‘Hist is littered with examples ‘History of ccompanies that have found a na nasty pool of toxic liabilities in their new purchase’ Ben Dyson, assistant editor G LOBAL RE I NSU RANCE.COM
MONTE CARLO 2011 FROM GLOBAL REINSURANCE MAGAZINE
DAY TWO
RENDEZ-Vous SPONSORED BY
Solvency II will sap smaller players’ ”I saw my schedule and creativity and drive said: ‘It’s barking
mad to expect someone to go to a meeting every half an hour.’ But it works”
XL Re’s Jamie Veghte on his first Rendez-Vous
“I can save you all a lot of time. The market’s not going to harden. Just go and enjoy the city instead”
Mike McGavick: Solvency II will contract the market to fewer, bigger players
head of reinsurance Manfred Seitz shared McGavick’s concerns over the structure and implementation of Solvency II, particularly over regulators’ ability to improve companys’ bespoke models for capital allocation. Continued page 3
Were you spotted out last night?
T T O N I G7 H Page
September 2011
e.com www.globalreinsuranc
Overheard at Guy Carpenter’s cocktail party
Solvency II could “drive the energy and creativity” out of the reinsurance market by penalizing smaller players, according to a gathering of reinsurer bosses this morning. Speaking this morning at a roundtable debate hosted by Global Reinsurance, XL’s group chief executive Mike McGavick warned: “The fundamental flaw in the thinking with Solvency II is that so much of the creativity and energy of the industry has come from smaller players. “This could drive that out of the market, and that would be a real mistake. If it goes forward as it is, it will result in fewer, larger players and I have never understood how the customer wins in that environment.” Other participants including Berkshire Hathaway’s
OUT& ABOUT
OM E NC C E E I N S U RS AUN RC A G LOBAL RE I N
Remembering 9/11
changed ten years on How the industry has
TALK TO US Email: news@globalreinsurance.com Follow: @GlobalReins Call: +44 7872 511244 GLOBAL REINSURANCE MAGAZINE
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ELLEN
BEN
LAUREN
DANNY
12/09/2011 12:11:15
2 RENDEZ-VOUS
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MONTE CARLO 2011
INSIDE...
“I wish the regulators would take a year off and pat themselves on the back rather than trying to invent a crisis to cure in our sector” Mike McGavick, XL PAGE 7
COMMENT READ MORE STAY INFORMED
Consolidator Jelf plans to snap up bolt-
Barriers to foreign operators raised in Brazil and United Arab Emirates PAGE 4
“If the models were the same, that would be frightening. There is
First-half catastrophes turn up heat in run up to renewals PAGE 6
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1 Casino de Monte Carlo 2 Hotel Hermitage
4 Fairmont MonteCarlo 5 Hotel Metropole Monte-Carlo 6 Port Palace Hotel 7 Eglise Sainte Devote 8 Gare de Monaco
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Remembering 9/11
Canopius confirms continued interest in Omega purchase PAGE 5
Bill Keogh, EQECAT president
3 Hotel de Paris
G LOBAL RE I NSU RANCE
How the industry has changed ten years on
so much inherent uncertainty in catastrophe risk that if the models said the same thing, that would point to a serious problem”
MONTE C ARLO
September 2011
S AY WHAT?
www.globalreinsurance.com
WHO DID MONTY SEE OUT AND ABOUT LAST NIGHT? PAGE 7
www.grdaily.com news@globalreinsurance. com Follow: @GlobalReins Call: +44 7872 511244
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GLOBAL REINSURANCE MAGAZINE is published 10 times a year by Newsquest Specialist Media Ltd 30 Cannon Street, London, EC4M 6YJ, UK Tel +44 (0)20 7618 3456 Fax +44 (0)20 7618 3457 www.globalreinsurance.com © 2011 Newsquest Specialist Media Ltd. All rights reserved. No part of this publication may be used, reproduced, stored in an information retrieval system or transmitted in any manner whatsoever without the express written permission of Newsquest Specialist Media Ltd. This publication has been prepared wholly upon information supplied by the contributors and whilst the publishers trust that its content will be of interest to readers, its accuracy cannot be guaranteed. The publishers are unable to accept, and hereby expressly disclaim, any liability for the consequences of any inaccuracies, errors or omissions in such information whether occurring during the processing of such information for the publication or otherwise. No representations, whether within the meaning of the Misrepresentation Act 1967 or otherwise, warranties or endorsements of any information contained herein are given or intended and full verification of all information appearing in this publication must be sought from the respected contributor. The publication of the articles contained herein does not necessarily imply that any opinions therein are necessarily those of the publishers.
12/09/2011 12:24:44
MONTE CARLO 2011
Sullivan: Only ‘Armageddon’ could harden some product types
B Y D A N N Y WA LK IN S HAW danny.walkinshaw@nqsm.com Willis Group deputy chairman Martin Sullivan has predicted a spike in mergers and acquisition activity in 2012. Speaking at a PwC briefing this morning on the availability of capital and changes to the market cycle, the former AIG chief executive said: “2012 will be a very, very interesting year. “If we continue to go forward in a soft market, the challenge for insurance company CEOs is: ‘How do we continue to grow?.’ [An M&A increase] is something I think will occur.” Sullivan also warned that unless there is an “Armageddon event”, hard cycles will only occur across some regions and product types.
‘Regulators are yet to solve last battle’ Innovation is not worth expense and effort Solvency II asset rules not fit for purpose BY ELLEN BENNE TT ellen.bennett@nqsm.com Continued from page 1 Seitz said: “There are 600 eligible companies in Germany. If two dozen of them went for innovative models, the regulator would be kept busy for the next decade or so. “Then once they have gone through all that expense and effort, they find they save maybe 10% over other companies.” Delegates at this morning’s debate also warned that Solvency II asset rules were not fit for purpose in the current economic environment. For example, the rules encourage insurers to invest in government bonds. Deutsche Bank’s global head of insurance asset management, Randy Brown, warned this would have a “negative impact” on insurers. Endurance chief executive David Cash suggested that global regulators should be focusing on other areas of the insurance business. He said: “The regulators are still fighting the last battle. If there are going to be failures, they will be due to loss
David Cash: ‘If there are going to be failures, they will be due to loss reserves’
MATCH OF THE DAY
AIR Worldwide vs PERILS With guns drawn at dawn, the dualling catastrophe modelling firms battled it out for best European risk modelling data. The war began with both firms producing reems of information and complex colour-coded maps. PERILS took an early lead with shapely pie charts, before AIR whet the market appetite by breaking down each 2011 catastrophe by cost, taking an easy lead by giving the punters what they want. Low blows were then traded, with each firm claiming the other was not nearly as well respected, while pumping their speeches full of terms such as “reduce basis risk” and “market leader”. AIR pulled ahead once again, with its meeting place overlooking the harbour, but in the heat of the moment (and day) PERILS stormed home with offers of ice cream at the Häagen-Dazs stand. A close victory for PERILS with snappy presentations, easy to understand maps and a well-thought-through meeting place. PERILS 1, AIR 0
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reserves. I’ve not heard anyone talk about that for years.” McGavick said that, unlike their counterparts in banking, insurance regulators did not have a crisis to solve. He added: “I wish they would take a year off and pat themselves on the back rather than trying to invent a crisis to cure in our sector.”
SPOTTED Will you be gracing our pages tomorrow morning?
Pondering the next move? SCOR lounge, casino or home to bed …
“We’ve lost how much in catastrophes this year?”
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C ST O A R TS N E R
Sullivan: how do we keep growing?
RENDEZ-VOUS 3
$50,000
Hole-in-one insurance can be placed for as much as this, and regularly is at Lloyd’s
$1.5m
Twelve brave reinsurers took part in a four-day cycle from Geneva, organised by Tokio Millenium, arriving at the Cafe de Paris in matching outfits yesterday at 4pm
A car dealership in the US state of Nebraska took out a $1.5m insurance policy at Lloyd’s after offering $10,000 to anyone who brought a car from it during December, providing it snowed on Christmas day.
12/09/2011 12:26:50
4 RENDEZ-VOUS
www.globalreinsureance.com
MONTE CARLO 2011
EMERGING MARKETS
MARKET VIE W FROM QFC A R E IN S U R A NC E IN TH E GC C R E GION
Why the GCC continues to stand out High growth rates and a relatively under-developed insurance sector mean the scope for reinsurance services in the GCC is great. Infrastructure and construction spending continues to drive insurance demand. In Qatar alone more than $75bn of infrastructure projects began from 2004 to 2010.
40%
LOCAL BUSINESS New requirement for Brazil’s market make-up
20%
BRAZILIAN RISKS Proportion of business that can be ceded abroad
$68m
CAPITAL Updated requirement for United Arab Emirates
Regulators tighten up on globalising groups 40% of Brazilian business must now be local Capacity requirements doubled for UAE New rules for reinsurers in the Middle East and Brazil suggest barriers to foreign operators are going back up. When the Brazilian reinsurance market opened to foreign competition in 2008 there was great excitement. Not only was there huge potential in the rapidly growing BRIC economy, but as a non-catastrophe exposed market it offered reinsurers an opportunity to diversify risks globally. The flood of reinsurers and service providers into Sao Paulo and Rio de Janeiro included many big names. Most sought admitted status but Munich, Mapfre, J Malucelli and XL were awarded
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local status. There are now more than 80 reinsurers licenced to trade in Brazil. Fast forward three years and changes by insurance regulator the Superintendência de Seguros Privados (SUSEP) have led to a big reduction in opportunities. From 31 March, new resolutions mandated the placement of 40% of reinsurance business within the local market. Previously, local reinsurers had simply been given the right of first refusal. SUSEP also tried to stifle intra-group transactions, banning foreign players with local operations from ceding Brazilian risks back to their
parent. The rules have been relaxed, but only 20% of any treaty can be ceded abroad. The move was derided by the industry. Risk management groups said it would limit capacity for commercial risks, raise prices for cover and could harm the viability of large projects such as the 2014 FIFA World Cup Brazil and 2016 Olympic Games. Meanwhile, rules are also becoming more stringent for insurers in the Middle East. The UAE has doubled its capital requirements ($27.2m for insurers, $68m for reinsurers) and ruled that at least 75% of the capital of (re)insurers operating in the country must be owned by UAE or GCCbased bodies.
Insurance markets mirror the macroeconomics of the region. Total non-life and life premium was more than $14.3bn in 2010. From 2005 to 2009, GCC premiums expanded five times as fast as the global average, with Qatar growing 25% a year. Across the region 43% of non-life premiums are ceded to reinsurers, reflecting a direct insurance business model based on commission and investment income. The total reinsurance market for 2010 is put at $5.5bn. Data published in the GCC Reinsurance Barometer – the Qatar Financial Centre Authority’s twice yearly study of senior managers of 24 companies – shows strong confidence in the GCC reinsurance sector. About two thirds of interviewees expect the expansion of the reinsurance sector to outpace expansion of regional GDP. There has been a trend for increasing capacity to be deployed to GCC countries, though Barometer highlights signs of a slowdown in this. Some 50% of interviewees believe total reinsurance capacity deployed will rise – as against 64% in March’s Barometer. The share of those expecting a rise of more than 10% has dropped from 43% to 8%??. Growth in GCC insurance markets provides a firm basis for the reinsurance industry. Some 38% of Barometer interviewees believe the share of regional capacity will continue to rise at the expense of traditional global capacity from Europe, Bermuda or London.
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12/09/2011 09:49:33
MONTE CARLO 2011
RENDEZ-VOUS 5
“Give any transformational merger a wide berth”
M
ergers and acquisitions are high on the list of hot topics at this year’s Rendez-Vous. The three-way fight for Transatlantic Re and the continuing uncertainty over Omega have added impetus to what is already a standard subject at gatherings. But I think reinsurers and brokers should give any so-called transformational transactions a wide berth. Over the years, there have
BEN DYS ON
been numerous mega-mergers. But it is a struggle to find a single one that was an unqualified success. History is littered with examples of companies that have found a nasty pool of toxic liabilities in their new purchase, for example. Then there is the sheer effort of combining what were previously bitter rivals. Integration is no mean feat from either a logistical or technological standpoint, and it can take many years.
Chief execs of the happy couple talk eagerly about synergies” – like the cost savings that can be achieved by running two businesses on one IT platform. But the effort and expense of reaching that point must surely cancel out the benefits in some cases. While companies struggle to combine, there is a risk that client considerations are sidelined. Companies focusing on getting their
Short-tail lines will harden, says Veghte
house in order will find it more difficult. And there is the impact on staff morale. Mergers mean redundancies, and some that keep their jobs will not want to work in an enlarged entity. We can all think of examples where a mega-merger led to a mass exodus of talented staff. It may be quicker to buy your way to the top, but it may be less painful to climb.
ben.dyson@nqsm.com
Haverford to buy 25% of Omega
Even Europe market will see price increase But long-tail rates will not be affected B Y BE N DYS ON ben.dyson@nqsm.com While some believe price rises will be confined to loss-affected areas, XL Re chief executive Jamie Veghte expects a global hardening of catastrophe rates at the 1 January renewals. “I expect the short-tail market will be firm worldwide at the end of the year,” he says. “We have had a tremendous amount of nat cat activity and there’s going to be a reaction as there was at 1 June and 1 July in our US renewals. I expect that momentum to continue.” Others, such as Guy Carpenter’s EMEA chief executive Nick Frankland, have predicted flat to falling rates in Europe, but Veghte believes market forces will dictate an increase even there, despite the lack of catastrophe losses.
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“Particularly in a geography like Europe, which requires a lot of the market’s capacity to complete its programmes, the market is going to resist any push towards price reductions,” he says. “There will be some geographies that will feel the pinch less than others, but I would expect increases in the major markets that require significant capacity from the entire marketplace to get programmes done.” However, he does not expect the losses in short-tail lines to prompt any firming of long-tail rates. “I think a turn in the casualty market is on the horizon,” he says. “But I don’t believe that a Japanese earthquake is going to cause firming of US casualty rates.”
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“I expect the short-tail market will be firm worldwide at the end of the year. We have had a tremendous amount of nat cat activity and there’s going to be a reaction as there was at June 1 and July 1 in our US renewals. Jamie Veghte, XL Re
B Y BE N DYS ON ben.dyson@nqsm.com Bermudian investment firm Haverford has agreed to buy 25% of troubled Lloyd’s (re)insurer Omega. Haverford, chaired by former Flagstone Re chairman Mark Byrne, will buy 60.2m shares of Omega for 83 pence a share. On completion of the transaction, Byrne will be appointed a director and executive chairman of Omega. Omega’s current chairman, John Coldman, will step down as chairman on completion of the offer but remain on the Omega board. Richard Pexton, current chief executive, together with the remaining Omega directors, are to be asked to remain in their respective positions. Mark Byrne’s father, Jack, will join the Omega board as a non-executive director. Haverford was competing with Lloyd’s insurer Canopius to take over Omega.
12/09/2011 12:57:12
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MONTE CARLO 2011
RENE WALS
Pressure on returns in run-up to renewals Jitters after first-half cat costs reach $60bn Uncertainty remains over casualty pricing A year can make a lot of difference, and as reinsurers and reinsurance buyers begin their discussions ahead of the 1 January renewals it is clear that many of the dynamics have changed. While 2010 had its fair share of natural and manmade catastrophes – the Chile and New Zealand earthquakes and Deepwater Horizon disaster among them – these did little to dent excess capital. Beyond some short-term spikes in pricing, the overall softening trend continued. Now, however, with the cost of catastrophes in the first half of the year coming in at around $60bn, very little excess remaining and some reinsurers hurting more than others, it is a very different story. “Undoubtedly there is pressure on the reinsurance sector to improve returns – and we’ve still got the Gulf of Mexico wind season to go. A loss there will cause
more price correction,” says Chaucer underwriting officer Bruce Bartell. These claims, their impact on reinsurance capital, along with an expected increase in demand for cover as a result of catastrophe model revisions and cat reassessments point to a firming of rates ahead of renewals. How far rates climb will depend on catastrophe
“Low interest rates and volatile equity returns put the whole pricing model for liability under strain, so something has to give.” Ian Clark, Deloitte
activity during the second half of the year, as well as underwriting discipline and whether capital flows back into the industry. On the casualty side of the business, the direction of pricing is less certain. While unlikely to experience significant hardening, prices cannot soften much further, particularly given claims inflation, poor investment returns and the drying up of prior-year reserves. The pressure is on to make an underwriting profit. “There has been a longterm soft market in most of the major liability classes,” says Deloitte partner Ian Clark. “There’s no sign of any material likelihood of a turn in that market, but much of that business has been written off the ability to earn investment income. “You’ve got low interest rates and volatile equity returns – that puts the whole pricing model for liability under strain, so something has to give there.”
Rebrand of Sirius brings ‘operational efficiencies’ BY ELLEN BENNE TT ellen.bennett@nqsm.com President and chief executive of Sirius Group Allan Waters has said the company’s rebrand from White Mountains and its reorganisation will “drive operational efficiencies”. The company has hitherto operated as White Mountains inside the USA and Sirius in the rest of the world. It has now scrapped the White Mountains brand, and increased regulatory capital for Sirius International to $2m. White Mountains Re becomes Sirius America and will retain a $600m surplus, with a further $300m of capital and stop loss support from its parent Sirius International. Waters said: “We’re taking on a form that’s not dissimilar to what some of our peers have already done – taking our US affiliate under our international affiliate. Over the years, it has grown to become the larger of the two organisations.” He added that the new business would be “more tax efficient, and over time, achieve operational efficiencies”. Asked for examples, he said: “One operating system; a reduction in duplication.”
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S AY WHAT?
THE FENCE Uncertainty over pricing BRUCE BARTELL, CHAUCER “We haven’t really seen the sort of frequency of major events – both wind and quake – that we’ve seen in the past year or so for a considerable time.”
OH DEER! Is a yellow tax disc to a deer like a red rag to a bull? “A deer headbutted the windscreen of my car, after being enticed by the yellow tax disc,” stated an insurance claim form for Aviva.
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VS
“The traditional transaction remains important but we
IAN CLARK, DELOITTE “At an industry level, there was surplus capital in existence. When you look at it around individual players, there are some losers that are bigger than others.”
DOUBLE TROUBLE Couple insures against having twins. Has twins. Twice A couple in Michigan who insured against multiple births causing higher household expenditure had twins and received a payout from their insurers. They insured against this happening again at a higher rate and promptly had twins for the second time.
want and are working towards getting better access to the C-suite.”
Chris Klein, Guy Carpenter head of sales
RUBBER DUCKY Why would you pull the plug on a bathtub sailing expedition? A 20-year-old merchant navy officer sailing from Dover to Cap Gris Nez, France, in a sea-going bathtub insured it for £100,000 in third-party liabilities, a risk which the underwriter accepted on condition that the plug remain in position at all times.
12/09/2011 11:16:58
MONTE CARLO 2011
“Are Canopius and Mark Bryne waiting for each other to drop out so they can name their price for Omega?”
MONTY’S RENDEZ-VOUS
Last seen at Guy Carp’s free bar, Brit’s Reinhard Seitz was surprisingly fresh as a daisy at this morning’s Global Reinsurance cedant roundtable. That’s my boy.
L A ST NIGHT
Share the joke with the class, Michael Pickel! Man after my own heart analyst Peter Hughes turns on the charm as ever
RENDEZ-VOUS 7
The fate of Lloyd’s insurer Omega has got a lot of people talking. But as some suitors have apparently walked away because Omega wanted more than they were willing to pay, many are questioning the continuing interest of the remaining suitors – Canopius and former Flagstone Re chairman Mark Byrne. Are they waiting for each other to drop out so they can name their price? Axis Capital chief executive John Charman tells me he will have been in the industry 40 years on 1 November. He says there’s never been a dull moment – or an easy one – during that time. Now that’s what I call commitment. Yet Axis’s website says he has over 40 years’ experience. Were Axis’s webmasters being overzealous, or have a couple of years blended into one for John? The tall figure of John Berger was notable by his absence at the Guy Carpenter cocktail party last night. Perhaps he’s too busy with new venture Third Point Re.
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NEWS@ GLOBALREINSURANCE.COM
TONIGHT
GO TO…
The sun is shining and temperatures are scorching. Ditch your afternoon meetings in stifling cafes and move to the SCOR lounge to cop a cool breeze.
S E E … Keep your eyes peeled for
new Lloyd’s chairman John Nelson at tonight’s Lloyd’s cocktail party. It will be his first Rendez-Vous, but not his last we hope!
DRINK…
Swap hot coffees for ice cold afternoon cocktails. You are in Monte Carlo after all!
AVOID…
The Casino at 2am. You’ll never win your money back from the House.
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