, exciting proposition.”

Got what it takes?

One particular challenge is that brokers are increasingly being chosen using a request for proposals (RFP) process rather than through personal relationships or recommendations.

“Efficiency, service, quick turnaround and better claims handling all add up, but it can be very hard for an independent to get into the RFP process,” says Martin Davies, a director in the London market reinsurance brokerage division of Towers Watson.

“It is not impossible, but it does come down to being clear about what you are offering and what the benefits are.”

The smaller and mid-tier brokers are convinced they have what it takes to win over cedants. “Part of the fun for us, my peer group and for the team I work with is having the time, energy and enthusiasm to come up with new ideas, putting them forward and developing the business,” Papworth says.

But the natural cycle of reinsurance broker development has changed. In the past, mega-mergers would prompt disgruntled executives to depart and set up their own small start-ups. Some feel that the cost of doing business today could limit this entrepreneurial activity.

Davies says: “While many support functions, including some aspects of compliance, can be effectively outsourced, I think one tends to see rather fewer of the star brokers setting up their own shop than we used to a number of years ago.”

Yet smaller firms do believe that market forces are on their side. “My perception from talking to an awful lot of people is that the time is right for an alternative to be developed. Clients want it, markets want it, people working in the insurance sector want it,” Beardmore says.

“In life in general, people always like to have options, and they are feeling that at the moment their options are not as great as they should be. For the mid-tier brokers especially, I think it is a period of superb opportunity.” GR FIND OUT MORE ONLINE: TOP TEAM, BIG CHANGE To read this feature, and for more on the big three and mid-tier firms, see globalreinsurance.com or goo.gl/uNOBC

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

globalreinsurance.com

HUMAN RIGHTS DETERIORATING WORLDWIDE China is now rated as one of the 10 worst countries for human rights strategicrisk.co.uk

AUSTRALIAN FLOODS COULD HIT LLOYD’S INSURERS Chaucer, Catlin, Hiscox and Lancashire profits under pressure, warns analyst insurancetimes.co.uk

In my view That’s so 1850s …

The reinsurance industry’s needs have changed since the 19th century, as has the technology available to it. So why are we still so technophobic? Igor Best-Devereux reports Technology offers so much to the reinsurance market that it’s hard to fathom why it isn’t more of a driving force for change.

This is a people business, and in the past technology has often been seen as disruptive to relationships. Still, much time, effort and money has been invested over the past 20 years into developing technology. It’s a shame the industry is still so technophobic.

Technology will always be one of the foundations of a market. If we are going to maintain an important role in risk management, the reinsurance sector must embrace this. Many of the challenges facing the industry – such as the need for more control over processes and information, cost-effective approaches to distribution and efficient capital utilisation – can only be tackled by using technology. And much of this technology is already available.

The best technology available in 1852 in Cologne included a stage coach to move information – which meant reinsurers had to be close to companies that ceded premium – and a hand-written monthly bordereau detailing assumed risks and premium.

The manual effort involved in copying and maintaining all the information available to describe exposure to a risk necessitated a less thorough approach. It wasn’t practical to hold a large volume of data, and even if it were, the processing power to do much with it did not exist. As is still the case, most risks were aggregated into treaties to make the process cheaper to manage.

Unfortunately, things haven’t changed much over the years. We now have the processing power to deal with huge volumes of data. If reinsurance treaties had only just been introduced, we would be seeking out much more data. Reinsurers would insist that

each risk be described early on in the process by a dataset that would be available online to all downstream participants. There’s no reason why this shouldn’t be our aim for all risk records, from the point of origination through to any fi nal retrocession or ultimate securitisation. Efforts by the Association for Cooperative Operations Research and Development to defi ne standardised exposure messages are long overdue.

Furthermore, unlike the 19th century, relationships in the industry today are spread across the world. Reinsurers face the challenge of rapidly distributing products

and expertise to a global customer base at a reasonable cost. The reinsurance market has always been a networked community, and the international nature of this community today means it is ideally placed to benefit from the internet – not just for transferring information, but maintaining and forming relationships through online collaboration.

Social networking is an exciting way of interacting that was not available in the past.

Another legacy that has remained is the way in which reinsurance is purchased.

The market is still segmented by treaty and facultative risk placing. We should recognise that these are merely labels that should not constrain our thoughts about how to package risks in the future. The preponderance of treaty over fac is in part owed to the costs of administering individual certificates in the absence of information technology and the difficulty inherent in controlling where, why and how reinsurance is purchased.

One reason for the renewed interest in the use of fac today is because it can be managed within a framework that supports consistency and central control, in which all parties use a common technological platform.

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People & Opinion WEF HIGHLIGHTS GOVERNANCE GAPS Economic imbalances contain the seeds for future financial crises, says report strategicrisk.co.uk

Without such technology, the fac purchased by local offices of insurers around the world can suffer from failures in execution and transparency. This example of technology adoption, in which a critical mass of participants have moved the market forward and created an important beachhead for advancement, is a bright spot.

In my view, whether reinsurance is managed in a treaty or as a facultative transaction, individual risks should be building blocks – some requiring detailed scrutiny during underwriting, some automated pricing based on predetermined underwriting criteria. Some that are unique will stand alone, while some can be packaged together for predictability or to obtain the benefits of uncorrelated risks. It should be possible to drill down on all these

Weblog Unfolding developments relating to Australia’s floods have had (re)insurers captivated since the beginning of the year. So it is of little surprise that our coverage of a turning point for reinsurers – the Brisbane River bursting its banks – got the most attention. It was at this point that reinsurers knew the losses would be big enough to hurt them.

Having been in the headlines a great deal in 2010, Switzerland burst back onto the collective consciousness of the reinsurance industry this year, with two stories from the country making the top five.

Canopius’s establishment of a Swiss reinsurance operation is further proof that the country is the new European hub of choice, particularly for Lloyd’s insurers. The story probably also gained attention because Canopius is a company with big plans – as its recent bid for rival Lloyd’s

firm Omega has demonstrated.

Readers are clearly keen to find out what the next chapter will be in the Canopius story.

Following private equityowned Swiss reinsurer Glacier Re’s decision to close its doors, it seemed likely that it would be sold to a specialist run-off buyer. Readers’ curiosity about who that would be was piqued when Catalina Holdings chief executive Chris Fagan – who has kept a low profile of late – finally broke cover.

News that Aon Benfield chairman Charlie Cantlay will be leaving in April no doubt surprised a few people – he has been with the reinsurance broker for 35 years. While he’s not yet revealed his plans, readers must be wondering where he can go from here, having served at the world’s largest broker for so long.

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

The best technology in 1852 in Cologne Up the ladder included a How did you make it to where you are today? stage coach to I had the good fortune to work with and learn from some pretty amazing people. move information unique elements rather than risks being hidden within an amorphous mass.

All the technologies necessary to support such enhancements in data management are available. There is, therefore, an opportunity for aggregators to fi nance risk more costeffectively. The transparency necessary for risk trading can exist, no matter what labels we use to describe reinsurance products.

While most of us like the fact this is a people-based business, greater user of technology to bring people together and help them move and manage information, is key to ensuring we survive and thrive. GR Igor Best-Devereux is chairman and chief executive of online reinsurance trading platform eReinsure

How has the industry changed since you first joined it?

It’s far more analytical than it was 20 years ago when we first founded RMS.

What would you say are the key challenges ahead for you and the industry?

Many of the challenges remain the same as when I began. We are all still at the early stages of understanding how to best integrate data and models into the fabric of the reinsurance enterprise.

What are the biggest opportunities?

We’re going to see a revolution in the velocity and interconnectedness of the market. Next generation information technology and analytics will be the catalyst, and it’s going to be incredibly exciting.

Online top five 1. REINSURERS TO BE HIT BY FLOOD CLAIMS 12,000 cubic metres per second from Brisbane River 2. CANOPIUS TO LAUNCH EUROPEAN REINSURER Lloyd’s insurer jumps on Zurich bandwagon 3. RUN-OFF FIRM BUYS GLACIER RE Transaction to close in Q1 4. CANTLAY TO QUIT AON BENFIELD IN APRIL Broker’s UK chairman exits after 35-year tenure 5. 2010 CATASTROPHE INSURED LOSSES TOP $37BN – MUNICH RE Second highest number of nat cats in 30 years

What advice would you give to someone starting out in catastrophe modelling?

Whether you’re creating the models or using them to support your business, prepare to make a real contribution, because we still have a lot to do.

What is the biggest mistake you’ve made?

A way to avoid mistakes is not to take risks.

Innovation is progressive and cumulative.

Engage, learn, see patterns, and make it better.

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

A pretty dynamic bunch, and I’m looking forward to 20 more years of innovation and change.

What do you do to relax?

Quality time with family and friends is a precious thing.

Hemant Shah is president and chief executive of risk modelling firm Risk Management Solutions

GLOBAL REINSURANCE FEBRUARY 2011 19

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24/01/2011 16:15

Profile

A league of

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Profile

f their own

How does Chaucer find the confidence to remain independent while being able to weather big losses? The secrets, Saxon East discovers, include an investments overhaul, a sure hand with price comparison websites and a lot of positive thinking

“I’m an optimist,” Chaucer chief executive Bob Stuchbery says, breaking into a broad grin. “You’ve got to be as a West Ham supporter.”

Chaucer has had an equally eventful time in recent years to Stuchbury’s chosen relegation-battling football team. Mysterious Russian private equity outfits snapping up shares, dangerous fl irtations with hedge funds and fighting off larger Lloyd’s predators – no wonder Chaucer has found itself so frequently in the headlines.

Stuchbery has thoughts to share on all of this, but fi rst he is here to talk about his ambitions for the (re) insurer. A key player in the fi rm’s management buy-out 12 years ago, he was chief underwriting officer until he took over as chief executive following Ewen Gilmour’s retirement on 1 January 2010. He clearly relishes this opportunity to defi ne the future of the company he loves.

Market watchers have noted Stuchbery as sharp and assured. A source says: “As an underwriter, he’s had his ups and downs, like the rest of Lloyd’s. I would say he’s a better manager than underwriter. Chaucer did well to remain independent. He’s confident and now he’s got his chance, so we’ll see how he does.”

Three-year plan Stuchbery and his board last month announced an ambitious strategy for 2011-2014. David Mead, who has been appointed chief operating officer of the company’s main subsidiary, Chaucer Syndicates, has responsibility for implementing the plan.

The strategy aims for a return on capital that is consistently among the best in Lloyd’s. Highlights include cutting the combined operating ratio by 2% and delivering a post-tax cross-cycle return on equity in excess of 12%.

To achieve this, Chaucer will withdraw from less profitable lines, such as US direct and facultative, while expanding in the lucrative but volatile area of property catastrophe treaty reinsurance. Chaucer will establish a global energy business targeting £300m ($466.5m) capacity at the peak of the energy cycle.

In the UK, Chaucer will build up its motor book by increasing its presence on price comparison websites from two to four of the major brands,

‘We drive operational efficiencies so that we can grow without laying down consummative amounts of costs’ David Mead, Chaucer

targeting Moneysupermarket and Comparethemarket.

Although price comparison sites, also known as aggregators, have proved tough for insurers, Stuchbery argues that Chaucer is different. He stresses that the company’s combined operating ratio in motor is on target for a respectable 100% by the end of the year. Forty-five percent of its business will come direct from aggregators and 55% via brokers. The hardening motor market will also help.

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Profile distribution method. It’s sold on price, so you’ve got to make sure you are getting the right price for the product.

We are converting well in the areas we have chosen. Over a period of time, we’ve used the aggregators we are already on to make sure our profit is at the right level.”

Stuchbery remains positive on energy, despite analysts’ pessimism over growth as a result of falling demand for deepwater drilling following the BP oil spill disaster.

“There’s always going to be a demand for energy and oil,” Stuchbery argues.

“People will be looking at renewables, and we are strong in nuclear, having a separate syndicate to underwrite the class. There will be a continuing demand for insurance related to energy exposures – they will just change over a period of time.

“I think following Deepwater Horizon there will be changes, and it will be more difficult to get licences to drill, but that’s a function of an improved risk for insurers as well.”

Chaucer’s plans played a large part in tempting chief operating officer Mead to the company from broking group Willis, where he was managing director of group operations.

“One of the key reasons for joining Chaucer was the strategy for growth,” he says. “The areas around motor and energy mean there are some very exciting opportunities to make sure we have a growth platform to support that.

In the process, we drive operational efficiencies so that we can grow without laying down consummative amounts of costs.”

Fighting for independence Stuchbery says the strategy proves that the board is intent on creating a flourishing standalone business.

Chaucer has been fiercely protective of its independence, fighting off a £221m bid from Brit in June last year. Only a few months before the Brit bid, Novae walked away from merger talks with Chaucer. And with Russian private equity fi rm Pamplona seemingly unable to expand on its 9.9% stake, it looks like the board will get its wish.

Stuchbery says: “We went through a process last year where a number of companies publicly disclosed an interest in an acquisition of our merger with Chaucer. That process was closed down last summer and we have concentrated on developing the business since.

“I think our strategy shows that we are focused on developing Chaucer as a standalone independent business.

We are a publicly traded company and, as such, we are in exactly the same position as every other publicly traded company: if someone is interested in talking, we will listen. ”

Investments rethink

‘We are in exactly the same position as every other publicly traded company: if someone is interested in talking, we will listen’ Bob Stuchbery, Chaucer

The reason there is such interest in Chaucer is that it is in a similar bracket to Hardy or broker JLT – small enough to be absorbed but big enough to make a difference.

Perhaps the acquisition-hungry rivals thought they could pick off Chaucer for a bargain price after it posted a £26.2m pre-tax loss in 2008, driven by an investment loss of £71m.

The insurer –like many other companies in the heady days before the fi nancial crisis – had gambled on higher returns from riskier investments by investing in equities and letting hedge funds select risks.

But Chaucer has learned its lesson.

The investment portfolio is now a much safer mix of government bonds and cash. “It’s public knowledge that we had what some people regard as a trip-up in 2008, which was largely driven by the investment results,” Stuchbery says.

“We are a business that, relative to its market cap, has a large investment fund.

In response to the unsatisfactory results we experienced in 2008, we repositioned our investment strategy to take a much more conservative approach.”

Indeed, the conservative investment portfolio, which returned £17.7m for the half year, gave Chaucer a more stable platform to post half-year profits despite encountering some large losses.

The Chilean earthquake, Deepwater Horizon losses and terrorism in Bangkok were three big factors in Chaucer posting a fi rst-half 2010 underwriting loss of £16.4m, but Stuchbery feels the losses were in line with the market.

“The fi rst six months were very difficult, but over the year it has balanced itself out,” he says.

One might think the stress and strain would wear him down, but he shows no loss of enthusiasm. “I enjoy what we do.

We’ve built a business and we currently employ more than 700 people. It’s a vibrant business and a good place to work,” he says.

If football fan Stuchbery is to take Chaucer into the Champions League of insurers, he’ll need that optimism. GR FIND OUT MORE ONLINE: CHAUCER HIRES SINGAPORE PROPERTY FAC TEAM To read this feature, and for more on Chaucer, see globalreinsurance.com or goo.gl/WXIjK

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Profile

Clarke’s tale A calm and unassuming exterior belies the Miller chief executive’s ambitious nature. Graham Clarke talks to Ben Dyson about how he plans to take on the big brokers

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Profile Lloyd’s broker Miller Insurance Services’ offices on London’s Jewry Street are inconspicuous and understated. The company itself generally makes little noise compared with some of its peers, participating sparingly in industry events and press commentary.

Likewise, Miller’s long-standing chief executive Graham Clarke is a businessman rather than a showman.

He lacks the table-thumping evangelism of, say, Joe Plumeri or the brusque self-assuredness of Adrian Colosso.

Without appearing shy or lacking in confidence, Clarke’s responses are measured and even.

This image is at odds with Miller’s ambitions. Clarke’s list of rivals does not include fellow Lloyd’s brokers such as Cooper Gay, BMS or RFIB, but the global powerhouses of Aon, Marsh, Willis and Jardine Lloyd Thompson. The company is unafraid of grabbing opportunities when it sees them, and won’t let a little thing like a global fi nancial crisis get in the way of its growth plans.

At a time when many brokers are reporting falling revenue as a result of low insurance rates and dwindling demand, Miller’s has surged. The company’s turnover rose 14% to £76.9m ($119.3m) in the year to 30 April 2010. Profit after tax fell 10% to £5.8m, but only because the 2008/09 results were propped up by a one-off £2m gain related to the cancellation of inter-company debt.

Business bulked up A big focus of Miller’s growth strategy over the past two years has been reinsurance. The merger of Aon Re Global with rival reinsurance broker Benfield in 2008 has allowed Miller to bulk up its business with about 38 ex-Benfield staff.

“Under normal circumstances, you would say ‘batten down the hatches’ and ride out the storm,” Clarke says.

“We told our people we were going to do that for our existing business, but that we saw really good opportunities for bringing in individuals and teams.”

Clarke estimates that staffi ng levels increased by between 50% and 60% overall. “At the time, everybody was thinking it was quite a brave move to be doing that when there was so much uncertainty around, but it made a significant contribution to our successful year last year.”

Miller has focused on reinsurance both because of the opportunities available and the comparatively tough conditions in the wholesale business.

Given the soft market, Clarke argues that wholesale business is staying in its home markets rather than making its way to Lloyd’s. “Unless you have a specialist angle, you are wasting your

time in general property/casualty business,” he says. “That is why we are putting our emphasis on reinsurance.”

Hedging against the dollar But the company is also seeking to counterbalance its reinsurance and wholesale business by boosting its UK and European retail book. This, says Clarke, will also give the company a hedge against the largely US dollar income from reinsurance and wholesale.

“We employed Ken MacDonald, former chief executive of Aon Global in London, and some very senior practitioners from Aon and Marsh, to enhance our retail capability,” Clarke says. “We are targeting the FTSE 250-350 size, larger corporations in the UK and

‘How can we be taken seriously by clients as an industry if we ignore what they are saying to us?’

Graham Clarke, Miller

Europe, those that are likely to be risk managed and that are looking for an alternative to the major brokers.”

Clarke believes Miller’s services are better suited to fi rms with more complex risk needs and high expectations of service levels. It faces stiff competition from the big brokers and the large non-Lloyd’s insurers that underwrite the risks. But Clarke is convinced risk managers at UK and European corporations are craving an alternative to the status quo.

“Companies want choice and we saw a clear gap in the market for an independent specialist broker that can provide objective advice and real expertise,” Clarke says. “The major brokers and the major insurers have set their sights on this marketplace with a one-stop-shop approach. Some buyers feel, though, that their needs get lost in the crowd and are increasingly dissatisfied with commoditised offerings that can lack individual attention and creativity. We want to work with clients for whom one size doesn’t fit all.”

As well as attracting new clients, Miller also wants to continue to lure new talent to keep on growing. “We won’t buy companies,” Clarke insists.

“We will grow the business out with individuals and teams. We are patient – we will employ people who we feel add value within our existing streams to

help us build out those businesses. We have got a number of opportunities on the table at the moment.”

Clarke says Miller differentiates itself as a place to work by being an independent, private company run to the same standard as a listed fi rm.

He says this involves a “significant” contribution from non-executive directors. “We can make the decisions for the long term rather than focusing on short-term quarterly results. That is very appealing to a lot of professionals.”

While Clarke views Miller as distant from the global behemoths it pits itself against, he is nonetheless concerned about getting caught up in the persistent fighting over a shrinking pool of business. “If you are a ‘have’, you are always under pressure because a ‘have not’ will always try to do something to take the business,” he says. “The pressure on fees and commissions is caused by brokers desperate for new business and prepared to work for little to get the business on the books. It does our reputation as an industry no good.”

Disservice to the industry Another activity Clarke frowns on is brokers charging commissions to underwriters in addition to the brokerage they receive from the insurance buyer.

“Brokers do themselves and the industry a huge disservice by charging contingent commissions,” he says.

He argues that the charging of contingent commissions is wrong, whether they are disclosed or not, and that they create conflicts of interest that do not benefit clients. “The clients have made it very clear through [UK and US risk management associations] Airmic and RIMS and other bodies that it is a practice they frown upon. How can we be taken seriously by clients as an industry if we ignore what they are saying to us?”

Clarke’s views on contingent commissions sum up his attitude to the business: brokers should serve the interests of the market and the rest will take care of itself.

He applies this outlook to the drive at Lloyd’s to improve the efficiency of the subscription market through electronic handling of endorsements.

“That project should create efficiency between brokers and underwriters and provide a better service to the clients,” he says. “If we focus on that rather than self-interest, I don’t think you can go far wrong.” GR FIND OUT MORE ONLINE: MILLER EXPANDS FAC TEAM To read this feature, and for more on Miller, see globalreinsurance.com or goo.gl/AZEj6

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21/01/2011 16:23

Cedants

Love’s

labours

Relationships are tricky at the best of times, but when the pressure is on, it’s those with strong foundations that survive. Lauren Gow has some tips on keeping the magic alive with your business allies in a tough market Trust, honesty, flexibility and resilience through difficult times are the building blocks of every successful relationship.

Without these, cracks begin to form and relationships can break down.

The reinsurance market is no exception. As reinsurers, brokers and cedants work towards a common goal – risk shared with fair conditions, in return for a reasonable premium price – good relationships can be crucial.

As Valentine’s day looms, many are examining their personal relationships.

Global Reinsurance used it as an excuse to examine how to best approach business ones.

Trust me No relationship can survive without trust. A shared belief that two parties can depend on each other is vital to achieving a common goal – and trust is seldom more important than when risk is involved.

Director of International at Lloyd’s broker RFIB, Simon Barnes, says: “Trust has always been a very integral part of the relationship between the reassured and the reinsurer. The parties probably know each other well anyway, but there has to be an element of trust between all.”

For brokers, the sector’s small-town mentality means trust is paramount.

Chairman of Willis Re International & Specialty, James Vickers, says: “The global reinsurance market is really small. If you know 3,000 people, you know everyone that matters. There is a limited number of high-quality reinsurers – probably less than 50. To be

blunt, reputation is all because you can’t hide a bad reputation in a global pond.”

True lips As the saying goes, honesty is always the best policy. In relationships, this means being open and telling the truth, even if it may cause a short-term blip. Without honesty, relationships struggle to grow.

Honesty, Barnes says, is particularly important for brokers wishing to remain at the top of their game. “You are dealing with large sums of money. If one of the parties tries to be clever then that could lead to a claim not being paid and errors and omissions claims on a broker. This obviously makes you very unpopular when there’s no bonus pool.”

In contrast, being honest and open helps forge strong relationships. “In both the long and short term, you want a partner you can work with. A really simple way of looking at reinsurance relationships is, ‘no surprises’. Be open and upfront,” Canopius reinsurance manager Chris Swan says.

Take it easy Flexibility in business relationships gives all parties room to develop, which Argo senior vice-president of business development Barbara Bufkin believes is vital in a dynamic working environment.

“We are trying to make a margin in a market that is difficult,” she says.

“We want to be flexible in terms of the service and support from our brokers and from our reinsurers in the business when, for example, we are not making our top-line projections.”

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Cedants For RFIB’s Barnes, flexibility is the key to developing long-term working relationships with cedants and reinsurers. “Contractually, we are talking about a one-year partnership, and there is no obligation to renew the contract in 12-months’ time.

Nevertheless, there are only a limited number of people you can go to in future – and reinsurers have long memories.”

But too much flexibility could spell trouble in terms of business strategy, Vickers says. “Yes, we like flexibility as it gets deals done, but we equally like people who run their business in a prudent fashion. This might sound like an odd thing for a broker to say, but we need strong reinsurers, otherwise we don’t have a market to place our client’s business. While it’s nice when reinsurers are accommodating, if they are too accommodating we can start to get worried about their medium to longterm strength.”

‘There is a limited number of high-quality reinsurers.

Reputation is all, because you can’t hide a bad reputation in a global pond’ James Vickers, Willis Re International & Specialty

expect. We don’t want to ask: ‘where did that one come from?’ ” He adds that misunderstandings also cause issues.

“Trust is often built up over years, particularly in the USA. It really is two nations separated by a common language.

Sometimes their meaning of something is completely different to ours.”

Don’t break my heart Yes, dear You can’t always get what you want.

Settling your differences by making concessions can pay dividends.

During 2010 fourth-quarter renewals, compromises were key, and helped bring cedants and reinsurers closer together.

“Reinsurers are now lowering prices at a pace equal to or faster than insurers,” says Aon Benfield chief strategy officer Bryon Ehrhart. “This is a change in the market that is positive for cedants.

Reinsurers and insurers need to partner to fi nd ways to help insurers differentiate their insurance products in their very competitive global markets.”

Vickers reiterates that trust and honesty helps during renewals. “You need to have the underlying trust and present the business in a fair and reasonable way, deploying considerable technical, analytical skills to explain the risk. The brokers don’t make the prices – the market makes the prices.”

Call me If there is an elephant in the room, relationships can begin to erode. Issues can arise when parties feel misled or misunderstood, but clear and careful communication decreases the chances of a relationship breakdown.

“The key issue brokers have with reinsurers is surprises,” RFIB’s Barnes says. “We understand that people have changes in their strategy, philosophy and underwriting. Things change. But what we like to have is decent advanced notice so we can manage client expectations, fi nd alternative sources and manage the process.”

Swan agrees: “We want no surprises.

We want our reinsurers to act as we

Relationships between cedants, reinsurers and brokers seem to be growing closer, with price concessions, greater sharing of information and a shift back from the colder, more businesslike excess-of-loss covers, towards more trusting proportional business.

But such closeness comes more easily when rates are soft. The true test of a relationship’s strength is a hard market.

“In a soft market, when reinsurers are clamouring for your business, it’s difficult to ascertain who your core partners are and who is just chasing you for the business,” Swan says. “We’re always bearing in mind how these people will respond in a tough market or when we say: ‘we’ve got a problem, can you work with us on this?’ If they are the types to run away, then they aren’t for us.”

Bufkin agrees, adding: “In a hard market, if you set principles or paradigms on how you work with trust and transparency, then the main concern will be availability of capacity.

But with the excess capacity we have in the market at the moment, it is difficult to predict what limitations will prevail.

We should be establishing core reinsurer and broker relationships throughout the market cycle when buying reinsurance.”

Nevertheless, the hard market can also highlight strengths. “A soft market is best when people have relationships already and can just get on with business,” Barnes says, “but a hard market always brings out the best in quality brokers.” GR FIND OUT MORE ONLINE: WHAT CEDANTS WANT To read this feature, and for more on the cedant-reinsurer dynamic, see globalreinsurance.com or goo.gl/NXr0w

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Cedants

Q&A with

Robin Clark

Aspen’s head of risk redistribution believes long-lasting relationships are vital to success in the industry, which is why he has devoted almost four decades to working in the reinsurance sector

After 35 years in the business, Robin Clark will be happy to fi nish his career exactly where he began – in reinsurance.

When he left school in the 1970s, he had three job interviews – with a bank, an investment fi rm and a reinsurance broker. Offered two out of the three jobs, he took the reinsurance option (at a small Lloyd’s broker) and has never looked back.

He spent 26 years at the fi rm, but when it merged with Aon, Clark accepted an offer to join insurer Aspen as its new buyer.

Founded in 2002 by Chris O’Kane, Apsen writes a diverse range of lines globally, including specialty (re)insurance, property and casualty reinsurance and property and liability insurance, principally in the UK and USA. Here, Clark discusses his reinsurance – and golfi ng – tactics.

Q:

PHOTO: YIANNIS KATSARIS

How would you describe the current pricing situation in the reinsurance market? Would you say we are in a soft market at the moment?

A: Yes, I would say that we are in a soft market. We have been for a while and, given the excess capacity in the market, I see little to change this in the immediate future.

Reinsurers would describe pricing

28 FEBRUARY 2011 GLOBAL REINSURANCE

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Cedants as not where it needs to be, but not getting much worse.

Q: How has your buying strategy changed post-financial crisis?

Q:

A:

How do you approach deciding what to buy and structuring your reinsurance programmes?

A: Our reinsurance approach is aimed at reducing volatility in the most costeffective manner. This can be divided into two elements.

First, there’s balance sheet protection.

We aim to mitigate the effects of very large single event losses or a series of medium or large losses, such as earthquakes, hurricanes and multi-class clashes. We want to ensure we remain within our stated tolerance for natural catastrophe events and optimise our capital adequacy from a rating agency perspective.

Second is earnings protection. The focus here is on limiting the impact of a moderate or series of moderate losses on different lines of business. Historically, such cover has been purchased on a class-of-business basis, but reinsurers are displaying an increasing appetite for whole-account structures.

Protecting classes written in multiple territories under single reinsurance structures and protecting classes of similar characteristics and exposures under whole-account structures is a consideration as we continue to diversify.

Q:

What in particular is important to your company as part of this process?

A: Risk management is very much integrated into the group. One lever for managing insurance risk is through purchasing reinsurance. We manage our business using quantitative modelling skills, but also apply qualitative knowledge. We use models to provide a consistent base set of metrics to compare structures, terms and pricing. It is, however, important to combine market experience within this analytical framework.

Q:

How has current pricing affected your buying strategy?

A: To use a quote: “Price is what you pay. Value is what you get.” Price has to be considered along with the classes being reinsured, the state of the market within those classes, loss activity, anticipated development and strength of counterparties. We think about ability and willingness to pay – that is all part of the value we are looking for.

For us, little has changed. The fi nancial crisis focused minds on balance sheet strength and for cedants that meant ensuring a rigorous approach to counterparty risk. We have always taken that aspect seriously. Our buying programme has been shaped by restricting our relationships to high-quality reinsurers, with a mix to avoid concentration of risk.

Q: What do you most look for in reinsurers?

A: There should not have to be a ‘mug in the equation’ for a transaction to benefit both parties

Q:

What impact will Solvency II have on the purchase of reinsurance?

for a reinsurance transaction to be considered of benefit to both parties.

A:

Q:

The impact of full implementation is not clear. It will, however, undoubtedly increase capital requirements, so introduce strain for some. Reinsurance is a solution to protect against this. For Aspen, the Quantitative Impact Study 5 process suggested we would not be subjected to any strain.

Q:

How much premium do you cede to reinsurers?

A: The reinsurance spend as a proportion of the total income has changed as the gross written premium of the company increased from $1.3bn in 2003 to more than $2bn in 2009.

Reinsurance appetite has also been dependent on Aspen’s expansion into new territories and classes. In recent years, the spend has ranged between 8% and 12%.

Q:

To what extent do you make use of alternative reinsurance structures?

A: Aspen has always been open to and enthusiastic about exploring all avenues for ceding risk. In the past, we have issued a catastrophe bond and used innovative structures for providing protection against reinsurer default risk. There has been some debate on the role of capital markets in the insurance industry, and the financial crisis exposed some issues that have since been addressed.

Q:

What do you most look for in reinsurers?

A: We have three prerequisites: consistency of approach in both rating and coverage, claims-paying ability and willingness to pay, and longevity of relationship. A respected friend coined a phrase many years ago that there should not have to be a “mug in the equation”

How is the success of your reinsurance purchasing measured?

A: The process starts at the planning stage and continues through to consideration of group objectives met through the role of reinsurance.

In simple terms, success will be dependent on whether the reinsurance responds in the way envisaged. Measures of success include price and coverage achieved against plans, the quality of the information developed and provided to our reinsuring partners and the quality of relationships developed with them.

Q:

Who do you most admire in the insurance industry and why?

A: Ajit Jain [head of Berkshire Hathaway’s reinsurance businesses] and John Berger [chief executive of Alterra’s reinsurance unit]. Ajit for his intellect, imagination, encyclopaedic knowledge and speed of appreciation of any risk. John Berger for his statesmanlike demeanour, values and consistent approach. Both for approachability, for engaging brokers and underwriters of all ages, experience and ability, and for remembering them years later.

Q:

What do you do in your spare time?

A: Golf takes up a lot of time. There are advantages to getting older: on reaching 50, I played in the British Senior Open at Troon. I ski and watch my wife and daughter’s equestrian activities – in fact, all my children’s activities. I should also mention walking Merlin the dog. GR FIND OUT MORE ONLINE: ASPEN HIKES NZ QUAKE LOSS ESTIMATE To read this article and for more on Aspen, see globalreinsurance. com, or goo.gl/ZUQ5N

GLOBAL REINSURANCE FEBRUARY 2011 29

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Lines & Risks

Watch this space The risks involved in putting a satellite into operation highlight a clear need for (re)insurance. Tim Evershed finds out what it takes for reinsurers to go into orbit in this highly specialised market

30 FEBRUARY 2011 GLOBAL REINSURANCE

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Lines & Risks Space may be known as the fi nal frontier, but around the Earth it is increasingly populous. More than 30 satellites go into orbit each year, with around 170 currently circling the globe.

As with other sectors, it is the involvement of the (re)insurance business that allows operators to share their risk. The space market provides all-risks coverage to satellite owners and operators for launch into geo-stationary orbit or near-earth orbit.

Satellite values can range from $150m to $400m, with launch vehicles an additional factor. Media satellites tend to go into geo-stationary orbits – on the same latitude (equator) and at the same speed as the earth turns, thus appearing motionless from the ground – while those providing telecommunications or global positioning (GPS) will be placed into lower orbits.

Cover is broken down into two separate phases, says Atrium Space Insurance Consortium underwriter David Wade. “Launch cover includes the launch and fi rst year in orbit: from the moment of ignition, on the launch vehicle through to separation from the rocket once in orbit,” he says. “Typically, the fi rst month in orbit will be spent rigorously testing the satellite before it goes into commercial service.”

Once the satellite has completed its fi rst year of service, the cover will move to in-orbit cover.

Because cover begins at launch, there is no specific renewal date for the sector. “It’s constant throughout the year. We do not have a key renewal date as satellite cover renews on the anniversary of the launch,” Wade says.

Overall the recent loss history in the market has been exceptionally good, with no losses recorded between September 2009 and September 2010.

Aon International Space Brokers London business unit leader Clive Smith says: “For launch and then a year in orbit, the typical offered capacity is about $500m. Capacity is at a historically high point and rates have been coming down for the past couple of years.”

Falling from space But the failure in October of the Eutelsat W3B – after a propulsion system led to a fuel leak – is expected to cause a loss of between $300m and $400m.

Guy Carpenter managing director and global practice leader for aviation Ian Wrigglesworth says: “The Eutelsat loss should temporarily halt any further decrease in rates. No new reinsurance capacity is coming into the market, as it is perceived to be at the bottom of the cycle.

I’d expect this to remain flat for 2012.”

Kiln head of space underwriting Laurent Esquirol says: “Rates on line have been decreasing steadily and have crossed the 10% threshold for launch plus one year. What you have to take into account is that as long as there are no claims, the burning cost of the market is improving.”

He adds: “Rates for in-orbit life coverage today are close to 1%. We are quite close to the bottom. Some satellites might be getting lower rates, but complex ones could be a lot higher.”

Esquirol highlights the key issue when renewing cover. “The main point is the health status, which comes in a 10-page document. It tells you how the various subsystems of the satellite are performing, solar array, batteries, thrusters, data handling, payload and so on,” he says.

But Wade warns: “There is a surplus of capacity at the moment, so there is tremendous pressure on rates.

Rates are about half what they were four or five years

‘As long as there are no claims, the burning cost of the market is improving’ Laurent Esquirol, Kiln

ago. Premium income is about $700m for the whole market, so some people are only one loss away from serious trouble.”

Atmospheric pressure The space market is no stranger to serious trouble, having suffered a series of crippling claims around the turn of the millennium.

Director of space insurance at risk modelling fi rm Sciemus, Sima Adhya, says: “When we saw a number of in-orbit losses in the late 1990s and early 2000s, they were mainly due to the fact that the technology provided by the manufacturers could not reliably match the technology required by the operators.”

Adhya continues: “There was a push for higher performance and thus higher powered spacecraft in the 1990s, and the testing was just not as rigorous as it is nowadays. Now, the level of testing is much greater and the technology used is proven and more stable.”

Wade places some of the blame on underwriters for allowing the terms and conditions of cover to slip to dangerous levels. “Insurers were being incredibly weak and were supplying policies that were for launch and the fi rst five years in orbit. A lot of problems came to light after satellites had been in service for a while,” he says.

This led to problems with satellites such as Boeing’s 702 series, which developed faults after about three years in orbit. It meant underwriters were not just liable for the original loss incurred, but had also continued to write cover for a faulty design, adding to that loss.

“As a consequence of that, operators backed away from manufacturers, whereas previously they had been keen to get vehicles to launch as quickly as possible and testing had taken a back seat. The length of time to manufacture a satellite has now increased and testing is better,” Wade says.

There have been other technical improvements too. The electrical margin on satellite components – how far above its intended use an electrical component has been tested – has been raised from 2.5% to 7.5%, and while the size of some satellites increased from two tonnes to five tonnes in the 1990s, that has since stabilised. The larger the satellite, the more can go wrong during launch and positioning.

Giant leap for underwriting Although many of the factors that have led to the space market becoming more profitable have come from the industry’s side, however, many others have come from improvements on the underwriting side.

“In the 1990s, there were a few leaders and a number of underwriters content to make up the following market – perhaps they did not have the technical expertise necessary to lead the market.

In order to get a larger slice of the pie, those players have had to improve their expertise,” Wade says.

Sciemus’s Adhya agrees: “In addition to increased reliability from manufacturers, insurers are now much more diligent in terms of coverage restrictions. An example of this would be if there were loss of redundancy on a satellite – insurers would seek to have an exclusion or deductible put in place for the loss of redundancy.

This underwriting position has saved insurers from a number of claims.”

One notable factor in the space market is that the primary market tends to retain much of the original risk.

Wrigglesworth says: “Forty percent of the market is provided by consortia and agencies and the vast majority of satellite insurers do not buy reinsurance.

Less than 10% is provided by quota share reinsurance and a small number buy excess of loss. The pricing of excess of loss is determined by the loss history and forward-looking exposure.

“The Eutelsat loss in October has provided reinsurers with a good reason to re-evaluate the pricing.”

Wrigglesworth adds: “If you are a reinsurance company in the space market, you would probably have one or two primary underwriters that you’d follow and they would have the expertise. It is about fi nding the right partner to help you follow your underwriting strategy.” GR FIND OUT MORE ONLINE: LIBERTY SYNDICATES IN SPACE DEAL WITH INTELSAT To read this article and more on the sector, see globalreinsurance.com or goo.gl/ei1W8

GLOBAL REINSURANCE FEBRUARY 2011 31

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21/01/2011 15:47

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 ONE | 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

Legal & Professional

Peacetim settlemen Reinsurers have taken a detour off the bumpy road to litigation in recent times.

Experts attribute the marked drop in lawsuits in the sector to the arrival of the soft market. “The current soft market has only been around a short while, and legal disputes usually follow a soft market,” explains law fi rm Barlow Lyde & Gilbert partner Clive O’Connell.

“The last one was quite a while back, so there has been a significant drop in disputes.”

In addition, budget constraints mean reinsurers are much more likely to opt for arbitration where possible, which is much cheaper than litigation, with the added bonus of confidentiality.

Litigation may be thin on the ground, but some recent landmark cases have set new standards for future disputes in the reinsurance sector.

Muireann Bolger reports

But there are suggestions that this could be the quiet before the storm. The fall-out from the subprime crisis of 2008 continues to rumble on, and legal experts predict we will soon see a flurry of lawsuits against fi nancial institutions hitting the reinsurance sector.

The much-anticipated Supreme Court fi nal ruling on

the EL trigger case at the end of this year is also predicted to have ramifications for the reinsurance market, as it is set to dictate the course of future asbestos litigation.

And even during this period of relative calm, a small number of rulings have caused the reinsurance sector to sit up and take note. According to Elborne Mitchell partner Edmund Stanley, recent decisions show the courts have become increasingly claimant-friendly and hostile to technical defences.

Global Reinsurance outlines the legal cases over the past 18 months that are set to leave their mark on the landscape of future reinsurance litigation.

34 FEBRUARY 2011 GLOBAL REINSURANCE

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21/01/2011 16:16

Legal & Professional Equitas Ltd v R&Q Reinsurance Ltd

IRB-Brasil v CX Re

The case centred on claims made by Warren Buffet-owned Equitas, the entity set up

by Lloyd’s in 1996 to reinsure and run off its pre-1993 liabilities. Equitas took on the rights of various Lloyd’s syndicates under excess-of-loss reinsurance contracts. Most of the claims related to the Kuwait Airways losses from the invasion of Kuwait in August 1990, and the pollution losses from the Exxon Valdez oil spill in 1989.

The awards were called into question when court decisions cast doubt on whether certain parts of the claim had been covered long after the original insurance claims had been paid. This presented a huge conundrum for the reinsurance sector. “No one had any way of knowing which bits were valid and which were not, as this would have involved re-opening the accounts on millions of underlying contracts,” Elborne Mitchell’s Stanley says.

Equitas responded to the challenge by investing in an actuarial model to take account of all the parts of the claim that were in doubt. They presented the losses to run-off reinsurer Brandywine, which was renamed R&Q Reinsurance after its purchase by run-off specialist Randall & Quilter. Brandywine disputed the fi ndings and insisted that Equitas had to unravel the accounts on the underlying contracts.

The court disagreed, however, and held that there was no reason in principle why the reinsured could not rely on an actuarial model to disentangle its claim from wrongly aggregated elements of a claim.

In this case, CX Re, a run-off reinsurer formerly known as CNA Reinsurance Company Ltd, was reinsured by Brazilian state-owned reinsurer IRB on a number of excess-of-loss contracts in the 1970 and 1980s that protected CX’s casualty and liability account.

CX Re faced large claims under product liability covers sold in the USA to manufacturers of asbestos products, silicone breast implants and blood plasma factor, and to companies that had caused pollution. IRB questioned whether the original settlements made by CX Re were covered under the original contract and also questioned how CX Re could prove that certain “continuous losses” occurred during their particular years of cover.

The case fi rst went to private arbitration, where the arbitrators were unsympathetic to IRB. They held the settlements in question were within the terms and conditions of the original contract and that the losses had occurred during the relevant periods of cover.

However, the arbitrator’s confused terminology ensured that IRB was able to appeal the decision in the High Court.

“They made a howler because they referred to ‘cause’ rather than the word ‘event’,” Weightmans partner Ling Ong explains.

Despite this confusion, however, the judge decided the High Court had no jurisdiction to interfere with the fi ndings of the arbitrator.

Why is this case important?

The case shows that courts are willing to accept actuarial modelling, especially when the claimant fails to suggest a viable or reasonable solution. “It does show that the English courts will generally embrace a constructive attempt by a party to do its best in difficult circumstances and be unsympathetic to someone whose response is simply to take pot shots at them without having a constructive alternative of its own,” Stanley says.

me nts

Why is this case important?

The case demonstrates that courts are reluctant to challenge an arbitrator’s decision even when there has been a fundamental flaw in the proceedings.

“There have been few reinsurance disputes in the English courts over the past 12 months, as most reinsurance matters now tend to be arbitrated. IRB-Brasil vs CX Re showed that such appeals can be difficult, with the courts being reluctant to interfere,” Ong explains.

AXA Corporate Solutions v National Westminster Bank Between 1998 and 2004, AXA insured The Royal Bank of Scotland (RBS), which took over NatWest in 2000, against employers’ liability, public liability and public/products liability exposure.

Following the 9/11 terrorist attacks, AXA introduced a terrorism exclusion when the time came for renewal terms. The insurer faxed around the renewal terms, which proposed the addition of a terrorism exclusion excess

of £10m for employers’ liability cover and £5m cover for public/ products liability.

NatWest and its broker, Marsh, argued that the renewal indication was not agreed and therefore did not form part of the parties’ agreement.

When NatWest was sued in 2005 by the relatives of the victims of a suicide bomb attack in Israel, who accused it of helping a charity raise money that funded Hamas, AXA relied on the exclusion.

RBS tried to argue that the exclusion was insufficiently certain to have legal effect. The judge disagreed and said that the exclusion had taken effect.

Why is this case important?

“This is a classic textbook case on incorporation of terms and worthy of mention, if only to show that even in these days of contract certainty, the basics can still be wrong,” Stanley says.

>

GLOBAL REINSURANCE FEBRUARY 2011 35

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21/01/2011 16:17

Legal & Professional AXL Resources v Antares Underwriting Services Ltd & Another This case threw up an issue never previously determined by the English courts: the meaning of a ‘mysterious disappearance’ exclusion.

AXL owned a consignment of 20 metric tonnes of cobalt, which was stored in a bonded warehouse in Antwerp.

When the company asked the owners of the warehouse to release a sample of the cobalt to a potential buyer, they discovered that the cobalt had gone missing.

AXL was covered by underwriter London All Risks, which said the cover excluded “mysterious disappearance and stocktaking losses”. The company argued that unless AXL could explain how and in what circumstances the cobalt was lost, the loss was a mystery and excluded from cover.

AXL’s argument was that the cobalt must have been stolen, and during the court proceedings a gang of thieves was caught in Belgium and confessed to stealing the cobalt. Consequently, the court ruled that the underwriter had no reasonable prospect of rejecting the claim.

Why is this case important?

This case clarifies the legal burden of proof in relation to mysterious disappearance exclusion clauses. Cargo insurers should be aware that the burden will fall on them to prove that there has been a mysterious disappearance and they cannot pass the burden back to the insured to prove the precise cause of the loss.

Gard Marine & Energy Ltd v Tunnicliffe

‘Courts will be unsympathetic to someone who simply takes pot shots without a constructive alternative of their own’ Edmund Stanley, Elborne Mitchell

FIND OUT MORE ONLINE: R&Q COUNTS COST OF COURT JUDGMENT To read this feature, and for more on legal developments in the industry, see globalreinsurance.com or goo.gl/wsLaC

This case involves another spat over jurisdiction. Gard Marine & Energy Ltd (Gard), a Bermudian company, presented claims to its reinsurers following losses sustained in the Gulf of Mexico. Glacier Reinsurance disputed the way the claims had been calculated. Gard began proceedings in England against Glacier and the two other reinsurers that also disputed the claim.

Glacier, based and domiciled in Switzerland, had written a 5% line in Switzerland on an excess-of-loss cover that was mainly placed in the London market. Therefore, it issued proceedings in Switzerland and also applied to the English court for dismissal of the action brought against it.

The Court of Appeal upheld that there had been a real choice of English law as the law of the contract, however, and stressed the London market nature of the placement. It held that the contract had its closest connection with England. Both of those were sufficient to establish jurisdiction of the English courts.

Why is this case important?

It shows that English courts are increasingly open to accepting jurisdiction when such disputes arise.

“Given the international nature of reinsurance contracts, jurisdictional disputes can emerge from time to time and these cases show that the English court is prepared to assert jurisdiction in appropriate cases,” Ong says.

Stonebridge Underwriting Ltd v Ontario Municipal Insurance Exchange (OMEX) OMEX is a Canadian not-for-profit insurance exchange that insures various municipalities in Ontario. Jardine Lloyd Thompson Canada Inc (JLT Canada) arranged excess-of-loss reinsurance cover for two of the risk pools in the OMEX programme. The dispute involved the refusal of the reinsurer Stonebridge (now XL London Market Ltd) to pay sums OMEX alleged were due. Stonebridge denied cover on the basis of a breach of the claims notification clause. OMEX applied for an order to set aside service of the English proceedings on the grounds that England was not the proper jurisdiction for the case between the parties to be heard.

OMEX began proceedings in Ontario claiming damages, and asserted that the contract was governed by Ontario law.

However, English law offered a number of advantages to Stonebridge. Most notably, the main issue in dispute – the proper construction of the excess/deductible provisions – is suited to the English court because of its considerable experience and expertise in reinsurance matters, particularly those concerning Lloyd’s. In addition, a lot of the evidence relating to the case was located in London.

The court ruled that there was a risk that if proceedings were held in Ontario, the court would apply a different law. This was regarded as unfair because it would deny Stonebridge a defence otherwise available to it under English law. The fact that OMEX was the fi rst to begin proceedings, in Ontario, held little weight as jurisdiction had not been

determined and English proceedings were further advanced. The court ruled there was nothing sufficiently special about the circumstances to mandate Canadian jurisdiction and OMEX’s application was refused.

Why is this case important?

According to Herbert Smith partner Chris Foster, the Stonebridge decision provides a guide to the factors that may be taken into account by the English court when considering the governing law of a reinsurance contract.

It also confi rms that reinsurance placed in the London market by London brokers is likely to be found to be subject to English law, particularly if it contains standard London market terms. GR

36 FEBRUARY 2011 GLOBAL REINSURANCE

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24/01/2011 16:21

Country Focus

With one or two notable exceptions, rates continue to fall in the Australian insurance and reinsurance market as competitive market forces and savvy buyers dictate renewal trends. Helen Yates reports COUNTRY FOCUS

AUSTRALIA

Dipping

down under

GLOBAL REINSURANCE FEBRUARY 2011 37

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24/01/2011 11:29

Country Focus

Cat-fi lled year Despite the absence of US hurricane losses in 2010, there have been plenty of catastrophe claims at home and abroad to dent Australian and international carriers’ earnings. There were up to $38bn of insured natural catastrophe losses over the year, Aon Benfield says.

For international (re)insurers, the Chile earthquake is set to be the most expensive insurance event of the year, prompting up to $8.5bn in insurance claims and $30bn in economic losses.

Lloyd’s continues to predict a pretax loss of $1.4bn, while Swiss Re and

Munich Re both upped their loss estimates to $630m and $1bn in the months following the quake.

In the Gulf of Mexico, it was an offshore oil rig rather than a hurricane that stole the headlines this year. While not as huge a loss for the industry as it may have been (had BP bought cover in the commercial market), the Deepwater Horizon disaster is still expected to fetch total claims of up to $3.5bn. This is helping to push up rates in the offshore energy sector, although this may yet prove to be a short-lived spike.

The year’s second-biggest earthquake – and one that was much closer to home for Australian (re)insurers – was in Christchurch, New Zealand in September. As proof that earthquake losses are notoriously difficult to assess post-event, four reinsurers (Platinum, Aspen Re, Catlin and PartnerRe) recently raised their loss estimates, with suggestions that total losses – originally expected to bring $3bn to $4.5bn in claims – could go as high as $5.5bn.

Despite rising loss estimates, the New Zealand earthquake is likely to remain a reinsurance event rather than a hit for primary carriers.

The mature Australian insurance market, dominated locally by primary insurers QBE, Insurance Australia Group (IAG) and Suncorp, continues to be big buyers of property catastrophe reinsurance protection. According to Fitch Ratings, IAG and Suncorp-Metway have a combined market share of 60% in New Zealand, but their net exposures to the quake are surprisingly low – NZ$60m (US$45.6m) for Suncorp and a “negligible” exposure for IAG. Chile, New Zealand and Deepwater were significant events for global carriers, but they occurred in a year without major hurricane losses. “While there has been no singular event of sufficient magnitude to immediately affect the global market, there have been enough significant catastrophe losses during the year to potentially dampen future underwriting profits, particularly in the local market, and contribute to a tempering of further rate reductions,” Marsh notes.

Closer to home, hail storms earlier in the year in Melbourne and Perth both resulted in losses in excess of A$1bn (US$988m), while severe storms in western Queensland and flooding in southern New South Wales and Victoria have added to the loss register.

With a higher loss than its peers, Hardy Underwriting Bermuda predicts a gross loss estimate of A$34.6m (US$34.2m) from the hailstorms and has pulled back capacity as a result.

“Our share of the loss in Australia is large compared to our peers and we

Queensland in deep water

Reinsurers should bear the brunt of claims resulting from the worst flooding in Queensland in more than 30 years. Three-quarters of the state is a disaster zone after 40 towns and cities were engulfed by floodwater in late December and early January. Catastrophe modelling firm AIR Worldwide has estimated insured losses from the floods could range from A$3bn (US$2.9bn) to A$6bn.

Queensland’s two main flood insurance providers – Suncorp and Insurance Australia Group (IAG) – are processing more than 8,000 storm- and flood-related claims lodged since Christmas. Suncorp’s preliminary estimate of pre-tax losses is A$130m-A$150m. This cost will be included in the group’s half-year result for the period ending 31 December 2010. Suncorp said it would be limited by a reinsurance programme to between A$70m and A$90m. It is also likely to incur additional reinsurance costs of about A$120m to reinstate multiple covers for the remainder of the financial year.

As a consequence of this and other natural hazard events during the first half, Suncorp said it expects to have eroded between A$220m and A$240m of retained costs under its aggregate reinsurance program.

IAG’s expectation for December storm damage is that the net claim cost will be A$10m-$30m, taking the total natural peril claim cost for the second half of 2010 to an estimated $120m-$140m.

The insurers said estimates would be included in results for the second half of 2011.

IAG chief executive and managing director Michael Wilkins said the firm’s renewed catastrophe reinsurance programme for the year commencing 1 January 2011 was structured similarly to that which operated in 2010.

Under the programme, the group’s maximum event retention for a first event in calendar year 2011 is $150m.

Reinsurers’ eventual payouts will depend heavily on how many loss events the flooding is deemed to constitute. They are currently expected to be classed as two or three events.

PHOTOS: REX FEATURES, GETTY IMAGES

The Australian insurance market continues to attract international attention despite softening rates and a high level of catastrophe losses in 2010, locally and internationally. “For the third quarter of 2010, invariably you saw price reductions from 10% depending on the risk profi le,” says THB Global Risks Australia specialist Paul Butler.

“By all accounts, until the end of the fourth quarter it will remain similar.”

But while previous soft markets have led to more uniform falls in premium, today’s prices are dipping more than anticipated on some accounts while those on loss-hit lines have remained flat. Rates for loss-making professional lines have stayed relatively stable – in particular for directors’ and officers’ (D&O) business.

But elsewhere, most property and casualty rates have fallen further over the year. This is largely a reflection of competitive forces at play for the better accounts and the relative profitability of the past three years.

Despite international catastrophe losses – including the Chile earthquake and Deepwater Horizon disaster – local and national catastrophe events, such as the New Zealand earthquake and hail storms in Perth and Melbourne have not had a big enough impact to turn the market. Reinsurance pricing remains soft (see box, right, for the implications of the extensive flooding in Australia).

However, in the commercial insurance sector, there are signs that prices may be getting too soft to bear.

According to Marsh’s November 2010 Australia Insurance Market Review, it may be difficult to achieve further price improvement in the primary market.

Low rates on line are beginning to affect insurers’ returns on an accountby-account basis and there are signs that claims activity is beginning to undermine positive underwriting results. In the third quarter, notes the review, we see “the fi rst signs of incumbent insurers walking away from deals they believe to be underpriced”.

38 FEBRUARY 2011 GLOBAL REINSURANCE

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24/01/2011 11:29

Country Focus

COUNTRY FOCUS

Australia Natural disasters at home and abroad have hit the Australian market hard this year, but it continues to attract international attention and foreign capital, which are keeping rates relatively low. Insurers are seeing the benefits of focusing on specialist markets, as well as diversifying risk in light of the global financial crisis.

Population: 22 million GDP (PPP) per capita: US$42,000 Unemployment rate: 5.1%

have considered it appropriate to adjust our underwriting in this region,” the insurer revealed in its half-year results.

Meteorologists are continuing to predict an active tropical cyclone season across northern Australia this summer (October to April). Nevertheless, more localised weather events are unlikely to have much influence on global rates.

“You’d expect the New Zealand rate to rise, reflecting the quake, but generally it’s not expected that Australia’s two major losses will have a material impact on rates,” THB’s Butler says.

“If you look at global ratings, the issue is that it’s just not enough,” THB managing director Craig Kingaby says.

“The total cat losses are strange in that they’ve come from areas people wouldn’t necessarily have expected, but they’re not sufficient enough in their own right to trigger any global market correction. There’s too much capital and there are too many people prepared to come in – if they’re not in yet.”

Continuing competition Despite diminishing margins for profit, the Australian insurance sector continues to command attention, attracting new capital to a market that is already carrying too much capacity.

This is conspiring to keep rates low, even on lines where loss activity has been higher than usual in 2010.

“There are different players saying: ‘the day the rating environment changes, we’ll be in’,” Kingaby says.

Insurers such as Zurich, CGU and Lumley have expanded their involvement in the corporate sector, while new entrants to the market in general include Axis, Mobius (Lloyd’s capacity) and CV Starr, among others.

“You’re getting a lot of capital provided by managing general agents, which is much more targeted and lower key,” Kingaby says. “In theoretically profitable segments of the market, you are getting new players coming in and focusing solely on those small sectors.”

Some are trying to replicate the Catlin model. The international and Lloyd’s (re)insurer established its Australian subsidiary in 2004 to focus on specialist classes including aviation, casualty insurance and reinsurance, crisis management, facultative reinsurance and general liability and specie.

“You’re getting to the point where people can’t see the overall return if you’re coming into the market as a generalist. But coming in as an absolute specialist is becoming a bit more fashionable,” Kingaby says.

The need to maintain underwriting discipline in an already saturated market remains a key challenge. The savvy Australian insurance buyer provides another hurdle.

“Australian buyers are not going to be held to ransom by the local market,” Kingaby says. “They can travel and look offshore for solutions.

Part of the attraction to us is there are a lot of risk managers and chief executive-level individuals who are happy to try to diversify risk, particularly after what happened in the global fi nancial crisis.”

One area that has maintained steady premium rates over the year

Key market players: QBE, IAG, Suncorp, Zurich, CGU, Lumley, Axis, Mobius, CV Starr, Chubb, Chartis, Novae, HCC, Iron Starr, Barbican, Alterra, Argo Re, Torus

is professional lines. Following the fi nancial crisis, this sector experienced a high level of claims – particularly for D&O and errors and omissions lines – with insurance prices rising as a result.

Competition across the class is limited to a few insurers fighting for primary positions on large complex placements. Chubb, Chartis, Lloyd’s insurer Novae and HCC are the most dominant players, says Marsh.

Diversification factor For excess layers there is more competition, with new Lloyd’s syndicates (such as CV Starr and Barbican) and new company market fi rms (such as Iron Starr, Alterra, Argo Re and Torus) competing for business.

The diversification appeal is evident for Bermuda players seeking to balance their exposure to North American risks.

“In professional lines you are usually seeing ‘roll-overs’ and sometimes discounts, and that’s just a reflection of the market regulating itself,” Butler says. “Particularly with the demise of AIG in the Australian market [AIG Australia was rebranded Chartis in 2009 and restructured across three lines], the likes of Chubb and some of the carriers with better quality paper were able to maximise the opportunities.

“Particularly for large D&O programmes, you saw them with 10% to 30% rises, whereas now it’s fairly static.” GR FIND OUT MORE ONLINE: REINSURERS TO BE HIT BY FLOOD CLAIMS To read this feature, and for more on Australia, see globalreinsurance.com or goo.gl/rGiTD

GLOBAL REINSURANCE FEBRUARY 2011 39

GR_37-39 Australia.indd 39

24/01/2011 11:29

Rewind

Monty Our industry insider dreams of Down Under and does a U-turn on modern technology

Boomerang tactics

you can play Angry Birds while you’re in the queue for the box – or if the underwriter’s boring you.

While flood losses are putting them through the wringer at the moment, you’ve got to hand it to the insurance companies Down Under for turning the tables. Back in the late 1990s, when I was still doing the office tea round, there was a group of reinsurers in Australia writing international business who, let’s say, could be persuaded to take on business on some interesting terms. You don’t need me to tell you what happened to them. Judging by how the Brisbane flood loss estimates are playing out, the Australian insurers have done a good job at pushing the bulk of their losses onto international reinsurers.

What goes around comes around, I guess.

Still hungry?

How about that Michael Watson at Canopius? Not one to let the grass grow under his feet, is he? The ink on the KGM deal is barely dry, and he’s already taken a pop at Omega. I didn’t see that coming but, then again, he did hint he was on the lookout for more deals, and that they would most likely be in the commercial insurance or reinsurance area. I also hear he’s been on the lookout for a way to get Canopius a stock market listing for a while, so if it doesn’t work out with Omega, watch out Hardy, Chaucer and Novae.

Brits abroad Still, the Aussies got a proper pounding in the Ashes, which I hear led to much partying for certain lucky employees at Brit Insurance, sponsors of the victorious England team.

Several members of staff were in Australia over the new year, living it large with the players (where was my invite, folks?). The Brit guys also brought some of the Ashes magic back to the UK, holding competitions for charity to see who could best imitate Graeme Swann’s ‘sprinkler’ victory dance. It’s good to see that underwriters are putting their entrepreneurial flair to good use.

Business as usual Like a lot of my mates in the sector, I got an iPad for Christmas. So I was made up to hear that Catlin and BMS managed to place the fi rst risk at Lloyd’s using one of Apple’s magic tablets. You might think this is a strange thing for me to say, given my previous fears that modern technology would have a detrimental impact on business practices – that is, hanging around Lloyd’s getting all the gossip. But I’ve had to change my tune, because these little beauties have some serious benefits. The guys who placed the risk met at the box anyway, so business as usual. But now

Surprise exit I have to admit I raised an eyebrow when I heard about UK chairman Charlie Cantlay’s planned departure from Aon – he’s been there forever. Even mega-mergers haven’t managed to shift him. I wonder what he’ll do next. The market’s not good for small brokers, so he’s unlikely to set up shop on his own, and I reckon it’d be a big step to work for a rival reinsurance broker after all that time with Aon. Maybe he’ll become a reinsurance buyer – seems to be the natural next step for brokers these days …

Now you can play Angry Birds in the queue for the underwriters’ box …

Oops-a-Beazley There’s not much to laugh about in Lloyd’s insurers’ stock exchange announcements these days, but I did spot something in one of Hardy’s recently that made me chuckle. When it fi rst put out its share buy-back details, the company accidentally used the name “Rolf” in place of “Beazley”, which, as you remember, it was trying to buy at the time.

Hardy hurriedly issued an update correcting the mistake, but the cat was out of the bag. So who’s Rolf? Who cares – I know what I’ll be calling Beazley underwriters from now on. GR

40 FEBRUARY 2011 GLOBAL REINSURANCE

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