Global Reinsurance - March 2012 by William Sanders

www.globalreinsurance.com

March 2012

G LOBAL RE I NSU RANCE IN THIS ISSUE: • Financial Briefing: Why poor data could stop reinsurers making better returns p6 • News Agenda: The rise of collateralised reinsurance p16 • Global Market Report: USA in-depth p25

Taking on the big guys BMS chief Carl Beardmore thinks he can beat the broking giants at their own game p20

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Leader The full-year results will no doubt have made uncomfortable reading for some executives

Reinsurers have not had the best start to 2012, after a punishing 2011. A tricky 1 January renewals was quickly followed by the Costa Concordia disaster. Then 2011 came back to haunt them all over again as the full-year results started to roll in. The numbers will no doubt have made very uncomfortable reading for some. While several reinsurers have merely posted much smaller profits, others have posted large losses. PartnerRe has been hit particularly hard – it has made a far worse loss than it did back in 2005 and has been downgraded by both Moody’s and S&P for posting losses that were out of line with its peer group. There has also been a worrying number of increased loss estimates from catastrophes from all sides. There is also concern about the eurozone. Reinsurers’ global nature will cushion them, but the economic fall-out could hit them, and the sheer uncertainty about the outcome means cedants feel they cannot rest easy. At times such as these, it is easy to get pessimistic about the industry.

But these events need to be put in perspective. The losses have been mostly within the industry’s capacity. Munich Re shouldered a €4.5bn ($6bn) catastrophe claims bill and still made a profit. And the stock market has not lost faith in the industry’s top tier: the largest reinsurers’ stock prices have performed well since the start of the year, terrible 2011 notwithstanding. | Despite its downgrades, PartnerRe is well capitalised, and the fact that rating agencies consider it an ‘outlier’ is a positive comment on how the rest of the industry coped. That is not to say cedant concerns about the state of the industry should be dismissed. Reinsurers and brokers need to make sure that buyers can get a fair and balanced view of the industry’s financial strength. This will improve trust, and also encourage cedants to share more with reinsurers about their own financial position. Ben Dyson Assistant editor Global Reinsurance GLOBAL REINSURANCE MARCH 2012 1

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March Risk Atlas

The perils of a lost generation ● Youth unemployment has reached staggering levels, and disaffected young people can trigger many more risks ● Frustration felt by young people has helped fuel protests movements, such as the Arab Spring uprisings

two young people in Spain is without a job. As the map above shows, the situation is not much better in several other parts of the world. High rates of joblessness among

young people is a risk that can easily be correlated with other social problems, such as civil unrest, drug use and crime. The collective frustration among youth has been a

contributing factor to protest movements around the world this year as it becomes increasingly difficult for young people to find anything other than part-time and temporary

work. High rates of joblessness among young men was certainly believed to be a factor in the Arab Spring uprisings that continue to sweep across the Middle East.

MARCH 2012 2012 GLOBAL GLOBAL REINSURANCE REINSURANCE 8 MARCH

GLOBAL REINSURANCE MARCH 2012 9

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In Increased interest from cedants and investors has le led to continued growth in collateralised reinsurance. H Helen Yates weighs up the costs and benefits in the a aftermath of 2011’s catastrophes and losses

Safe and sound

News

Financial Briefi ng Mapfre’s challenge; Solvency II

Risk Atlas Fears triggered by huge youth unemployment

10 Risk Atlas Special The world’s worst disasters 12 Global Insurance Index Leaders show optimism 14 News Analysis Taking the hit from Costa Concordia 16 News Agenda The rise of collaterised reinsurance

People & Opinion 36 Diary Monty spots a priest wearing a Willis flag … no, really

Group production editor Áine Kelly Deputy chief sub-editor Laura Sharp Senior sub-editor Graeme Osborn Publisher William Sanders Tel +44 (0)20 7618 3452 Email william.sanders@nqsm.com

FIVE STEPS TO DODDFRANK’S IMPLEMENTATION

June 2009: The new law on fiscal responsibility was initially proposed by the Obama administration, with the White House sending a series of proposed bills to Congress. Obama calls it a “sweeping overhaul of the US financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”.

July 2009: A version of the legislation was introduced in the House in July 2009.

December 2009: The Act received its name as revised versions were introduced in the House of Representatives by Barney Frank, and in the Senate Banking Committee by chairman Chris Dodd.

July 2010: President Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act.

Spring 2012: Proposed implementation date for DoddFrank Act.

WILD WEST OF REGULATION THE GOOD: FIO remedies the lack of expertise The Federal Insurance Office (FIO) has been created to remedy the lack of insurance expertise at federal level. The scope of the FIO’s oversight extends to all lines of insurance except health insurance, long-term care insurance and federal crop insurance. Under the present interpretation of the legislation, the FIO has a largely free scope in determining the subject matter of its prepared annual reports to Congress. But there are two compulsory reports whose results should prove to be a useful, reflective insight of the US market. The first is due within 18 months of the enactment of the legislation and deals with the modernisation of US insurance regulation, while the second

is a comprehensive look at the US and global reinsurance market. The FIO may require insurers to submit data, with the director empowered to issue subpoenas to gain such information. But the legislation requires the FIO to obtain data from federal and state regulatory agencies or publicly available sources, if possible, before requiring insurers to submit such data. There is also an exemption for small insurers. The FIO’s first report, which was due at the end of January, is to review the uniformity (or lack of) in insurance regulation in the USA.

WE SAY: The need for insurance expertise and representation at a federal level is long overdue. The formation of the FIO is a positive step.

THE BAD: Life insurers to be branded a risk FSOC is ultimately responsible for deciding which financial institutions need heightened supervision by the Federal Reserve Board, as a result of

WE SAY:

The Resolution Plan, or ‘living will’ as it was dubbed during the legislative debate, will be an enormous burden on insurers. Though the idea for a plan dealing with insolvency is undoubtedly useful, the resolution will need to be updated each time there is a change in the structure or condition of the insurer.

FIO director MIke McRaith will hold one of three insurance seats on the Financial Stability Oversight Council

THE UGLY: Federal powers to override state Under Title V of the Dodd-Frank Act, the Treasury and the US Trade Representative have a new advance authority to negotiate international agreements on insurance prudential matters. That agreement effectively becomes law, without a need to go back to Congress for approval or be ratified like a normal treaty. Also, the director of FIO will have the power to review any state supervisory measure thought to be inconsistent with any commitment made within such an agreement. The director is then allowed to issue an order pre-empting the state order if certain conditions are met. One of those conditions is that the state regulation must not treat a non-US insurer or reinsurer less favourably than a US insurer or reinsurer. This move is popular with foreign insurers and reinsurers who have objected strongly to the collateral obligations forced upon them by state regulators, rules that did not apply to US insurers and reinsurers.

WE SAY: Congress may have put restrictions on the advance authority within Title V, but insurers are right to be extremely concerned. State regulators will have the opportunity to participate in a ‘consultation’ and provide input, but not have any veto powers. State regulators also face the real possibility of having their own regulations trumped by the FIO in order to keep international agreements on track. GLOBAL REINSURANCE MARCH 2012 31

30 MARCH 2012 GLOBAL REINSURANCE

The wild west of regulation, page 30

26 The big picture How the combination of acts of God and acts of man – by that read economic woes – have hit US reinsurers

28 Timeline Regulatory change, hurricanes and terrorism on an unprecedented scale – the market’s past, present and future

30 Horizon We reveal the good, the bad and the ugly of incoming US fi scal responsibility reform, the Dodd-Frank Act

32 Market map Key stats, big movers and their share 35 Inside / out

XL North America chief exec Seraina Maag

and Sean McGovern of Lloyd’s bring views from inside and outside the US market on the latest developments

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Managing director Tim Whitehouse

Federal Insurance Office (FIO), which has been created within the Treasury by Dodd-Frank. A third voting seat is to be held by an insurance expert appointed by US president Obama and is currently held by Ray Woodall. The FSOC’s final rules are expected to be delivered in the spring.

prices, and insider views on the future of the life insurance market

20 Carl Beardmore The BMS chief offers an alternative

Group sales director Tom Sinclair Tel +44(0) 7618 3429 Email tom.sinclair@nqsm.com

goo.gl/HxQ7B

he Dodd-Frank Wall Street Reform and Consumer Protection Act, a new fiscal responsibility regime, is expected to unsettle US financial institutions this year. The Act is a direct result of the 2008 financial meltdown and will incorporate all US financial institutions including insurers and reinsurers. Many in the industry question the relevance of a regime that puts banks and insurers under the same risk banner, but Federal regulators are adamant that the regime will be fair for the insurance industry. Part of the new regime is the formation of a committee of regulators, the Financial Stability Oversight Council (FSOC), on which insurers hold three seats. “Although there is no federal insurance regulator, insurance is represented because it is quite clear that insurance is within the definition of ‘financial institution’, so it can be studied by this council for potential systemic risk,” Dewey & LeBoeuf partner Charles Landgraf says. One non-voting seat will be held by a chosen representative of the National Association for Insurance Commissioners (NAIC), currently Missouri Insurance Department director John Huff. A second non-voting seat will be held by the Mike McRaith, director of the new

potentially posing a systemic risk to the US economy. Insurers will fall under the ‘non-bank financial company’ heading, under which they will be subject to a size test of whether they hold more than $50bn or more in assets in the USA, as well as being assessed on debt levels and how interconnected they are to other financial institutions. These rules have yet to be finalised but give a clear indication that US insurers, particular life insurers, could be designated a systemic risk. Dewey & LeBoeuf’s Landgraf says: “It is possible that a non-life insurer could be designated but just looking at the way the rule-making is developing, it is more likely to be life insurers. However, very few will be designated and it will be the first time that many of them had anything to do with the Federal Reserve Board. This means the board will be their macro prudential overseer and require information above and beyond what their prudential supervisor does.” Once an insurer has been declared a systemic risk by FSOC, it is referred to macro supervision by the board, which may impose new, additional capital requirements and conditions on top of its existing prudential supervisor’s requirements. There is also a second wave of concern at holding company level for those insurers facing designation as a systemic risk in the form of a creation of the ‘Resolution Plan’ for the Federal Deposit Insurance Corporation in case of insolvency. “The uncomfortable fact is that one of the big headline stories during the financial crisis was American International Group [AIG]. It was very deeply involved in the crisis through credit default swaps, which aren’t a traditional insurance product written by a traditional insurance company,” Landgraf says. “Because of this disaster, it has been very difficult, if not impossible, to argue politically that there is a reason for the insurance sector to be excluded from this new systemic risk supervision mechanism that was being set up.”

Global Market Report: USA

Senior sales executive Tomas Imrich Tel +44 (0)20 7618 3432 Email tomas.imrich@globalreinsurance.com

FIND OUT MORE ONLINE

Playing it safe, page 16

Leader

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

LANCASHIRE DEPLOYS SIDECAR FOR JAPAN RENEWALS

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

01: Money for claims is funded upfront and there is no basis risk, meaning peace of mind for cedants 02: Solvency II’s capital requirements have increased the appeal of collateralised cover 03: Collateral reinsurers, typically backed by hedge funds or pension funds, are able to set up without a credit rating

Less of a risk While it is not a replacement for traditional reinsurance – and is a more expensive option, reflecting the fact it is fully funded – collateralised reinsurance protection does offer cedants peace of mind. And with rates rising in the traditional property cat market (by an average of 9.5%, according to Guy Carpenter’s rate on line index), the differential in pricing is not as pronounced as it was. Collateralised cover eliminates counterparty risk and does not come with the basis risk typically associated with securitised products. This is the risk that a company experiences a loss but that it does not trigger a payout from the (re)insurers’ cat bond or ILW. While in theory, collateralised cover can be used in any class of business, it is typically purchased to cover property catastrophe risks. But, again unlike cat bonds and ILWs, this is not just at the top end of catastrophe programmes. “Collateralised reinsurance is being used more down in the working layers, which is why the UNL aspect is so important for the buyers,” Klein explains. “You don’t want basis risk at that level, and of course the rates on line reflect that.”

Dodd-Frank: it’s the new sheriff in town Set to become law this spring, the Dodd-Frank Act is the US government’s response to the 2008 financial meltdown. But as Lauren Gow reports, it contains much for insurers to be concerned about

investors, which set up unrated reinsurance vehicles in domiciles such as Bermuda, the Cayman Islands and Guernsey. The attraction is that catastrophe reinsurance is typically not correlated to wider economic cycles. “The investment market globally is pretty challenged,” Klein says. “Insurance and reinsurance is an area where there are still good returns and there is the accepted view that the insurance sector operates to a different economic cycle, although it’s under pressure from low interest rates. So it’s diversifying, it’s making returns and within the property cat arena it is now much easier to come up with a quantification of the risk that investors can understand more easily.”

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News & Analysis

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

he growing popularity of 100% collateralised ultimate net loss (UNL) reinsurance cover is testament to several factors in the market: last year’s catastrophe losses, the impending Solvency II directive and the increasing involvement of insurance investors in this space. Capacity is growing and is currently worth around $11.5bn, according to reports, but could grow to $12.5bn by 2014. Last year saw many examples of cedants complementing their traditional reinsurance purchases with collateralised cover. “Collateralised reinsurance is popular,” Guy Carpenter head of sales operations for the UK and EMEA Chris Klein confirms. “We effectively brought a collateralised vehicle to market last year. We were certainly using them as an important source of capacity and have managed to sell all that capacity into the market. It’s an important part of the placement process and is gradually increasing in importance, provided market conditions continue to make it attractive for the investors.” So what is collateralised reinsurance and why is it increasingly popular? Distinct from catastrophe bonds and industry loss warranties (ILWs), a tradable instrument is not created to facilitate the risk transfer process. Collateralised reinsurance transactions are essentially the same as traditional UNL reinsurance placements, except that the underwriter or investor posts full collateral against the risk. “From the start, the most attractive feature to the buyer is that it is collateralised,” Klein says. “You buy your cover and then the limit that you have purchased – the potential loss you’ve indemnified – is funded 100%. That money is put into a trust fund so you know that if there is a claim, the money is there – it’s been funded upfront.” Collateralised cover is typically provided by hedge funds, pension funds and other capital market

KEYPOINTS:

Lost generation, page 8

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

Global market report: USA

News Agenda

HORIZON

Going back further, youth unemployment in UNREST: Recession claims ON A KNIFE after the financial crisis January said: “For the EDGE in Argentina in 2001, generation entering the which led to the labour market in the (Re)insurers have been expecting a FIND OUT collapse of the years of the Great surge of financial crisis-related claims MORE ONLINE Argentinean economy, since trouble started back in 2008. goo.gl/pmXQy Recession, there is not large numbers of young only current discomfort The industry was especially worried people became addicted from unemployment, that there would be a wave of claims to the drug Paco (short under-employment and in professional lines, particularly from for ‘pasta base de the stress of social directors’ and officers’ liability policies. cocaine’ – a substance created hazards associated with This claims wave has yet to emerge, at the early stage of cocaine joblessness and prolonged however, leaving many concerned that production). inactivity, but also possible it will catch the industry unawares. The highly addictive and longer-term consequences in Despite this, there is evidence that cheap drug expanded out of terms of lower future wages financial crisis and recession-related the ghettos to the Argentine and distrust of the political and claims are on the rise. For example, middle class. No definitive economic system.” London’s Commercial Court recently numbers exist on deaths. Executive director of the ILO ordered 11 insurers to pay a £102m Youth unemployment was employment sector José Manuel professional indemnity claim brought high on the agenda at the Salazar-Xirinachs said that by Standard Life. The 11-strong group World Economic Forum in ultimately the job market will is led by ACE European Group and Davos, where politicians, only ever pick up if “obstacles to Liberty Mutual Insurance Europe, and economists and bankers said growth recovery” are removed, includes the UK divisions of several action was essential to stimulate “such as accelerating the repair other big names such as Axis Specialty growth and prevent a “lost of the financial system, bank Europe, Catlin Insurance Company UK generation”. This is set against a restructuring and recapitalisation and Chartis Insurance UK. to re-launch credit to small- and The claim centres on Standard medium-sized enterprises, and Life’s Pension Sterling Fund, which lost real progress in global demand 5% of its value after its investments in rebalancing”. asset-backed securities tanked. As with every risk, there’s an There are also other signs that upside too. Countries and senior (re)insurance executives are companies that are still in a taking the potential for recessionposition to offer employment related claims seriously. Markel should easily be able to attract International chief financial officer Andy the best workers. Davies says he is expecting claims Percentage of unemployment Chancellor Angela Merkel activity to increase as a result of the in Spain (ages 16-24) only had to mention Germany’s economic environment (see page 6). NB: 2011 figures shortage of healthcare professionals at a recent growing should, similarly, be European summit to trigger an backdrop of rising frustration able to pick and choose from a influx of migrant workers from among millions of young people large pool of talented and Spain into her country. worldwide who are facing high enthusiastic young people. Those companies that are still unemployment, increased inactivity and precarious work. As recent figures show, the The unemployed take to the streets global economic crisis has led to a substantial increase in In Europe, measures designed to remedy national financial problems are likely to youth unemployment around spark further public protests. Greece is expected to make further spending cuts the world. And it’s not just a as one of the conditions of its bail-out package from the EU and IMF. problem confined to poorer The same could be true in other European countries as governments struggle countries. At the peak of the crisis to ward off a return to recession. French finance minister François Baroin has period in 2009, the global youth announced austerity measures, while UK chancellor of the Exchequer George unemployment rate saw its Osborne has pledged to continue the country’s fiscal squeeze, despite the fact highest annual increase on that unemployment is now at its highest level in 15 years. record, going from 11.8% to Spain and, to a lesser extent, Italy have both seen protests against cuts 12.7% between 2008 and 2009 in spending. There could be a number of disasters waiting to happen as – an unprecedented increase of disaffected citizens take to the streets. 4.5 million unemployed youth Principal of Paris-based Adageo, an independent risk management resource, worldwide. Chris Lajtha says: “The likelihood of civil commotion is largely determined first The average increase of the by the hardship – real or perceived – felt by various segments of a population, pre-crisis period (1997-2007) and second by the availability and accessibility of channels to voice discontent/ was less than 100,000 young demands for change. people per year. “In countries in both the developing and developed world where there is a A report by the International high rate of unemployment in the 18-30-year-old category, there is a tendency Labour Organisation (ILO) on for discontented youth to take to the streets to try to accelerate change.”

51.4

Youth unemployment rate (16-24-year-olds) 50% and over 31%-49% 21%-30% 10%-20% 0%-9% no data

outh unemployment in Spain has reached 51.4% among those aged between 16 and 24, figures released in January reveal. A shocking one out of every

News Agenda

Risk Atlas

Risk Atlas: Youth unemployment

G LOBAL RE I NSU RANCE.COM

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 © 2012 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.

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News

PartnerRe, Platinum top 2011 worst-hit list ● Both saw 10%-plus drop in shareholders’ equity in second-worst cat year ● PartnerRe suffers Moody’s and S&P downgrade due to ‘outsized’ cat losses Reinsurance groups Platinum Underwriters and PartnerRe SOURCE: INSURANCE TIMES/GLOBAL REINSURANCE FINANCE DESK DATA: COMPANY ACCOUNTS have suffered most from the 2011 natural catastrophes out of Net cat loss as % of 2010 shareholders’ equity the global (re)insurers that have 25.89% Platinum Underwriters 24.84% reported their full-year results PartnerRe 22.39% Montpelier Re so far. But they are not the only 19.89% Transatlantic Re 19.85% companies that were hit hard Beazley 19.7% Catlin during what was the industry’s 19.12% Munich Re 18.41% second-worst year for natural RenaissanceRe 18.09% Validus disaster claims. 16.49% Aspen 16.05% The results come as fears Endurance 15.27% Everest Re increase among cedants over 8.68% Alterra 7.17% the financial stability of the XL 3.91% ACE reinsurers they use. PartnerRe 0% 5% 10% 15% 20% 25% 30% posted the largest full-year 2011 loss of its peer group at % change in shareholders’ equity 2010-11 $520.3m. It also reported the -10.79% Platinum Underwriters second-largest decline in -10.26% PartnerRe shareholders’ equity of 10.3%, -8.4% RenaissanceRe -8.32% Endurance which was just surpassed by -4.88% Montpelier Re Platinum’s 10.8% reduction. -4.7% Transatlantic Re -4.35% Catlin PartnerRe’s 2011 performance -3.74% Alterra is a sharp contrast to how it -3.38% Everest Re -2.13% Aspen fared in 2005, the worst year -1.61% Validus -1.1% on record for insured Beazley -1.01% Munich Re catastrophe losses. The 1.47% XL 6.71% company’s 2005 loss was just ACE -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% $51m, despite the fact that the USA was hit by three major hurricanes – Katrina, Rita and Wilma – S&P Catastrophe specialist reported full-year losses, DOWNGRADES Montpelier Re’s that year. while even the earnings of PARTNER RE Rating agencies have catastrophe claims the profitable companies ONE NOTCH noted PartnerRe’s were also above 20% of were significantly lower than underperformance shareholders’ equity, in 2010. FIND OUT MORE ONLINE relative to its peer while the rest ranged Munich Re posted the goo.gl/MqT5C group in 2011. Moody’s between 4% and 20%. biggest profit of those that downgraded its ratings The worst combined have reported so far, at €710m one notch to A1 from Aa3 ratio was posted by ($945m). But this is a fraction on 8 February because of Montpelier Re. of the €2.4bn profit the earnings volatility and the drop Companies with a particularly company made in 2010. in equity capital caused by its strong focus on catastrophe Munich Re paid out €4.5bn in “outsized” losses from the 2011 business tend to perform catastrophe claims in 2011, catastrophes. worst in tough years like equivalent to 19.1% of its 2010 Standard & Poor’s followed 2011, but much better than shareholders’ equity. suit 10 days later, with a their more diversified peers Last year was difficult for one-notch downgrade to when losses are lower. In 2010, reinsurers, as the bulk of the A+, stating that the reinsurer Montpelier Re’s combined ratio losses came from non-peak was “a negative outlier among was 82% – lower than most of zones. But, despite the losses its peers in 2011”. its peers. and declines in capital bases, Platinum and PartnerRe’s Last year there were an reinsurers are still on strong catastrophe claims bill relative estimated $107bn of insured footing and are unlikely to to 2010 shareholders’ equity losses. Around $30bn of these have difficulty paying claims. were also the largest of those losses hit reinsurers. Of the PartnerRe may have been that have reported so far, at 16 reinsurers that have downgraded, but it still has 25.9% and 24.8%, respectively. reported so far, 10 have total capital of more than $7bn.

Going global: Peo 1 New York Starr Companies has named

Bob Coords head of Starr Specialty Reinsurance, reporting to president Charles Dangelo. Initially, the team will focus on the agriculture sector.

Reinsurer results: effects of a cat-heavy 2011

2 4

1 5

3 São Paulo Ana Carolina Mello, property

and engineering director, and Salvatore Lombardi Jr, cargo and marine director, have joined Argo Group’s Brazil division.

5 Bermuda Former RenaissanceRe

Ventures head John Nichols will assume leadership of Axis Re on 2 April and join Axis Capital’s executive committee.

Euro storms: Lo

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News eople moves 2 London Longstanding executive Tony

Melia has been named chief executive of Willis Re International. He will oversee operations in Europe, Asia, Latin America and emerging markets.

4 Madrid Liberty International

Underwriters Europe has named Jose Luis Ruiz-Poveda vice-president and Leonardo Villalba senior risk engineer.

6 Qatar The Qatar Financial Centre

Authority has appointed former Merrill Lynch executive Bob Wigley as a non-executive director.

Online top five

Weblog globalreinsurance.com Not even Sherlock Holmes could have found John Berger after he left Alterra, but the industry was damn sure he was cooking up something big. And, indeed, he launched a Bermuda venture, Third Point Re, in January with $785m of capital and an A rating from AM Best. Topping our web stories this month was Berger’s nabbing of two Aon Benfield stalwarts: Rob Bredahl as chief financial officer and chief operating officer and Dan Malloy as executive vice-president for underwriting. In claims, nothing seems so bad if it isn’t happening to you. Nearly everyone in the industry who is not at RSA or XL (and even some who are) clicked with glee as losses mounted from the sinking of the Costa Concordia. In the third spot was more bad news for insurers, as Standard & Poor’s downgraded eight European insurers, including Allianz’s Italian

T To contribute to the website, email Lauren Gow at lauren.gow@globalreinsurance.com

2. RSA AND XL ON HOOK IN €405M CRUISE SHIP DISASTER Aon is the broker for the ill-fated Costa Concordia 3. S&P DOWNGRADES EIGHT EUROPEAN INSURERS Rating still undecided for major European groups 4. SOLVENCY II ‘DELAYED UNTIL 2015’ Latest rumours add two years to 2013 deadline 5. AT LEAST FIVE SUITORS GUNNING FOR HARDY Interest in Lloyd’s insurer driven by strong business and low valuation

Tokyo quake risk rises – AIR

Loss estimates reach $350m

● Likelihood of mega quake in region could hit 93% ● Risk modeller says Japan was unprepared for Tohoku

PHOTO: REX FEATURES

HARSH BLOW Windstorm Andrea will cost insurers about €267m ($350m), according to initial estimates from European insurance loss index, PERILS. Most of the losses from the storms, on 4 and 5 January, occurred in Germany, with signiﬁcant losses in the UK, France, Belgium, the Netherlands, Luxembourg and Switzerland as well. PERILS is due to publish an updated estimate on 4 April.

operation and Ageas’ Portuguese unit. At the time, the ratings agency was still mulling over its decision on some of the big group insurers such as Allianz Group, Aviva Group, AXA Group and CNP Group, but has since put them on a negative outlook. There was a collective groan in late January at rumours that Solvency II was to be delayed once again to 2015. A spokesman for EU financial services commissioner Michel Barnier said the European Commission “regrets this delay and is still working resolutely toward a speedy introduction”. Finally, five sharks are circling Hardy. Shore Capital analyst Eamonn Flanagan said its Lloyd’s presence was a key attraction for the likes of US insurer Tower Group and Bahraini reinsurer Arig.

1. BREDAHL AND MALLOY JOIN BERGER AT THIRD POINT RE Aon Benﬁeld pair in senior posts at Bermuda-based venture

The probability of earthquakes in the vicinity of Tokyo may have increased to between 81% and 93%, according to analysis by risk modeller AIR Worldwide. AIR’s analysis of last year’s Tohoku earthquake in Japan indicates that the 30-year rupture probability of earthquakes with a magnitude of 6.7 or greater in the Kanto Plain, on which Tokyo sits, may have increased from its previous level of 72%. AIR Worldwide conducted an analysis of whether – and where – the stresses relieved by the Tohoku earthquake have been transferred to

neighbouring faults in the vicinity of Tokyo. The analysis also discovered that, while the bulk of the damage from the Tohoku earthquake last year was caused by the resulting tsunami, the 30-metre-high tidal wave was only responsible for 30% of the overall insured losses. The shake damage was more widespread, and AIR pointed out that shake damage would have been significant in the area that was subsequently hit by the tsunami. Japan was unprepared for an earthquake of Tohoku’s magnitude, according to AIR, despite its long seismic history. GLOBAL REINSURANCE MARCH 2012 5

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Financial Brieﬁng Marketwatch: European reinsurers lead the way ● Reinsurers have had another good month, with all of the top companies posting rises. European reinsurers performed best, with Munich Re leading the pack. ● But some reinsurers only posted small rises. PartnerRe’s stock was up 1.9%, as bad news about

12.6%

Munich Re 110 100 90 80

120k 115k 110k 105k

SCOR 20 19 18 17

PartnerRe 66 64 62 60

its heavy losses was slightly offset by the annual dividend payment.

Swiss Re 55 50 45 40

Hannover Re 40 38 36 34

Reinsurance Group of America 54 52 50 48

Everest Re 90 85 80 75

Munich Re was this month’s biggest riser

*All prices expressed in local currency 17 January-16 February 2012

Berkshire Hathaway 'A'

CFO interview: Andy Davies The man in charge of Markel International’s money tells us how it is riding the storm

Andy Davies Markel International

Q: What is your biggest concern as a chief financial officer in the current economic environment? A: The biggest concern I have is the adequacy of the premium rates we are charging on the business today. There are two drivers of that. One is that claims activity is likely to go up because of the economic environment. The other is the fact that buyers have less money and are therefore putting pressure on (re)insurers and brokers on the premium front. So there is a double-squeeze going on.

Q: How are you managing the challenges? A: We are turning away business in sectors we are not comfortable with and giving underwriters all the tools we can to make sure they adequately price business. Q: What impact is the low interest rate environment having on your investment portfolio? A: We’re unusual because we have a big equity portfolio and our investment strategy is different to others’. In

London, we have about $3bn of invested assets and in the USA, $8bn. We achieved a 6.5% return in 2011. Our investment philosophy on the equities side is to invest in companies we know, we like and whose businesses and cultures we understand. We tend to take long-term views. On the bond side, the bond yields have really come off quite a lot and there is not much juice left in the bond market, so we are trying to shorten the duration of our bond portfolio as much as we can and pushing more into equities.

Mapfre hits out at downgrade ● Four agencies cut ratings following Spain deterioration Spanish insurance group Mapfre has spoken out against the rating agencies, following its recent raft of downgrades from the four main agencies. Mapfre’s ratings were cut after a downgrade to Spain’s sovereign debt ratings as a result of the continuing eurozone crisis. But Mapfre argues that the downgrades do not reflect the company’s financial strength. “Rating agencies are in contradiction. They do their job analysing your figures, but then they reduce your rating according to the rating of your country,” Mapfre general manager Esteban

Tejera told a press conference for Mapfre’s 2011 results. Tejera pointed out that Mapfre’s 2011 financial position was stronger by several measures: its equity capital was up 24.8% versus 2010; its interest coverage (the number of times earnings exceed interest payments) increased to 36.5 times from 30.1 times; and its solvency margin increased to 287.2% from 285.7%. Standard & Poor’s cut Mapfre’s ratings by two notches to BBB+ from A on 17 January. Fitch and Moody’s later followed suit. AM Best downgraded the insurer to A from A+ on 14 December last year.

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Financial Brieﬁng

Solvency II data rules could curb investment

Transatlantic Holdings 56 55 54 53

● Industry survey reveals (re)insurers concerned about new data requirements ● Over two-thirds expect to change asset allocations to achieve higher returns

Korean Re 16k 15k 14k 13k

Solvency II: mapping insurer conﬁdence

Q: How is the eurozone sovereign debt crisis affecting you? A: Any exposure we had to some of the problem governments we got rid of about a year ago, and we didn’t have much anyway. There will be more claims activity because the eurozone crisis is putting more stress on companies. We are trying to keep the investments matching our euro liabilities in the northern European countries, which are stronger. Q: How is Solvency II affecting your job? A: It is taking up a lot of resources. Hopefully we are over the hump. Once it is implemented, it shouldn’t really affect your job – it should be embedded in the way you operate.

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We say …

PHOTO: BIGSTOCK

LLOYD’S TALLIES UP THAILAND LOSSES Lloyd’s is expecting claims of $2.2bn from the severe ﬂooding that hit Thailand at the end of 2011. The estimate is based on market share analysis, a review of contracts in place and syndicate estimates, and is consistent with an industry-wide loss of between $15bn and $20bn.

Solvency II should not hinder (re)insurers’ ability to invest in higher-yielding instruments, but There is a disconnect between insurers’ confidence and the understanding of the companies’ ability to meet the necessary time and resources required for Solvency II regulation’s data demands might, Q. How confident are you in the quality of your investment governance and risk management in according to asset management light of Solvency II requirements? SOURCE: BLACKROCK powerhouse BlackRock. NOT AT ALL CONFIDENT 1% NOT VERY (Re)insurers are under EXTREMELY CONFIDENT 2% CONFIDENT SOMEWHAT CONFIDENT increasing pressure to invest in higher-yielding asset classes as 55% 42% persistently low interest rates depress returns in their Q. How concerned are you about the prospect of limiting your investment strategy because some traditional staple of government assets will not adequately meet data requirements under pillar III of Solvency II? and highly rated corporate VERY CONCERNED SOMEWHAT CONCERNED NOT CONCERNED bonds. Companies that have guaranteed either policyholders 38% 54% 8% or shareholders a specific return are feeling this pressure particularly acutely. A survey conducted by SOLVENCY these asset classes, and which could prevent companies the Economist Intelligence II’S ORSA thus attract a lower taking advantage of the lower REMAINS A Unit on behalf of capital charge than risk charges. CHALLENGE – BlackRock, which polled they would under the The BlackRock survey found WILLIS RE 223 insurers across standard model. that insurers are very concerned Europe, found that 70% of FIND OUT “What we’re about their Solvency II reporting respondents are expecting MORE ONLINE witnessing here is the requirements. Although 89% goo.gl/2039E changes to their asset desire of the insurers to claim to be well prepared allocations to result in really reflect the risk for pillar III data reporting higher returns. they are running in their requirements, 97% are worried “They are worried about asset pools on a more that if they do not get pillar III a yield environment that is defined basis,” he said. right, it will prevent them from very low. They are worried Lomas said that BlackRock pursuing high-yield strategies. about guarantees they need to ran two of its hedge funds “If you have to deliver fund, and therefore they will through its Solvency II risk returns to shareholders and expect to undertake asset model, and arrived at a capital policyholders, and your allocation changes,” BlackRock’s charge of 10%. Based on this, limitation is the quality of your financial institutions group he estimated that insurers using data, that’s a bad place to be,” head, David Lomas, said. their own internal model could Lomas said. The Solvency II standard be looking at a capital charge of model – the capital model that between 15% and 20% for will be used by insurers that hedge funds and private equity, ● With the Solvency II deadline have not approved their own rather than the more penal 49% internal capital model – imposes under the standard model. now extended to 2014, and some a hefty 49% capital charge on But while Solvency II itself indications that it may be pushed asset classes such as hedge might not hold insurers back out further, some are wondering funds and private equity. from pursuing higher-yielding whether it will ever happen. But Despite this, the BlackRock investments, their data might. given the amount of expenditure, survey found that 32% of Lomas explained that data forms there is a determination by many respondents expected their the kernel of pillars II and III of to see it through. private equity and hedge fund the new regulation. Data drives ● Investments in alternatives holdings to increase under the internal model, which in turn can be risky, but BlackRock is not Solvency II. Lomas said this was drives a company’s own risk advocating that insurers allocate because insurers using their consultancy assessment, large portions of their portfolios own internal model rather than enterprise risk management and to hedge funds or private the standard model would be ultimately corporate governance. equity. As with all financial able to demonstrate a lower In short, if the data is poor, so instruments, understanding cost of capital of investing in too is Solvency II compliance, what you are buying is critical. GLOBAL REINSURANCE MARCH 2012 7

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Risk Atlas Risk Atlas: Youth unemployment

Youth unemployment rate (16-24-year-olds) 50% and over 31%-49% 21%-30% 10%-20% 0%-9% no data

The perils of a lost generation â&#x2014;? Youth unemployment has reached staggering levels, and disaffected young people can trigger many more risks â&#x2014;? Frustration felt by young people has helped fuel protests movements, such as the Arab Spring uprisings

outh unemployment in Spain has reached 51.4% among those aged between 16 and 24, figures released in January reveal. A shocking one out of every

two young people in Spain is without a job. As the map above shows, the situation is not much better in several other parts of the world. High rates of joblessness among

young people is a risk that can easily be correlated with other social problems, such as civil unrest, drug use and crime. The collective frustration among youth has been a

contributing factor to protest movements around the world this year as it becomes increasingly difficult for young people to find anything other than part-time and temporary

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Risk Atlas Going back further, youth unemployment in UNREST: Recession claims ON A KNIFE after the financial crisis January said: “For the EDGE in Argentina in 2001, generation entering the which led to the labour market in the (Re)insurers have been expecting a FIND OUT collapse of the years of the Great surge of financial crisis-related claims MORE ONLINE Argentinean economy, since trouble started back in 2008. goo.gl/pmXQy Recession, there is not large numbers of young only current discomfort The industry was especially worried people became addicted from unemployment, that there would be a wave of claims to the drug Paco (short under-employment and in professional lines, particularly from for ‘pasta base de the stress of social directors’ and officers’ liability policies. cocaine’ – a substance created hazards associated with This claims wave has yet to emerge, at the early stage of cocaine joblessness and prolonged however, leaving many concerned that production). inactivity, but also possible it will catch the industry unawares. The highly addictive and longer-term consequences in Despite this, there is evidence that cheap drug expanded out of terms of lower future wages financial crisis and recession-related the ghettos to the Argentine and distrust of the political and claims are on the rise. For example, middle class. No definitive economic system.” London’s Commercial Court recently numbers exist on deaths. Executive director of the ILO ordered 11 insurers to pay a £102m Youth unemployment was employment sector José Manuel professional indemnity claim brought high on the agenda at the Salazar-Xirinachs said that by Standard Life. The 11-strong group World Economic Forum in ultimately the job market will is led by ACE European Group and Davos, where politicians, only ever pick up if “obstacles to Liberty Mutual Insurance Europe, and economists and bankers said growth recovery” are removed, includes the UK divisions of several action was essential to stimulate “such as accelerating the repair other big names such as Axis Specialty growth and prevent a “lost of the financial system, bank Europe, Catlin Insurance Company UK generation”. This is set against a restructuring and recapitalisation and Chartis Insurance UK. to re-launch credit to small- and The claim centres on Standard medium-sized enterprises, and Life’s Pension Sterling Fund, which lost real progress in global demand 5% of its value after its investments in rebalancing”. asset-backed securities tanked. As with every risk, there’s an There are also other signs that upside too. Countries and senior (re)insurance executives are companies that are still in a taking the potential for recessionposition to offer employment related claims seriously. Markel should easily be able to attract International chief financial officer Andy the best workers. Davies says he is expecting claims Percentage of unemployment Chancellor Angela Merkel activity to increase as a result of the in Spain (ages 16-24) only had to mention Germany’s economic environment (see page 6). NB: 2011 figures shortage of healthcare professionals at a recent growing should, similarly, be European summit to trigger an backdrop of rising frustration able to pick and choose from a influx of migrant workers from among millions of young people large pool of talented and Spain into her country. worldwide who are facing high enthusiastic young people. Those companies that are still unemployment, increased inactivity and precarious work. As recent figures show, the The unemployed take to the streets global economic crisis has led to a substantial increase in youth unemployment around In Europe, measures designed to remedy national financial problems are likely to the world. And it’s not just a spark further public protests. Greece is expected to make further spending cuts problem confined to poorer as one of the conditions of its bail-out package from the EU and IMF. countries. The same could be true in other European countries as governments struggle At the peak of the crisis to ward off a return to recession. French finance minister François Baroin has period in 2009, the global youth announced austerity measures, while UK chancellor of the Exchequer George unemployment rate saw its Osborne has pledged to continue the country’s fiscal squeeze, despite the fact highest annual increase on that unemployment is now at its highest level in 15 years. record, going from 11.8% to Spain and, to a lesser extent, Italy have both seen protests against cuts 12.7% between 2008 and 2009 in spending. There could be a number of disasters waiting to happen as – an unprecedented increase of disaffected citizens take to the streets. 4.5 million unemployed youth Principal of Paris-based Adageo, an independent risk management resource, worldwide. Chris Lajtha says: “The likelihood of civil commotion is largely determined first The average increase of the by the hardship – real or perceived – felt by various segments of a population, pre-crisis period (1997-2007) and second by the availability and accessibility of channels to voice discontent/ was less than 100,000 young demands for change. people per year. “In countries in both the developing and developed world where there is a A report by the International high rate of unemployment in the 18-30-year-old category, there is a tendency Labour Organisation (ILO) on for discontented youth to take to the streets to try to accelerate change.”

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work. High rates of joblessness among young men was certainly believed to be a factor in the Arab Spring uprisings that continue to sweep across the Middle East.

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Risk Atlas Special The 10 most costly natural disasters since 1980 2011 $210bn 15,500

CHINA 2008 $85bn 84,000

USA

JAPAN 1998 $30bn 4,159

1994 $44bn 61

2004 $28bn 46

1992 $26bn 62

1995 $100bn 6,430

2008 $38bn 170

INDIAN OCEAN

PACIFIC OCEAN

2010 $30bn 520

The 10 most deadly natural disasters since 1980

RUSSIA 2003 $13bn 70,000

2010 $400m 56,000

1990 $7bn 40,000

2008 $85bn 84,000

IRAN 2005 $5bn 88,000

THAILAND 1991 $3bn 139,000

INDIAN OCEAN 2008 $4bn 140,000

PACIFIC OCEAN

2004 $10bn 220,000

Tsunami

Hurricane

Earthquake

Heatwave

Floods

Tropical cyclone

2000 $$$ 1,000

Year Economic losses Fatalities Magnitude of event

Source: Munich Re

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Risk Atlas Special

2005 $125bn 1,322

Our worst year yet ● Earthquakes are not actually growing more frequent, despite contrary perception ● But the cost of catastrophes has hit a new high as populations concentrate in cities 10 0bn 0

CHILE

HAITI 2010 $8bn 222,000 1999 $3bn 30,000

ast year was the costliest year ever for natural catastrophes. At about $380bn, global economic losses were nearly two-thirds higher than the previous record in 2005 of $220bn, according to Munich Re. The earthquakes in Japan and New Zealand caused almost two-thirds of these losses, as the map top left shows. Five of the 10 most costly natural disasters were in the past four years (see opposite). But, contrary to popular perception, at around 820 natural catastrophe events in 2011, the number of events was in line with the average of the last 10 years. Nine out of 10 of the natural catastrophes were weatherrelated (floods, storms, hurricanes and so on), whereas nearly two-thirds of the economic losses stemmed from geophysical events (like earthquakes). Normally geophysical events account for under 10% of economic losses and usually it is the weather-related natural catastrophes that are the dominant loss drivers.

City life

Almost 30,000 people lost their lives last year as a result of natural catastrophes (the map

bottom left shows the deadliest 2011 was also unusual. disasters of the past 30 years). Around 70% of economic Perhaps one of the reasons losses in 2011 occurred in for the high costs – both in Asia. The most destructive terms of money and human loss event of the year was life – is that a growing share the earthquake of 11 March of the world’s population and in Tohoku, Japan, when a economic activity is being seaquake with a magnitude concentrated in disaster-prone of 9.0 occurred 130km east of places: on tropical coasts and the port of Sendai and 370km river deltas, near forests and north of Tokyo. along earthquake fault lines. Before the tsunami in Whereas in 1950 only about Japan, there had been an 30% of the world’s population earthquake of 6.3 magnitude lived in cities, the United in Christchurch, New Nations currently puts that Zealand, on 22 February. figure at 50%. It is expected to The notable aspect of this rise to more than 60% by 2030. event was that an earthquake Natural disasters are more of 7.1 magnitude had hit destructive when they strike Christchurch just six large cities. months earlier. And most of the world’s Head of Munich Re’s geo megacities (that is, urban risks unit, Peter Höppe, says: areas with eight million or “Even if it seems hard to more people) are built in areas believe given recent events, where earthquakes, floods, the probability of earthquakes landslides and other natural has not increased. disasters are most likely to “But these severe happen. earthquakes are timely Currently, 280 million reminders that the people live in at least 25 CATASTROPHES decisions on where CUT MUNICH RE megacities across the to build towns need PROFIT BY 70% world, three-quarters of careful and serious which are located in the FIND OUT consideration of these MORE ONLINE developing world. risks, especially where goo.gl/hgf7l certain buildings are concerned – Where on earth The distribution of above all nuclear regional losses in power plants.” GLOBAL REINSURANCE MARCH 2012 11

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Global Insurance Index Survey: The views of senior reinsurance leaders

Taking a (slightly) brighter view ● Optimism rose this month among key reinsurance leaders for the economic outlook in 2012 ● Over half of survey respondents expect to wait until at least 2014 to see a return to proﬁtability

olitical unrest in Europe is second only to natural catastrophes as the area of maximum concern for global (re)insurers. Catastrophes scored on average four out of a possible five for level of concern, followed by European instability with three points. Unrest in the Middle East scored least with two. The Global Insurance Index tracks business confidence among a panel of senior (re)insurance leaders each month. Respondents’ optimism bounced during February with an average score of three out of a possible five on the pessimistic-to-optimistic-ometer. This was a gain on 2.8 in January. The outlook for profitability softened slightly, however, with the average score down 0.1 points to 1.8. This may be because the majority, 55%, expect to have to wait until 2014 or later for interest rates to rise and thus investment returns to improve. Nearly one-fifth, 18%, expect an interest rate rise in 2013. The largest minority, 28%, were unable to nail their colours to the mast, choosing ‘it’s impossible to predict’ as the best option.

Q: What’s your view on the global ﬁnancial outlook for 2012, and its impact on (re)insurance?

Q: How do Very optimistic you feel about the global 5 economic outlook for the remainder of 4 2012?

Q: How would you evaluate the industry’s outlook for proﬁtability in 2012?

3 Average score

Q: Please rate Maximum concern the following 5 matters for concern for the global (re) 4 insurance industry in 2012. 4.0 Natural

Good

3.0 Political unrest in Europe

3.0 2

1.8 1

1 2.8 Jan

Very pessimistic

Q: When do you expect interest rates to rise and thus investment returns to start improving?

1.9 Jan

Q: Catastrophe prices have increased following the events of 2011. What are the prospects for casualty rate rises in the next two years?

H1 2012 9% H2 2012 0%

Financial fraud or mismanagement 2.2 2.0 Political unrest in the Middle East

Poor

Minimum concern

No change 9%

91%

Q: How far will the Eurozone sovereign debt crisis impact on (re)insurers’ capital levels?

Loss 0% to 10% 55% Loss 11% to 20% 27% Loss 21% to 50% 0% Loss 51% or more 0%

2014 or later 55%

No negative impact 0%

I expect global ﬁnancial instability to continue: high risk levels on European and possibly US sovereign bonds, coupled with erratic equity markets with overall gains. The (re)insurance industry will increasingly suffer from bond market instability, with little to zero ability to participate in equity market gains. There is strong

2.3 Aviation/ marine catastrophes

2013 18%

It’s impossible to predict 28%

catastrophes

They will rise

possibility for new solvency capital requirements for sovereign bonds under a revised Solvency II regime. A continued low interest environment will severely depress investment income. Technical margins are not rising enough to compensate and there are questions marks as to catastrophe activity in 2012.”

Don’t know 18%

The potential impact of the sovereign debt crisis, and/or the collapse of the euro, would be a big negative for the industry.”

In my view, 2012 will be a poor year, but 2013 will be better.”

12 MARCH 2012 GLOBAL REINSURANCE

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Generating positive change

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08/02/2012 14:32

News analysis Maritime disaster

Day of reckoning Losses from the sinking of the Costa Concordia cruise ship will hit reinsurers hardest and prompt rate hikes, writes Helen Yates

Still missing

The Italian cruise liner, owned by a subsidiary of Carnival Corporation, ran aground on 13 January on a reef off the Italian island of Giglio, just off the Tuscan coast. Latest reports put the number of fatalities at 17 (including 15 passengers and two crewmen), with 16 people still missing. Passenger claims are likely to be inflated by the cost of accommodation and repatriation.

A lawsuit has been filed in Florida, where Costa Cruises is based, on behalf of 500 of the passengers who are suing the company for $460m. The legal move follows a compensation offer from Costa Cruises of about $14,600 per passenger, plus the cost of their passage home and a complete refund. Investigations into the cause of the accident continue. Captain Francesco Schettino was arrested on charges of multiple manslaughter, failure to assist passengers and abandonment of the ship. The vessel’s first officer was also arrested.

Market impact

Reinsurers will be hit harder by the loss than the ship’s insurers, says Moody’s, since marine insurers generally carry significant reinsurance coverage on their marine hull and liability risks with relatively low deductibles. Munich Re says it expects a mid-double-digit million-euro claims burden, while Hannover Re estimates its loss to be in the region of €30m ($40m) for the company’s net account. As the marine insurance market is widely syndicated, losses are expected to be spread widely among primary insurers and Lloyd’s syndicates. Specialty insurer Lancashire is likely to face losses of between $20m and $30m, according to Jefferies. Meanwhile, Validus says it expects its loss to be in the range of $50m to $65m, based on a total industry loss of $845m-$950m, net of reinstatement premiums and reinsurance. It has additional reinsurance in place if the ultimate industry loss increases. Other insurers affected by the Costa Concordia loss are Generali, RSA and XL, according to Jefferies. Coming after last year’s sizable catastrophe claims – including the Japan earthquake and tsunami, which resulted in a loss of $450m for marine insurers, and the Thai floods at the end of the year – this latest disaster is set to further harden rates in the market. “I think there’s been an initial hardening on the liability side and hull underwriters are pushing for increases almost straightaway,” says the marine liability underwriter. “Brokers have factored that into their renewals as well – accounts that were expiring are now getting 5%-10% increases. I suspect that on the hull side people will review how much exposure they’ve got out there on certain larger accounts.” “The majority of the liability side is generally relatively profitable so I don’t know how much longevity [the rate spike] will have, but significant corrections are being made on underperforming sectors,” he added. “There have been some large marine and energy liability losses and some accounts are being hit hard. In my mind it is important to make that point.”

ILLUSTRATION: BRETT RYDER

hile it is estimated to be insured for up to $513m, losses from the wrecked cruise ship the Costa Concordia could reach $1bn, according to Moody’s senior credit officer James Eck. Liability claims by passengers, the costs of recovery as well as the potential for environmental liability claims arising from any fuel spillage – the risk of which has increased with poor weather conditions, are all conspiring to push up the final bill. “On a net basis, I don’t think this is going to kill anyone but there are certainly people who have big retentions,” says a senior marine liability underwriter. “There are certain syndicates who would have hull, marine liability and also potentially have treaty reinsurance or fac take-outs as well – so some people are going to be a bit unlucky.” Investment bank Jefferies International has put the loss at $850m, although it is still unclear if the ship will be a total or partial loss. This early loss range of $850m to $1bn would seem to stack up. The marine liability underwriter reveals that the liability claim is being reserved at $385m, an estimate he believes to be conservative. Should the stricken vessel be declared a total loss, the cost of removal of the wreck will fall to the liability insurers. “If the vessel isn’t a total loss then the hull insurers would be responsible for the salvage rather than the liability insurers, so that would change the balance a bit,” he says. “If the underwriters feel they can salvage the vessel then the liability claim would go down a lot and the hull claim would go down a bit as well. “The surveyors and lawyers appointed by the hull insurers are currently advising them but I suspect it’s going to be a total loss.” As of 24 January, crews from Dutch salvage firm Smit International were preparing to remove the vessel’s 500,000 gallons of fuel. The defueling was due to begin on 28 January, but poor weather has delayed the operation. After defueling, work on removing the wreck will begin. On 3 February, Italian Civil Protection Authority head Franco Gabrielli said the ship would be refloated and removed intact, not cut up for scrap.

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News Agenda

In Increased interest from cedants and investors has led to continued growth in collateralised reinsurance. le Helen Yates weighs up the costs and benefits in the H aftermath of 2011’s catastrophes and losses a

KEYPOINTS:

Less of a risk

While it is not a replacement for traditional reinsurance – and is a more expensive option, reflecting the fact it is fully funded – collateralised reinsurance protection does offer cedants peace of mind. And with rates rising in the traditional property cat market (by an average of 9.5%, according to Guy Carpenter’s rate on line index), the differential in pricing is not as pronounced as it was. Collateralised cover eliminates counterparty risk and does not come with the basis risk typically associated with securitised products. This is the risk that a company experiences a loss but that it does not trigger a payout from the (re)insurers’ cat bond or ILW. While in theory, collateralised cover can be used in any class of business, it is typically purchased to cover property catastrophe risks. But, again unlike cat bonds and ILWs, this is not just at the top end of catastrophe programmes. “Collateralised reinsurance is being used more down in the working layers, which is why the UNL aspect is so important for the buyers,” Klein explains. “You don’t want basis risk at that level, and of course the rates on line reflect that.”

LANCASHIRE DEPLOYS SIDECAR FOR JAPAN RENEWALS FIND OUT MORE ONLINE

goo.gl/HxQ7B

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News Agenda Following the reinsurance industry’s second most expensive catastrophe year on record, with over $100bn in losses, there is likely to be more concern over the ability of some of the weaker reinsurers to honour claims than would have been the case a year ago. Collateralised cover eliminates many of the counterparty concerns cedants may have with their reinsurers. “We generally err on the side of caution,” Canopius reinsurance manager Chris Swan reveals. “So I guess it is more of a flight to security whenever times get tough. And also we use more collateralised markets than we did before. It is more mainstream than it was 10 years ago.”

A very testing year

While the industry arguably proved its resilience once again last year, absorbing the cat losses with minimal erosion of capital, it is feasible that some cedants could be looking for more reassurance in the current environment. There have inevitably been winners and losers from the 2011 catastrophes, with some firms disproportionately affected by losses. The downgrading of Platinum to Afrom A by rating agency Standard & Poor’s followed the reinsurer’s revised cat loss estimates in October last year while PartnerRe saw its ratings cut by Moody’s to A1 from Aa3 as a result of its “outsized” losses in February. “We often have buyers who are looking at a company with an A- rating with a negative outlook and they will say: ‘We’re going to need some sort of security to accept you,’” Klein says. Aside from instances where reinsurers’ A-range ratings are under threat, he does not think there are too many concerns about reinsurer counterparty strength. “If you think back to the financial crisis,”he says, “we had a couple of scares with a couple of important carriers but they are still trading. “The industry managed to solve its problems from within its own resources and indeed, one of those companies has been upgraded back to where it was before the crisis … So really the reinsurance industry came through the crisis very well.” However, cedants could also be further compelled to reduce their counterparty credit exposure in preparation for the Solvency II regime. Particularly for those European insurers planning on using the standard formula to calculate their capital requirements, a bit of collateralised catastrophe capacity could make a big difference.

“Solvency II will give a benefi efit to cash collateral vis-à-vis counterparty rty credit exposure,” Leadenhall Capital al Partners chief executive Luca Albertinii says. “Solvency II basically says you u need to put some capital aside for the e counterparty credit risk you take. But if you collateralise the cover with triple-A money market funds,, it ought to be better.” He notes that Leadenhall, which provides collateralised cover to primary insurers and reinsurers, ers, has seen an increased appetite from om buyers following last year’s catastrophes. “We are a capital tal markets fund and that createss some interesting features,” Albertini explains. “In an environment like 2011 1 and 2006, where capacity has been volatile, having an open relationship with a pocket of capacity that has different sources of capital than traditional reinsurance is a good way to diversify.”

Cat models kickstart sidecars

Another potential driver for cedants to purchase more collateralised cover is the cat model releases that came to market last year. RMS version 11 for the USA and Caribbean in particular revealed a much higher exposure for areas inland from the coast, leading to increases of up to 100% for probable maximum losses (PMLs) on some portfolios. Alterra Bermuda president Andrew Cook credits this – along with last year’s losses – for driving some of the increased interest in the reinsurers’ sidecar New Point IV at the 1 January renewals. New Point IV writes property catastrophe collateralised retrocessional cover and was one of the vehicles set up in Bermuda during last year’s sidecar resurgence. “As companies moved to RMS version 11 and saw the impact on their US PMLs, we saw a number of examples of buyers looking for US-only cover,” Cook says.

‘An open relationship with a pocket of capacity which has different sources of capital is a good way to diversify’ Luca Albertini Leadenhall Capital Partners

“Overall, the market is still working through the implementation of RMS 11, particularly in Europe, so we believe that this staged implementation will continue to drive demand for retro throughout 2012. “The third driver of demand was the overall improvement in the underlying property catastrophe market,” he adds. “As companies took advantage of the improving market conditions, it necessitated their purchase of retro to protect their books.” One of the benefits of collateralised reinsurers, of which sidecars is one type of vehicle, is that they do not need a credit rating in order to get started. Compared to Bermuda start-ups, where a minimum rating of A- and start-up capital anywhere between $1bn and $3bn is an essential ‘ticket to the dance’, hedge-fund-backed reinsurers can get to work extremely quickly. For Albertini’s portfolio, collateralised reinsurance provides wider scope than insurance-linked securities on its own. “The amount of business available through capital markets instruments like cat bonds and ILWs doesn’t yet allow you to build a portfolio across all the perils and the risk layers available in the reinsurance industry,” he explains. “If I do a cat bond-only portfolio first of all, I’m likely to be exposed to the very remote layers and cannot reliably target more than a 6%, 7% or 8% yield.” “If I want to deliver a 16% yield, I have to go into the private market,” he continues. “Some ILWs are efficient, particularly for the USA, but if I want to have a good portfolio of European wind exposures or something in Australia and New Zealand, the collateralised markets offer the combination of yield and territorial scope that I need to build a portfolio.”

18 MARCH 2012 GLOBAL REINSURANCE

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Proﬁle

‘‘

The big guys created an arms race and that has created a problem for them

‘‘

BMS chief Carl Beardmore believes that sturdy mid-tier brokers are set for a golden age of opportunity. Expansion in the USA and launching into underwriting at home are part of his plan to square up to the big hitters 20 MARCH 2012 GLOBAL REINSURANCE

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Proﬁle

MS chief executive Carl Beardmore is clearly not one for putting his feet up. “I’m not the best person to talk to about holiday entitlement – I simply don’t take them,” he says, only half-joking. He has set himself and the (re)insurance brokerage he runs a huge task: beating the big hitters at their own game. He wants BMS to occupy the space vacated by mid-tier companies such as Benfield|when they were bought by their larger peers. “Our vision now is very much to present ourselves as the alternative to the larger players,” Beardmore says. “Speaking to clients and markets, there seems to be a great desire to see somebody fill the slot behind the big guys.” It was the opportunity to fill this perceived gap in the market that tempted Beardmore to take the top job at BMS. He became chief executive in September 2010, having worked for the company for eight years as a consultant and non-executive director. The position was left open following the departure of previous chief John Spencer back in January 2008 – the company’s board, led by chairman Hugo Crawley, had been running the company since then. “There are too many examples of people putting very good companies together, including the likes of [US (re)insurance broker EW] Blanch and Benfield, and then selling out ultimately,” Beardmore says. “The notion of creating a company that is similar in characteristics to those people, but truly sustains itself over time and isn’t snapped up by one of the big people, is a really compelling and attractive ambition.” To say Beardmore has his work cut out is an understatement. By way of illustration, BMS turned over £50.2m ($79m) in 2010, its 30th year of operation and the most recent year for which figures are available. In the same year, Aon’s risk solutions division pulled in $6.4bn, and Marsh & McLennan Companies’ risk and insurance services division reported revenues of $5.8bn.

Chipping away at rivals

While Beardmore is clearly not trying to match his biggest rivals’ turnover, the numbers show the vastly superior firepower of the companies he is taking on. This financial muscle allows the big brokers to invest heavily in analytics and risk modelling, which reinsurance buyers in particular find highly valuable, and which have become differentiators for brokers. Smaller brokers cannot hope to match the top tier’s spending power. But Beardmore feels that he is chipping away at his larger rivals in small but meaningful ways, even on the analytics side. “In terms of the modelling and actuarial side of things, we have put together a GLOBAL REINSURANCE MARCH 2012 21

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Proﬁle team that has shown itself able to compete with the big boys,” he asserts. He argues that the bigger brokers’ heavy spending on analytics could be their undoing. “The big guys felt there was a differentiation opportunity by creating an arms race and boasting about who was spending the most per annum on modelling and actuarial,” he says. “I think it has created a problem for them now.’” Beardmore claims that BMS’s modelling and actuarial analysis is at least on a par with that of the top-tier brokers and that these facilities have helped BMS win “significant business” from its larger rivals in the past six months. In the USA, which BMS sees as a key battleground, the company is targeting members of the Ward 50 – an influential ranking of US property/casualty insurers produced by benchmarking firm Ward Group, which, interestingly, is owned by Aon. BMS has managed to lure three Ward 50 accounts from the big brokers over the past six months and is expecting to tempt over at least another two in 2012. “Those for me are real examples revealing the potential we have to compete at the highest level,” Beardmore says.

THE MAN

Age: 52 Hometown: Stoke First insurance job: Consulting for Amlin Interests: Travelling and sports In his own words: ‘One of the ﬁrst things I always advocate to people is that I’m not a broker, which I think is quite useful because that means I can concentrate on leading as opposed to protecting my client base’

THE COMPANY

Turnover: £50.2m (full-year 2010) Employees: 267 Market view: A solid Londonbased broker in the traditional wholesale and reinsurance mould, but one that is trying to expand beyond its roots.

From the giants’ tables

The broking giants’ size can give a leg-up to their smaller rivals. The bigger a broker, the bigger the contract it needs to win to make the effort worthwhile. Beardmore contends that larger brokers are struggling because these big ticket deals are few and far between, while smaller firms are finding rich pickings and growth opportunities in the scraps from the larger firms’ tables. | “The big players will look at clients that have $1m-$2m of brokerage to present and question whether it is viable for them to invest the time and effort to sustain or win that kind of business. Whereas we can justify the time and effort on that account and we still value that kind of business highly,” Beardmore says. “The opportunity at the moment sits with the mid-tier brokers. The bigger challenges sit with the large brokers as they try to keep their sausage machines full.” Overall, Beardmore is expecting BMS’s 2011 revenues to be 10% up on 2010 levels, based on information currently to hand. He describes| 2012 as a year of consolidation, but even so predicts |a further revenue boost of between 20% and 25%. This is far more rapid growth than that being reported by the larger brokers. Aon and MMC’s (re)insurance broking divisions, for example, grew revenues by 6.1% and 9.3%, respectively, in 2011. The company is on track to surpass £100m of revenue by 2016. However, this is not enough for Beardmore. He contends that a broker needs to be pulling in revenue of between £200m and £250m before it can be considered a genuine alternative to the larger players. Luckily, he has a growth plan of which the main focus is the US market. The company’s US hub in Minneapolis has expanded from four to almost 50 staff in the past year. It also has

offices in Chicago and Philadelphia, and added a New York City office in January this year, which will be Beardmore’s base. He will now spend the majority of his time in the USA and expects to expand the US structure over the next year. Meanwhile, BMS’s wholesale insurance division has offices in South Africa, the Middle East, Asia and Australasia. On the reinsurance side, Beardmore says South America is looking increasingly interesting. Closer to its home market of London, BMS has made inroads into underwriting with the launch of its Pioneer managing general agency. It took the MGA route after its application to set up a Lloyd’s syndicate was refused. Pioneer has £62m in underwriting capacity from Liberty and a target to write £27.5m of premium in its first year. Beardmore says the MGA is on track to hit its 12-month underwriting goal and will be close to filling the full £62m facility over the next 12 to 18 months. BMS has not abandoned its plans to set up in Lloyd’s. “We still have one eye to moving our MGA play into a syndicate play at some point,” Beardmore says. BMS’s push into underwriting is in keeping with the actions of its peer group. Cooper Gay has Globe Underwriting (recently rebranded from Oliva), Hyperion has DUAL and RK Harrison has Aqueduct. Beardmore says brokers’ underwriting efforts are being driven by the fact that the broking business model is in transition. “Brutally speaking, it is because overall volumes of business are not increasing, and so if you want to grow your business, you also have to look at the quantity or the extent of the distribution chain you own,” he says.

Only in the M&A game to buy

BMS OPENS NEW YORK OFFICE

FIND OUT MORE ONLINE

goo.gl/hI4NN

Of course, if Beardmore is to hit his target of revenues between £200m and £250m, he will need to make acquisitions. He expects this will happen in the next two to three years. But, given the number of unsuccessful mergers in the broking and insurance sectors, he will proceed with caution. “I would like to make sure we do it at a time that’s right for us and we’re properly prepared and resourced to manage a merger or acquisition,” he says. “Two out of every three never add the value that was intended.” He is adamant that the only part BMS will play in the M&A game is that of buyer. “I know there are regular rumours that BMS is simply polishing itself up ready for a sale. That couldn’t be further from the truth,” he says. “We are polishing ourselves up to make ourselves into a highly attractive and compelling business that can sustain its independence.” All these plans should keep Beardmore extremely busy over. While taking few holidays, he does allow himself regular visits to the gym. He would be wise to keep this up, as if he keeps taking business from bigger brokers, he could have a fight on his hands.

22 MARCH 2012 GLOBAL REINSURANCE

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09/02/2012 11:52

Global market report

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The big picture: Painful year for the USA Timeline: Regulating to unify the industry Dodd-Franks: The good, bad and the ugly Market map: Making sense of the numbers Inside / out: A cocktail of challenges ahead

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GOVERNMENT FEDERAL CONSTITUTIONAL REPUBLIC AND REPRESENTATIVE DEMOCRACY HEAD OF STATE PRESIDENT BARACK OBAMA POPULATION 313,064,000 CURRENCY US DOLLAR

IN ASSOCIATION WITH

GLOBAL REINSURANCE MARCH 2012 25

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Global market report: USA

THE BIG PICTURE

America’s reinsurance Two issues worked against the US insurance market in 2011 and both leaving residual effects that have carried on into 2012. Forces of nature are always an expectation for insurers, but in combination with economic forces of man, the results have been painful

ACTS OF MAN

The debt difference ● US downgrade fallout not as bad as feared ● Exposure to eurozone debt has different effect

Last year, investors were forced to reconsider a stalwart assumption of modern finance after rating agency Standard & Poor’s downgraded longterm US debt to AA+ on 6 August, the first time it had ever fallen below its coveted AAA status. As Congress struggled to put in place a debt deal by the 2 August deadline, broking firm Towers Watson said US insurers had voiced concerns over their investment portfolios, short- and long-term interest rates and a decline in equity markets. According to figures from the US Federal Reserve Board, the US national debt is more than $15 trillion, with insurance companies holding a $253.7bn stake in Treasury securities.

S&P said at the time of the 6 August downgrade that it “reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics”. At the time of the downgrade, and amid widespread panic and confusion, an AM Best stress test of the capital position of all of the US-based property/ casualty companies showed promising results. AM Best group vicepresident John Andre says: “There wasn’t as big a downgrade you might expect. There was no one going from As to Bs. Just movements within the high A range.” But the nightmare of debt entanglement has continued into 2012, with S&P downgrading the ratings of nine eurozone countries in mid-January. AM Best senior financial analyst Greg Reisner said US insurers’ long-term portfolios will be affected differently by exposure to

the two different debts. “There are subtle differences as it regards US debt and European debt. Both European debt and US debt have their risks. The risk and merits can certainly be debated. “However, with regards to the debt of European countries, given the current structure of the eurozone, individual countries on their own lack some flexibility as compared to the USA.”

26 MARCH 2012 GLOBAL REINSURANCE

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ACTS OF GOD

US catastrophe bill tops $44bn ● But harder market still some way off despite 2011’s record losses ● US industry’s combined operating ratio expected to fall 6.5 points Market experts predict US property/casualty insurers face a 24-month wait for a traditional hard market to surface despite the industry’s books suffering a severe underwriting blow in 2011 as a result of natural catastrophes. Many had hoped for a hardening of the market as the US market picked up about $44.1bn of the $105bn total global natural catastrophe bill for 2011, says rating agency AM Best. Most of 2011’s recordbreaking insured losses bill was

for events that occurred beyond US shores, while the US market has shelled out more than twice the 2010 bill of $19.6bn. On the home front, the industry faced a recordbreaking tornado season, wind storms, winter storms, wild fires in the southwest and Hurricane Irene. Most domestic losses were as a result of tornadoes that hit the midwest and southwest in April and May. According to data by AM Best, the industry’s combined operating ratio is expected to deteriorate 6.5 points to 107.5% in 2011 from 101% in 2010. This poor result is driven by unstable and weak macroeconomic conditions coupled with high catastrophe-related losses, elevated losses in certain non-catastrophe exposed lines and fewer reserve releases from prior years.

Combined operating ratio in 2011 (%)

US national debt clock

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Global market report: USA THE STORY

WHAT HAPPENED

Florida Large-scale hurricanes change the market forever

2005-06 Property insurers raised statewide average rates, causing

● In 2004 and 2005, Hurricanes

some policyholders’ premiums to double or triple; outgoing governor Jeb Bush and governor-elect Charlie Crist held a special meeting to discuss rate hikes.

Charley, Frances, Ivan, Jeanne, Katrina, Rita and Wilma made a direct hit on US shores, resulting in more than $132bn total damages (indexed to 2010).

Unifying the industry Individual states’ long-established rights to regulate the insurance industry could be about to change. Lauren Gow reports

nsurance in the USA has always been an amalgamation of rules and precedent that has remained just on the right side of effective. In principle, there is good reason for each state to govern its own insurance practices, with each state having a vested interest in what is best for its citizens. But policyholders in catastrophe-ridden states such as Florida argue that they pay above the odds in comparison to neighbouring states because of this fragmented approach. The National Association for Insurance Commissioners (NAIC), a voluntary association of state insurance commissioners, made headway in solving this issue in November with the adoption of revisions to the Credit for Reinsurance Model Law and Regulation. “The real key for supervisors is to stay on top of change and understand how risks are emerging in the companies they supervise. The NAIC’s view is:

don’t get a false sense of confidence because you’ve got some rules and therefore you have solved the problem. Rules only go so far. Systems have to be built and supervisors have to work together and really share information,” NAIC chief executive Therese Vaughan says. These changes, as well as those stemming from the impending Dodd-Frank Wall Street Reform and Consumer Protection Act, will unify all US state insurance commissioners and streamline the industry. But the biggest unifier of the market came in the form of the single biggest terrorist attack on US soil, the September 11 attacks. The attacks singlehandedly changed the course of insurance in the USA and abroad. What the industry has faced since the attacks has not only forced issues such as terrorism risk to the surface, but has also made an example of the issue of contract certainty in insurance.

➤ Terrorism September 11 and contract certainty ● Four co-ordinated suicide attacks using hijacked planes targeted New York City and Washington, DC. Nearly 3,000 people died in the attacks, which were attributed to Middle East terrorist cell al-Qaeda headed by Osama Bin Laden.

➤ Red tape State versus federal control and the NAIC ● The US insurance market has traditionally been governed on a state level, which in reality means each insurer must obtain a permit to write cover in each state, slowing down regulation changes and causing unnecessary work.

➤ 2001 Property developer Larry Silverstein sought to claim $7.1bn, double the face value of World Trade Center buildings 1, 2, 4 and 5 by arguing separate plane strikes on two separate buildings constituted two occurrences within the policy deﬁnition.

➤ 1752 The ﬁrst American insurer created – Philadelphia Contributionship for the Insurance of Houses from Loss by Fire with the assistance of Benjamin Franklin. Franklin also established the ﬁrst life insurer.

DATA: INSURANCE INFORMATION INSTITUTE, (1) ADJUSTED TO 2010 DOLLARS BY THE INSURANCE INFORMATION INSTITUTE USING THE US DEPARTMENT OF LABOR BLS CALCULATOR

TIMELINE

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WHAT’S NEXT 2007 A law was passed to expand a state

2009 Governor Charlie Crist signed into law

programme selling catastrophe back-up coverage to insurers, allowing them to pass savings to consumers.

a bill allowing Citizens Property Insurance Corporation to raise premiums by up to 10%. The law also made it easier for insurers to hike rates as much as 10% to meet rising reinsurance costs. Crist also vetoed a bill that would deregulate property insurance rates.

2008 Florida’s lawmakers froze Citizens Property Insurance Corporation’s rates until 2010, while extending provisions allowing regulators to block insurance rate hikes.

➤ 2002 Congress enacted the TRIA (Terrorism Risk Insurance Act) and the Insurance Information Institute released loss distribution information for September 11 attacks. Other liability $4.9bn (12.9%)

Life: $1.3bn (3.3%)

Aviation liability $4.3bn (11.1%)

Property (other) $6.6bn (17%)

Event cancellation $1.3bn (3.3%) Aviation hull $0.6bn (1.5%) Workers’ compensation $2.2bn (5.7%)

Property (World Trade Centers) $5.6bn (14.4%)

Business interruption $12.1bn (31.1%)

2011 Florida governor Rick Scott signed into law SB 408, which was deeply unpopular with policyholders but a small victory for the insurance industry. The bill allowed insurers to pass reinsurance costs onto policyholders and limited the window and scope for sinkhole claims.

➤ 2004 A jury found in favour of 10 insurers that will be

●

subject to a ‘one occurrence’ deﬁnition, meaning their liability was limited to the face value of the towers. A second case found nine insurers were subject to a ‘two occurrence’ deﬁnition and therefore liable for a maximum of double the face value or $2.2bn.

➤ Despite the huge loss, the September 11

requiring the Treasury to establish a process for the allocation of pro-rata payments if terrorism-related insured losses exceed the government’s annual $100bn cap.

attacks led to a positive change in the international insurance market in the form of contract certainty. The lack of contract certainty at the time of the acts, and in the decade since, has drawn together the UK and US markets to seek resolutions.

Further improvements could

●

be made with technical innovations, like e-trading, to speed up processes.

$38.8bn

➤

US Supreme Court decision in Paul v Virginia [1868], which established state supremacy over the insurance industry. It ruled that insurance policy contracts were not in commercial contracts and that insurance was not subject to federal regulation. This established state-based regulation.

looking for the same answer, which is a fair price for insurance that covers the cost of any claims. But the deﬁnition of ‘fair’ differs widely.

●

Total insured losses estimate:

1871 NAIC formed after the

Ironically, all parties are actually

●

➤ 2007 President Bush extended TRIA

The tug-of-war

between Florida lawmakers, US-based insurers and reinsurers, foreign insurers and reinsurers and policyholders will continue.

➤ 1995 NAIC ofﬁcially declared itself a ‘private trade organisation’ – US district judge Peter Leisure stated that the NAIC was not a government body but “a private trade association composed of government regulators from different states”.

➤ November 2011 NAIC unanimously adopted revisions to the Credit For Reinsurance Model Law and Regulation. All 50 states, the District of Columbia and ﬁve US territories were now able to certify non-US reinsurers to post only a percentage of collateral based on a rating given.

➤ The NAIC has taken the ﬁrst real steps towards uniﬁed

●

state regulation but the Dodd-Frank Act will force insurance regulation into the federal scope.

Rapid changes will be difﬁcult to swallow, but hopefully a

●

big picture focus will outweigh any localised politics.

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Global market report: USA

HORIZON

FIVE STEPS TO DODDFRANK’S IMPLEMENTATION

June 2009: The new law on ﬁscal responsibility was initially proposed by the Obama administration, with the White House sending a series of proposed bills to Congress. Obama calls it a “sweeping overhaul of the US ﬁnancial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”.

July 2009: A version of the legislation was introduced in the House in July 2009.

December 2009: The Act received its name as revised versions were introduced in the House of Representatives by Barney Frank, and in the Senate Banking Committee by chairman Chris Dodd.

July 2010: President Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act.

Spring 2012: Proposed implementation date for DoddFrank Act.

30 MARCH 2012 GLOBAL REINSURANCE

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WE SAY: The need for insurance

expertise and representation at a federal level is long overdue. The formation of the FIO is a positive step.

THE BAD: Life insurers to be branded a risk FSOC is ultimately responsible for deciding which financial institutions need heightened supervision by the Federal Reserve Board, as a result of

WE SAY:

FIO director MIke McRaith will hold one of three insurance seats on the Financial Stability Oversight Council

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Global market report: USA

MARKET MAP

KEY STATS

PROPERTY/CASUALTY 2011 was a catastrophe-fraught year for US property/casualty insurers, with 37% of the total $105bn natural catastrophe bill accounted for on US shores. According to data from the National Association of Insurance Commissioners, the top 10 US property/casualty insurers suffered various levels of economic blows according to their diversity to catastropheexposed lines. Nine of the top 10 are likely to have suffered pronounced exposure, with only the Progressive Group escaping unscathed.

TOP 50 GLOBAL REINSURERS The top 50 global reinsurers, listed annually by rating agency AM Best. As the statistics show, US reinsurers take nine top places but their total GWP only just surpasses the market’s biggest player, Munich Re.

= US reinsurers

US TOTAL GWP

MUNICH RE GWP

$32,246m

$31,280m

LIFE INSURANCE EMERGING MARKETS GREW ANNUALLY BY

INDUSTRIALISED COUNTRIES ONLY GREW

0.6%

DROUGHT AND WILDFIRES Drought ongoing; Wildﬁres April/Sept

12.6%

$5.2bn ➤

Projected life premium rankings Country 2011 2021 est ➤ USA 1 1 China 5 2 Japan 2 3 France 3 4 United Kingdom 4 5 India 8 6 Italy 6 7 Germany 7 8 Taiwan 10 9 South Korea 9 10 Canada 11 11 ➤ Brazil 17 12 Australia 13 13 ➤ South Africa 12 14 Luxembourg 14 15 Belgium 19 16 Sweden 15 17 Spain 16 18 Switzerland 18 19 Hong Kong 21 20

Total life insurance premiums in the US market $150bn

➤

➤➤➤ ➤➤ ➤

➤

$120bn

➤

➤➤

15 SEPTEMBER 2008: The collapse of the Lehman Brothers bank sends world ﬁnancial markets into meltdown, with life insurance premiums spend dropping just as quickly.

➤

➤➤➤

$90bn

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

32 MARCH 2012 GLOBAL REINSURANCE

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Fire Allied lines Multiple peril crop Federal ﬂood Farm owners’ multiple peril Homeowners’ multiple peril Total commercial multiple peril

SEVERE STORMS, TORNADOES 20-27 May

100%

80%

$6.7bn FLOODS April-May

$5bn

60%

HURRICANE IRENE 22 Aug-2 Sept

$4.9bn SEVERE STORMS, TORNADOES 22-28 April

40%

$7.3bn 20%

DATA: NAIC; COMPANY REPORTS; SWISS RE; MUNICH RE

United Services Automobile Association

Progressive Group

Nationwide

Berkshire Hathaway

Travelers

Liberty Mutual

AIG

Allstate

Zurich

US market insiders, who wished to remain anonymous, told Global Reinsurance they fear the USA could lose its number one spot in the next decade, though Swiss Re economists have argued differently (see table, far left). The sharp rise of life insurance premiums, in conjunction with strong, growing economies in the emerging markets, has signiﬁcantly dwarfed the sluggish growth in US life premiums. The most notable fall in premiums was felt by the market post-global ﬁnancial crisis, with many life insurers reporting little improvement in the intervening years.

State Farm

LIFE INSURANCE

GLOBAL REINSURANCE MARCH 2012 33

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Global market report: USA

MARKET MAP

BIG MOVERS SHARE PRICE

Four of the USA’s biggest listed insurers battled fluctuating share prices in 2011. The Transatlantic saga saw Berkshire Hathaway’s price hit a year low after its failed $52 per share offer in August, while the merger deal with Alleghany saw Transatlantic’s shares peak. For AIG, a sharp slide in the first five months ended with May’s news of its combined public offering with the US treasury. Meanwhile, an AM Best affirmation in January 2012 renewed investor interest in Allstate.

$140k

$120k

$100k

$60

BERKSHIRE HATHAWAY 8 August: Transatlantic Holdings conﬁrmed that it had received a proposal from National Indemnity, a subsidiary of Berkshire Hathaway, to acquire all of Transatlantic’s outstanding shares of common stock for $52.00 per share.

BERKSHIRE Warren Buffett

BERKSHIRE HATHAWAY 14 March: In one of its biggest-ever deals, Berkshire Hathaway agreed to purchase 100% of The Lubrizol Corporation for $135 per share in an all-cash transaction. The deal, unanimously approved by each company’s directors, was valued at about $9.7bn. TRANSATLANTIC 16 September: Allied World Assurance Company and Transatlantic mutually terminated their previously announced merger agreement, with Allied World to receive a termination fee of $35m plus $13.3m of merger-related expenses.

AIG 31 March: AIG reorganised its non-life insurance arm Chartis, naming Peter Hancock as chief executive. Reuters reported the move could be a sign that AIG chief executive Robert Benmosche, battling cancer, was grooming Hancock as a successor.

BERKSHIRE HATHAWAY 25 August: Warren Buffett bought $5bn worth of shares in Bank of America. The deal included warrants for Berkshire Hathaway to purchase 700 million shares of Bank of America common stock at an exercise price of $7.14 per share.

$50 TRANSATLANTIC Bob Orlich* * replaced by Michael Sapnar in January 2012

$40

TRANSATLANTIC 21 November: Transatlantic agrees to a merger with Alleghany Corporation, with Transatlantic stockholders receiving aggregate payment currently valued at $59.79 per share in stock and cash, or about $3.4bn.

TRANSATLANTIC 28 July: Transatlantic’s board rejected Validus’s offer to buy all outstanding common shares of Transatlantic, which says it “remains committed to the terms of the merger agreement that it entered into with Allied”.

ALLSTATE Thomas Wilson

ALLSTATE 26 January 2012: AM Best affirmed Allstate Insurance Group’s financial strength rating of A+, reflecting its “favourable operating performance and significant market presence”.

AIG 23 May: AIG announced it had completed a registered public offering of 300 million shares of AIG common stock at $2.50 per share, by AIG and the US Treasury as the selling shareholder. AIG Bob Benmosche

$30 ALLSTATE 18 May: White Mountains announced a deal to sell auto insurance arm Esurance and Answer Financial businesses to Allstate for an amount in cash equal to $700m plus the tangible book

ALLSTATE 23 June: Allstate began a court battle to recover more than $1m in its third insurance fraud lawsuit of 2011.

$20 Jan

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Global market report: USA

INSIDE / OUT

A potent cocktail of challenges Lauren Gow talks to industry leaders to get their views on the latest market developments

INSIDE VIEW

OUTSIDE VIEW

Seraina Maag XL chief executive, North America property and casualty

Sean McGovern Lloyd’s general counsel and North America director

ECONOMIC INSTABILITY

The impact of the global economy and the political environment (they are so intertwined these days) on the industry in general is pretty significant. You just have to look at the impact that fiscal policies are having on the interest rate environment, which in turn has a significant impact on our business. Then we have the impact of the European sovereign debt crisis and the slowdown in Asia, both of which have an impact on the US economy and US insurers. At XL, we are more optimistic about our growth prospects because of what we’ve done over the past 12-18 months. We’ve made significant investment in our business, including adding new lines of business like surety.

The current economic instability has meant that insurers and reinsurers, wherever they are in the world, are worrying as much about the asset side of the balance sheet as they are about the liability exposure side. We have had a period of significantly low interest rates for four years and continued financial market volatility, particularly in the eurozone. That’s creating an environment where insurers need to be focused on preserving their capital position. It’s certainly creating some headwinds in terms of being able to preserve that capital.

CATASTROPHES

Catastrophes had a big impact in 2011. It was the fifth-largest year on record. Personal lines was hit much more than commercial lines, but what we have started seeing is that it is beginning to help the market in terms of rates. We are clearly in a transition. From what we have observed and what you hear consistently throughout the market, even from our competitors, is that property-related rates have gone up, in particular where you are insuring properties in a catastropheprone location or that have had prior losses. It has definitely helped the market transition into a more rate-hardening environment.

Clearly the economic environment has had a depressing effect on the side of demand and put an inflationary effect on claims. When you combine that with the catastrophe losses of 2011, you have a pretty potent cocktail of challenges for the global industry and I’d include the USA in that. Last year is expected to be a record cat year for the industry, with losses of over $100bn, including major events in the USA costing $20bn, and yet there is talk only of improving rates, not hardening rates. The industry is well capitalised but that, in a sense, is the problem – there is too much capital.

LLOYD’SSTYLE MARKET IN NEW YORK

My personal view is that a Lloyd’s-style market would be really hard to do, as we have a really well-entrenched marketplace. They have been trying to do it for years, so I think that if people really want that, they would have been able to do it by now. Also, with the excess and surplus lines market and the way it operates over here, we have an avenue for placing these tough risks through the wholesale market. I don’t really see a need for it and there doesn’t seem to be a desire in the marketplace for change.

While it has been talked about a lot, we don’t see much in the way of [Lloyd’s-style marketplace] activity, and my sense is there isn’t really any demand for it from the industry. If there was, it would have happened by now – it would have happened a long time ago. There was a lot of talk about it being a competitor to Lloyd’s, and it clearly would be if it was established, but our position is that Lloyd’s isn’t afraid of competition. We’ve been watching for developments, we haven’t seen any and I am not expecting any in the near future.

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Rewind

Monty

Could our man make a move into politics, or would previous email banter catch up with him? Knockin’ on Cameron’s door

doubt plenty of explaining to do. What worries me is that if the good people out there on the internet got all hot under the collar about that, what would they make of some of the emails that I send out?

The London market’s great. I get to dabble in global business without having to stray too far from the things I know and love. Of course, that means that we’re sometimes a bit distant from the action. So it was nice to see that the UK insurance market was recently at the centre of political intrigue, when several chief execs had an audience with prime minister David Cameron. Of course, this lot are not used to rocking up to Number 10 Downing Street, and it showed. One chief, AXA UK’s Paul Evans, had been told the door would open for him when he got there. When nothing happened, Paul was left standing on the doorstep, until the copper on duty leaned over and said: “You have to knock on the door, mate.”

Knowing sweet F(S)A about broking

No matter which market you’re from, no one ever has a good thing to say about the regulators. They’re either too soft, too tough or, in the case of the US insurance industry, too abundant. And they don’t make themselves easy to like. A broking mate told me that someone from the FSA here in the UK asked him if it was normal for a broker to accept commission! That said, given the wafer-thin margins we’re all being driven to by the tough economy and crazy competition, maybe it does look to the outside world like we want to work for free.

Insurance from on high

One of the other great things about London is taking the tube into work (there’s no way I’m putting my Aston Martin at risk in rush-hour traffic). I thought I’d seen it all, but even I was surprised by what I saw the other day. A Catholic priest got onto my carriage in full get-up, and there, pinned on his robe in pride of place, was the distinctive blue flag of Willis. I wasn’t quite sure what to make of it. Perhaps he’s the broker who deals exclusively with Ecclesiastical Insurance, or maybe Joe Plumeri is taking broking in a whole new direction.

Heading for an inbox incident

Speaking of Willis, I had a nasty ‘there but for the grace of God go I’ moment the other day. Many of you will no doubt have read about the hapless young lad from Willis who sent an email to his mates about a planned trip to Dubai. The email contained lots of gory details about compulsory chants on how rich they were, and other such japes, and the bloke ended up with a very red face and no

Couldn’t have put it better

What would the internet hotheads make of some of the emails I send out?

Regular readers will know I have a taste for good old London market wisdom, and so I had to pass this one on. I know underwriters out there will be familiar with that horrible feeling when you realise the reserves you booked a bit carelessly a few years ago don’t cut it in the real world when the claims bill comes in. One of the people I broke to regularly summed this feeling up really nicely as “the turd of destiny hitting the fan of reality”. It’s times like this that I remember why I’m in broking.

Next stop, the White House

This industry has had its fair share of people who have ended up here after doing something far more exciting. Take Third Point Re’s John Berger, who used to be a professional basketball player. But there are few examples of people who stopped by on their way to bigger and better things. So it surprised me to learn that Zurich used to employ none other than former US president Franklin D Roosevelt, who worked for Zurich forebear Fidelity & Deposit in the 1920s.

36 MARCH 2012 GLOBAL REINSURANCE

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24/02/2012 09:57