www.globalreinsurance.com
November/December 2011
G LOBAL RE I NSU RANCE • The facts, figures, heroes and villains of the year p14 • Special report: the future of Latin America p24 • Space insurers covering the industry’s final frontier p30
No man is an island Tom Bolt shares the decision-making, but the buck stops with him as the market’s ‘critical friend’ at Lloyd’s
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Who will help you deliver if the weather doesn’t?
When does a broken link mean a broken chain? Sometimes the best laid plans are never enough, and this is especially the case in a world where the margins are wafer thin. Globalization and rising demand have placed enormous pressure on the transport sector. As margins are squeezed, cargo values are increasing whilst transit times are decreasing in hyper-efficient supply chains — representing a challenge for transport insurers to think bigger and think beyond. Thus it pays to know a reinsurer that truly grasps every conceivable risk — whether before, after or during shipping. To find out how to keep business delivering whatever the weather, check out our website at www.munichre.com NOT IF, BUT HOW
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Cover image: Carl Court
Far better for Flagstone to acknowledge that it had overstretched itself than struggle on and risk disaster
Leader
Flagstone Re is going back to basics. Having expanded out rapidly into insurance and the Lloyd’s market, the company has, following a string of catastrophe losses this year, decided to sell its Lloyd’s, Caribbean and South African operations. The company will now focus on the lines of business where it made a name for itself in its formative years: property, property-catastrophe and specialty reinsurance. The move makes a lot of sense. Far better to acknowledge that it had overstretched itself, take corrective action and move forward, than struggle on and risk disaster. The company’s travails are also a lesson that diversification is not always a good thing. Investment portfolio theory teaches us that it is best to have a good mix of assets so that any losses in one area can be covered by profits in others. But this only works if all areas are going at full strength. If you expend your efforts branching out in several areas and the unexpected hits while you are still building up certain elements,
the benefits are not there to cushion you. Some analysts and observers have accused reinsurers of diversifying for its own sake – simply because this conforms to the most prevalent business model in the industry. It is perfectly possible and acceptable to be a successful propertycatastrophe writer without having a presence at Lloyd’s, without a string of international offices and without any offsetting lines of business such as casualty. Of course, there will always be a place for large, one-stop-shop reinsurers such as Munich Re and Swiss Re on buyers’ panels. For some risks, no one else will fit the bill. But cedants and brokers also revere companies that write a small selection of products extremely well. While handy, the corkscrew on a Swiss army knife is no match for a dedicated tool.
Ben Dyson Assistant editor Global Reinsurance GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 1
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Nov/Dec The year in review, page 14
G LOBAL RE I NSU RANCE.COM
Tor Mellbye talks strategy, page 28
News
Cedants
1
28 Q&A
Leader
4
News
8
News analysis
way to tackle the market How the market is “like a crème brûlée”;
why US Rep Richard Neal is in insurance buyers’ bad books
14 News agenda We take an info-packed look back over the
Claims 30 Final frontier
past year: the heroes, the villains, the haves and have-nots
20 Tom Bolt Lloyd’s entry is strict, but not impenetrable
Assistant editor Ben Dyson Tel +44 (0)20 7618 3480 Email ben.dyson@globalreinsurance.com Markets editor Lauren Gow Tel +44 (0)20 7618 3454 Email lauren.gow@globalreinsurance.com Group production editor Áine Kelly Deputy chief sub-editor Laura Sharp Senior sub-editor Graeme Osborn Art editor (group) Clayton Crabtree Publisher William Sanders Tel +44 (0)20 7618 3452 Email william.sanders@nqsm.com
mankind’s exploration, but with that comes a whole new
Country Focus 33 Out of the shadows
Special Report
Senior Sales Executive Tomas Imrich Tel +44 (0)20 7618 3432 Email tomas.imrich@globalreinsurance.com Group sales director Tom Sinclair Tel +44(0) 7618 3429 Email tom.sinclair@nqsm.com
late. Can it regain its shine in an uncertain market and in the face of challenging new regulations?
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Managing director Tim Whitehouse
For years the industry’s
reinsurance darling, Bermuda has lost some of its gloss of
The future of this emerging market
Business development manager Donna Penfold Tel +44 (0)20 7618 3426 Email donna.penfold@globalreinsurance.com
Outer space is next on the agenda for
world of reinsurance challenges
People & Opinion
Editor-in-chief Ellen Bennett Tel +44 (0)20 7618 3494 Email ellen.bennett@globalreinsurance.com
Länsförsäkringar’s reinsurance general manager
Tor Mellbye believes a slow and steady approach is the best
the complexities of offshore energy operations cover; and
24 Latin America
Entering the space race, page 30
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
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2 NOVEMBER/DECEMBER 2011 GLOBAL REINSURANCE
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News
Catastrophe models ‘not fit for purpose’ ● Underwriters slam modelling firms for ‘inaccurate’ and ‘wrong’ information ● RMS, EQECAT and AIR Worldwide dominating ‘unhealthy market’ Catastrophe models are suffering from a “paucity of data” that 175,000 renders them inaccurate, speakers at the International 150,000 Underwriting Association’s fourth annual catastrophe 125,000 modelling conference claimed. 100,000 Moreover, they said that unreliable information was 75,000 creating high levels of 50,000 uncertainty in models and their outputs. 25,000 Karen Clark, president DATA: GUY CARPENTER Return period and chief executive of Karen 0 0 50 100 150 200 250 Clark & Company, said it was a myth that cat models were Model 1 Model 2 Model 3 objective tools. “They are not, Model 1 range Model 2 range Model 3 range because there is such little objective data,” she said. “All the models are wrong – but the FEEL THE estimates from the some of the delegates at the HEAT question is, how wrong?” cat modelling firms? conference. AIR Worldwide AT THE Clark said that the Financial Services senior vice-president and RENDEZrelease of RMS version 11 Knowledge Transfer managing director Milan Simic VOUS had been a “wake-up call” Network director Dickie defended the models, claiming for the industry. Whitaker described they had progressed over time FIND OUT She said: “Where did the current crop of to make it easier for users to MORE ONLINE we have the most data and goo.gl/4fw4x cat models as comprehend their results, and the best accuracy? Florida, “fundamentally not fit that the market was healthy. from 63 landfalling storms for purpose”, owing to He added: “They are not since 1900 and lots of their lack of compliance perfect, but they are fit for claims data. If we have with Solvency II. purpose. The models are anywhere figured out, it is “You need to know that completely different from the Florida. But if Florida changes there are limitations, and you black boxes they were 10 or by 100%, what does that tell need to be aware of what 15 years ago.” you about other places?” these are,” he said. She continued: “What I Listing the limitations to the believe is more important than current catastrophe models, the models is that the market Whitaker said that there was ● With only three major has reliable information and this unknown sensitivity to the comes from multiple sources. impact of individuals, functions modelling firms in the market, “The models are based on and variables, while key risks there is a risk that smaller, historical data, and we don’t and uncertainties were newer players will find it have enough of that. What unmodelled, as only the major tough to make their mark. do we know about the New perils and economies were ● Catastrophe models are Madrid earthquakes in included at present. not an exact science, and Missouri? We know something He also claimed that the three contain various assumptions. happened in 1811 or 1812, but major modelling firms – RMS, Having faced calls for more we don’t know the magnitude EQECAT and AIR Worldwide transparency about these or the return period.” – had dominance over an assumptions, modellers are Clark, former chief executive “unhealthy market”. He said now providing more detailed of AIR Worldwide, dismissed they had “virtually excluded documentation. the idea that an updated model academia” from providing input ● While criticisms of models was a better model. If that was and running models, which are valid, reinsurers should the case, she asked, why did a meant the sector was losing the ensure they use model output “piddly little storm” such as potential for innovation. intelligently and avoid seeking August’s Hurricane Irene cause Whitaker’s comments a single, definitive exposure such a wide range of loss prompted angry words from number from them.
Going global: Peo 1 Sydney Global broking firm Guy
Carpenter expanded its risk management arm in the Asia-Pacific area, to be headed by Christian Schirmer.
Vendor model uncertainty bands
3 2
Modeled loss
5
3 London Lloyd’s broker RFIB’s chief
executive Marshall King left the company suddenly, and chief financial officer Jonathan Turnbull has taken the reins.
5 Bermuda Bermuda-based (re)insurer
Endurance promoted Rene Lamer to senior vice-president and head of US property-catastrophe treaty business.
Thailand’s floods
We say ...
4 NOVEMBER/DECEMBER 2011 GLOBAL REINSURANCE
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News eople moves 2 New York Marsh promoted
David Batchelor to head of the international division, filling Alex Moczarski’s old role.
4
1
4 Singapore Guy Carpenter has
appointed three senior brokers to the firm’s Singapore office from January 2012. Lucinda Coleman joins from rival JLT Re Asia, Brendan Plessis will join as head of multinational and retrocessional practice from Willis Re, and Richard Hawkes joins as head of marine and energy from London broker Cooper Gay.
Online top five
Weblog
1. MCMANUS IN SHOCK EXIT FROM WILLIS Willis International chief David Margrett also leaves
globalreinsurance.com
No one would have predicted this one.|By far the most popular story of the month was the shock departure of Willis UK and Ireland chief executive Brendan McManus, as well as international chief executive David Margrett. Some speculators claim the departures were related to the broker’s record £6.9m fine in July for failings in its anti-bribery systems and controls between January 2005 and December 2009. Others suggest a personality clash with group chief executive Joe Plumeri. Taking second place this month, the ongoing Transatlantic merger saga hit the headlines again as the US-based reinsurer revealed it had entered a confidentiality agreement and takeover talks with another anonymous third party. The latest suitor is in addition to the anonymous third party revealed late September, believed to be former Gen Re chief executive Joe Brandon.
T To contribute to the website, email Lauren Gow at lauren.gow@globalreinsurance.com
2. TRANSATLANTIC REVEALS NEW SUITOR The company is in takeover talks with another anonymous third party 3. LIBERTY MUTUAL RE HIRES TWO IN TREATY ROLES Richard Mairano and Thomas Greene join 4. DEATH OF PROPORTIONAL REINSURANCE IS EXAGGERATED Endurance believes prorata business will stay intact 5. SPECIAL REPORT: FACULTATIVE IN FOCUS Natural disasters and improved risk modelling are making the benefits of fac more apparent
Canopius left out in the cold
ds: Insurers face $2.5bn bill
● Omega pursues deal with Bermuda’s Haverford ● Canopius now seeking more acquisition targets
PHOTO: GETTY IMAGES
SWEPT AWAY Japan’s casualty insurers are facing a bill of around ¥190bn ($2.5bn) in net payouts to cover damages from Thailand’s floods, according to analysts at Deutsche Bank. Japanese property and casualty insurers have underwritten as much as 70% of seven flooded industrial estates in Thailand that are facing around $13bn in damages. Residential insured losses are set to be small, as less than 1% of Thai households have flood insurance.
In third spot, US-based Liberty Mutual Reinsurance’s appointment of two senior managers, Richard Mairano and Thomas Greene, for its Connecticut operations proved once again that it is the people that make this business tick. Anyone bold enough to make a prediction is sure to capture the market’s attention. Endurance’s chief underwriting officer for Europe and Asia, Hans-Joachim Guenther, spoke to Global Reinsurance in BadenBaden and declared: “I believe the pro-rata business will stay intact.” Take that, naysayers. And finally, the market showed a keen appetite for facultative reinsurance in a Global Reinsurance special report. If only we could always look at things one risk at a time.
Lloyd’s insurer Omega will focus on completing a transaction with Bermudian investment firm Haverford after reviewing bids from three suitors. The announcement was made after Invesco, Omega’s biggest shareholder, indicated a preference for Haverford’s offer. Following Omega’s announcement, suitor Canopius said in a statement: “In view of its inability to secure a recommendation from the board of Omega and the support of its largest shareholder for its offer, Canopius is withdrawing from the process.” It said that it was
disappointed by the latest developments, but hinted that it would seek more acquisition targets following the collapse of the Omega bid. Canopius put in an offer for the entire share capital of Omega on 13 October, after making an “indicative proposal” in September to buy the firm for 83p a share. Haverford has offered up to 83p a share for 25% of the firm. While Canopius’s indicative proposal was in line with Haverford’s offer, Canopius chairman Michael Watson said that his firm’s revised offer was a “higher price than the Haverford offer”.
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News
Flagstone units attract ‘top class’ potential buyers ‘This year’s hero? Warren Buffett, saving Bank of America. Villain? Richard Neal …’ >>> see News Agenda, page 14
The big ... Withdrawal
Canopius chairman Michael Watson has pulled its offer for fellow Lloyd’s insurer Omega “in view of its inability to secure a recommendation from the board of Omega and the support of its largest shareholder for its offer”, he said. Canopius says it is continuing to look for strategic opportunities to boost growth.
● Sale of operations outside core focus will slash general expenses by $40m ● Executive vice-president Guy Swayne insists ‘this is not a fire sale’ Flagstone is close to finding buyers for the operations it is selling as part of its restructuring, according to executive vice-president Guy Swayne. The Luxembourg-domiciled reinsurer revealed on 24 October that it would divest its Lloyd’s managing agency, its Island Heritage Caribbean primary insurance unit and its Johannesburg office, in a bid to focus on property, propertycatastrophe and specialty reinsurance. The company estimates that the Lloyd’s and Island Heritage sales will cut annual gross written premium by $300m. In its third-quarter results, Flagstone estimated that the restructuring as a whole will reduce annual general and administrative expenses by
$40m, starting in 2013. Flagstone said the sales would be completed in Q1 2012, and Swayne added the current target was mid-February to coincide with the release of the company’s full-year earnings. “We are pleased but not surprised that the level of interest is significant, and the quality of the interested parties is top class,” Swayne told Global Reinsurance. The decision followed a review that was sparked by heavy catastrophe losses in the first half of the year. The company had already begun reviewing operations 18 months ago, and had closed its Dubai and Puerto Rico offices. Flagstone made a net loss of $241m in the first nine months of 2011. But Swayne stressed that the sales were orderly. “This is
not a fire sale by any stretch,” he commented. He added that the decision was driven by management, not rating agencies, though management had sought rating agency endorsement after making its decision.
We say ... ● Flagstone had clearly overstretched itself when it expanded rapidly away from its core business into new territories and business lines. ● While the restructure looks like a backward step, it will help Flagstone move forward on more stable footing. ● A leaner, cleaner, smaller operation is likely to attract buyers, though Swayne insists that was not the reason for the changes.
US snowstorms: Up to $3bn in damages
Cat
Investors flocked to insurance stocks following the announcement of another Greek debt bailout plan. AXA’s share price soared 14%, while Aviva rose 8.5% and Allianz 6%. Despite the large market gains, some commentators are warning that the measures are only a stop-gap, especially if market confidence in Italy and Spain continues to deteriorate.
A severe snowstorm battered the US northeast in late October, causing between $1bn and $3bn in insured and uninsured damage according to risk modelling firm Kinetic Analysis Corp. The New York-based Insurance Information Institute said the storm is likely to generate thousands of insurance claims. At least 11 people died and more than two million homes and businesses were without power.
ILLUSTRATION: PETER PACHOUMIS
Surge
IN A FLURRY
PHOTO: AP
Munich Re purchased a new $100m catastrophe bond, covering US hurricane and European windstorm risks. The German reinsurer acquired the coverage from special purpose vehicle Queen St IV Capital, which placed the cat bond into the capital markets in October.
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News analysis Markets
Finding a balance Against the odds, some reinsurers are set to make a profit in this, their worst ever year, and yet Ben Dyson finds the market remains balanced on a knife edge
Forces in both directions
The problem is that although a number of market challenges are exerting upward pressure on reinsurance rates, the industry’s still-robust capital buffers and the resulting abundant levels of capacity are pushing back the other way. On top of the catastrophe losses, low interest rates are depressing investment returns, eating into profitability. Economic pressures mean reduced insurance spend, and by extension reinsurance spend, making growth difficult to come by. “You have got very anaemic growth in mature markets and growth has even started to slow down in some of the emerging markets,” PartnerRe Global chief executive Emmanuel Clarke says. But several global reinsurers remain profitable despite the numerous pressures of the year, prompting some to question the need for further rate rises. For Cooper Gay reinsurance chairman Seymour Matthews, the fact that private equity investors are interested in getting into the reinsurance sector, as evidenced by the recent launch of Third Point Re, shows that the sector has profit potential and is therefore attracting adequate rates. “At the time of Baden-Baden, reinsurers were talking about making profits in the worst ever year in their history. Why would prices go up? Why should they?” Matthews says. “There is plenty of capital out there. The capital has nowhere else as attractive to go as far as I can see.” Even where there are losses, some are expecting measured responses. “We are expecting quite a soft renewal other than whether there have been actual losses on the treaties we placed in the markets.
And we expect the market to react calmly to those losses – we are not really expecting a knee-jerk reaction,” says UIB treaty reinsurance divisional director Kenrich Aldrich. While rates may not be hardening in loss-benign territories such as Europe, cedants should not expect large reductions either. While capacity is still plentiful, reinsurers are still keen to ensure they are paid adequately for it. “There is certainly no capacity drought,” PartnerRe’s Clarke says. “But I believe people will be a lot more careful about how and where they deploy that capacity and at what price.”
Exercising caution
On the flip side, it seems that reinsurers are also wary of putting up rates too much. There are rumours of private equity capital waiting in the wings to buy into the reinsurance market if and when rates start to go up, and reinsurers may want to avoid a situation where fresh competition enters the market, depressing prices again. “An aviation underwriter told me that they wouldn’t be upset if there was a large loss, but at the same time if there was one they would rather it caused a 5% rise than a 10% rise, because then everybody would throw their capacity into the market and the market would go down within a couple of quarters,” Aldrich says. “They want to keep rises steady because everybody is worried about the fact that capacity is so easily and quickly transferable.” The current market conditions are not all bad news for reinsurers. While ceding companies may be under pressure to cut costs – including their reinsurance spend – their increased retentions have hit them hard in the past year, as there have been a number of smaller losses that have fallen below the threshold of their reinsurance programmes. But while losses have not been heavy enough to prompt rate rises so far in Europe, danger still lurks in several business lines. On the natural catastrophe front, Eastern Turkey was hit by a devastating earthquake in October. The losses from the Thailand floods are highly uncertain, with estimates varying wildly. And some believe certain liability lines are an accident waiting to happen. “Primary prices should rise dramatically in financial institutions business,” says Cooper Gay’s Matthews. “Directors and officers liability losses will come through. There will be problematic areas there around the world. Those prices are still very competitive if not in certain cases going down in much of the world.” The industry is balanced on the edge, and it may not take much more to push it over. GR
ILLUSTRATION: BRETT RYDER
“T
he market is like a crème brûlée – hard on the outside but soft in the middle.” This is how general manager of the reinsurance department at Swedish mutual insurer Länsförsäkringar Tor Mellbye describes the current reinsurance pricing environment. His analysis echoes the talk in the hotel lobbies of the small German spa town of Baden-Baden in late October, where European cedants, reinsurers and brokers gather to start 1 January renewals discussions in earnest. The general sense is that rates are hardening where there have been big catastrophe losses, such as New Zealand, Australia and, to a lesser extent, the USA. Despite flooding in Denmark in July, Europe got off relatively lightly. As such, many believe it is inappropriate to talk of a single reinsurance market. “It is the time of micro-cycles,” says Endurance Europe and Asia chief underwriting officer Hans-Joachim Guenther. “Markets are moving sideways in Europe, and we don’t see too much movement in pricing. But we see improvements in terms and conditions in countries that have been affected severely by large events.”
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Bravely exploring uncharted territory in the world of specialty insurance and reinsurance.
Specialty solutions. Worldwide.
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A world without a road map is a world full of opportunity. At Allied World, we aren’t afraid to journey off the beaten path to find new markets or explore new opportunities. Our skill at navigating uncharted terrain enables us to work closely with clients to find innovative ways to balance risk with reward. When it comes to specialty insurance and reinsurance solutions, sometimes the road less taken is the one well worth traveling.
INSUR A NCE | REINSUR A NCE | S Y NDIC ATE 2232
Insurance coverage is underwritten by member companies of Allied World. Coverage is subject to underwriting. Member companies may not be licensed in your state or jurisdiction. To find out if coverage is available, please contact your insurance broker.
News analysis Liability
Picking up the tab Accidents like the Deepwater Horizon oil spill have woken underwriters up to the fact that offshore energy operations require much more complex cover. Tim Evershed reports
T
he $4bn payment from Anadarko Petroleum to BP that settled “Despite significant losses, there’s been no reduction in capacity, claims relating to the Macondo oil spill last year underlines other than in the liability area, and for most insurance buyers there the difficulties underwriters face in assessing liability of is ample capacity for the limits they want to buy and until that offshore drilling platforms. withdraws, pricing is not going to increase significantly. We are The settlement ends a long dispute between BP, which operated seeing rises of 10% here and there, but that’s it.” the well in the Gulf of Mexico, and Anadarko, which had a 25% The nature of the losses has also changed, with insured losses stake, about accepting responsibility for one of the worst oil spills in from two of this year’s largest energy claims, the storm-damaged US history. Maersk Gryphon and the Alberta Horizon oil sands fire, increasing But, while the settlement was a fillip for BP, it is still at due to business interruption (BI) claims. loggerheads with two other contractors: Transocean, which “BI claims were a big piece of the Maersk Gryphon [loss],” operated the rig, and Halliburton, which was responsible for Steptoe says. “From that the lesson is: should you be writing BI?” cement work. The situation has got to the point where Lloyd’s performance Marsh managing director and US upstream energy practice management director Tom Bolt felt it necessary to write an open leader Andrew Steptoe says: “What we have seen since letter warning the market. He said: “Aggregations [in the offshore Deepwater Horizon is that the drill operators and suppliers energy book] are difficult to assess and manage owing to the lack of are seeing significant changes in how their programmes are transparency associated with package policies. This approach is not structured. Underwriters are sustainable; there is a requiring more information material imbalance between and there is a lot of focus on premiums charged and $2.5bn the operations. Underwriters exposures assumed. Operators extra expense have woken up to the fact $2bn Property damage that in drilling there are many Modest returns Business interuption $1.5bn companies involved in any “The economics simply don’t DATA: WILLIS ENERGY LOSS DATABASE $1bn one project. work. It is not only $0.5bn “One of the interesting underwriters who have been things is that the whole left disappointed by the Deepwater Piper Maersk Ekofisk Riots Explosion P36 Montaracontractual relationship offshore energy class, as Horizon Alpha Gryphon collision Escravos & Fire Brazil West Atlas between the parties involved capital providers have Nigeria GOM in the drilling of a well is received only modest returns changing, with everyone for what is a very capital trying to limit their own liability and pass it on to the operator. It is intensive line of business. Could better returns have been made had a little early to say how that will impact the insurance market,” capital been deployed elsewhere?” Steptoe adds. Bolt set out a number of best practice guidelines and pre-conditions and warned syndicates Regulation changes that if they were not followed, next year’s business plans would be subject to veto. The Deepwater Horizon explosion in April last year was a landmark Key among these was the demand that OEE (operators’ in many respects and it has altered the industry in the USA. extra expense), which includes well control, drilling and pollution Lloyd & Partners energy and marine team senior partner John and is known as blowout insurance, is written into the liability Cooper says: “One of the biggest changes was in the oil industry policy rather than classified as physical damage and that liability itself and that was regulation. A lot of our clients in the UK, risks are underwritten on a standalone basis not in packaged Australia and Norway, etc, said the Macondo loss would not have policies. happened in their countries because the regulation is completely “OEE has not been the problem in our view and underwriters different. The US rules regarding deepwater drilling have now have been writing it for many years without any significant changed significantly.” problems. Our view is that the market will find its correct price for a Deepwater Horizon was just one of several headline-grabbing product and what it covers should be for individual underwriters losses that have hit the offshore energy and marine markets over the and the market as a whole to determine,” Cooper says. last couple of years. Cooper says: “Of course, Deepwater Horizon Steptoe adds: “Bolt’s concern is with the energy liability market would have been a horrendous loss to the market if BP were a buyer and he feels there has been a lack of discipline in how that market of insurance. Maersk Gryphon and other sizeable losses should be has been underwritten. Bolt needs to be aware that this is a supply absorbed by reinsurers or were retained by the front-end market but and demand market and Lloyd’s is just one of many markets around have not resulted in any significant withdrawals of capacity, so this the world.” GR will limit underwriters’ attempts to raise prices.
Top Individual Offshore Energy Losses
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News analysis USA
Closing the loophole A change to US legislation aims to end an unintended tax subsidy for foreign-owned insurers, and stem the flow of capital out of the country. But with the likelihood that rates will rise and capacity will fall as a result, insurance buyers are not happy. Lauren Gow reports
P
resident Obama is in hot water with insurers. His full-year 2012 and associations have publicly fi led opposition letters against this budget includes a provision that threatens to drastically increase tax proposal. A 2009 study by researchers at the Massachusettsrates across the USA, with some critics saying that the changes based economic consulting firm Brattle Group demonstrated that will make insurance less available and more expensive for US customers. | the proposed legislation would cost consumers between $10bn Obama’s provision is based on bills HR 3424 and S 1693, which and $12bn per year to maintain their current coverage and would were introduced in Congress by US representative Richard Neal reduce US reinsurance capacity by 20%. and senator Robert Menendez in October. The legislation aims CCIR says the effects of these cost increases would be felt most to close what Neal calls an ”unintended tax loophole” that gives in disaster-prone states like California, Florida, Louisiana and foreign-owned insurers commercial advantage over their US Texas. Other states are also hitting back. North Carolina Insurance competitors serving the domestic market. Commissioner Wayne Goodwin says: “On the heels of Hurricane Under the current “loophole”, foreign-owned insurers are able Irene’s devastation in my state, anything that has the impact of to declare in so-called tax havens income that was generated in the driving up insurance rates and reducing reinsurance capacity for USA by reinsuring their US business with foreign affiliates. hurricane-prone states is unacceptable. I must raise my objection The new bill will effectively eliminate the to congressmen Neal’s legislation. competitive advantage for foreign-owned “Ultimately, anyone in favour of consumer insurers and defer the deduction for any protection must oppose this measure.” reinsurance premiums paid to a foreign 1984: Congress provides authority to the The Risk and Insurance Management affiliate (if the premium is not subject to Society (RIMS) has also spoken out against Treasury to make adjustments in reinsurance US tax). the legislation, calling it a “serious threat” transactions to prevent tax avoidance or evasion. In addition, to ensure foreign-based to small and large businesses, universities, 2003: Bush Treasury Department testifies insurers cannot be disadvantaged relative hospitals and public entities, all of which before Congress that existing mechanisms were to domestic insurers, the legislation allows purchase significant amounts of commercial not sufficient. foreign-based groups an election to avoid property/casualty insurance. 2004: Congress amends Tax Code to expand the the deduction deferral rule and be taxed RIMS External Affairs Committee board authority of Treasury to make adjustments to similarly to a US company on the income liaison John Phelps says in a statement: “By reinsurance agreements. from these affiliate reinsurance transactions. disallowing the tax deduction for reinsurance July 2009: Congressman Richard Neal introduces A foreign tax credit is provided for any premiums ceded by US insurers to offshore bill to close the reinsurance tax loophole. foreign taxes paid on such income. affiliates, the legislation will inevitably Feb 2011: President Obama’s 2012 budget In introducing the legislation, dismantle a legitimate practice in risk includes tax deductions proposals for certain congressman Neal said: “Ending this management, which facilitates the shifting reinsurance premiums. unintended tax subsidy for foreign and pooling of a variety of risks from a Oct 2011: Bills HR 3424 and S 1693 are insurance companies will stop the capital domestic insurer to an affiliate reinsurer.” reintroduced in Congress by US representative fl ight at the expense of American taxpayers “During this period of consumer Richard Neal and senator Robert Menendez. and restore competitive balance for uncertainty and economic fragility, now is domestic companies.|Closing this loophole not the time for tinkering with this provision does not impose a new tax. It merely ensures that foreign-owned of the tax code, especially when economists forecast that a change companies pay the same tax as American companies on their could cost individual and commercial consumers over $10bn a earnings from doing business here in the USA.” year,”|Phelps adds. “The increasing trend of foreign insurance companies moving profits made in America offshore and sticking Americans with the Searching for a resolution bill is incredibly troubling,” Menendez added.|“This legislation will Ironically, some of those companies that are supportive of the staunch the flow of capital overseas, protect|American jobs, and legislation in the USA have been fighting against almost identical reduce deficits|by shutting down a tax|loophole that provides a rules in Brazil called Resolution 224 and Resolution 232. huge unintended subsidy to foreign companies at the expense of The Resolutions were formulated to stop a proportion of both their US competitors and American taxpayers.” premium earned by local reinsurers from leaving the country, as The US Joint Tax Committee estimates that this legislation would well as forcing local reinsurers that are a division of a multinational help to reduce the deficit by nearly $12bn over 10 years.| group to invest more capital in Brazil. The US bill has now been read in the Senate and in the House ‘A serious threat’ of Representatives, and has been referred to the Committee on Finance, where hearings will be held and amendments possibly However, according to insurance advocacy group Coalition for made before the bill is passed. If the industry has any objections to Competitive Insurance Rates (CCIR), more than 100 insurers, the bill, the time to speak is now. independent experts, state government officials, business owners
Timeline
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2011 News Agenda
A look back
Catastrophes, disasters and scandals; this year has been nothing if not tumultuous. How has the industry weathered the storm? Lauren Gow reflects
T
his has been a year of haves and have-nots: those who have bought or been bought, and those who have not. Those who have been hit hard by natural catastrophes and those who have not. Those who have predicted widespread rate rises and those who have (correctly) not. But it’s also been all about the people who make the industry what it is. From the shock simultaneous departures of chief executives Brendan McManus and David Margrett from Willis, to a sad farewell for Ken LeStrange, who stepped down as Endurance chairman. From the Guy Carpenter management reshuffle that saw Peter Zaffino trade reinsurance for insurance, to the appointment of Hammerson’s John Nelson as Lloyd’s chairman, it has been a year of big, bold and shocking moves. It seems fitting, then, to honour a few of the industry’s finest in our inaugural Monty Awards. And the winners are:
Hero: Warren Buffett Hero: Stefan Lippe Hero: Torsten Oletzky Chief executive, Berkshire Hathaway Feat: Buffett saved Bank of America with a $5bn investment from his bathtub
Villain: Richard Neal US representative Misdeed: Neal reintroduced the HR 3424 bill, aimed at closing a tax loophole and forcing foreign reinsurers to pay more US tax
Chief executive, Swiss Re Feat: Lippe won back his company’s AA- rating
Chief executive, Ergo Feat: He arranged for a donation of €83,000 ($113,000) on behalf of Ergo to a women’s shelter to make up for the orgy scandal
Villain: Ed Noonan Villain: Michel Barnier Chief executive, Validus Misdeed: He can attempt to scuttle a deal at the last minute – and succeed
European commissioner for internal markets Misdeed: He is responsible for the implementation of Solvency II and for it being pushed back even further
Scarlet Pimpernel Award
John Berger may be planning a comeback with Third Point, but he has been a noticeable absence from this year’s festivities.
Pat Ryan, for running the only broker to break down Lloyd’s defences by buying Jubilee.
Blast from the Past Award
After disappearing off the radar in 2009 following the IPC sale to Validus, Jim Bryce has resurfaced out of the blue with a new venture, Aliseo Re.
HEROES & VILLAINS
ILLUSTRATION: PETER PACHOUMIS
Battering Ram Award
14 NOVEMBER/DECEMBER 2011 GLOBAL REINSURANCE
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News Agenda Transatlantic’s share price
19 SEP
3 JAN - 1 NOV 2011
Transatlantic receives letter from National Indemnity reinstating $52-per-share all-cash proposal to acquire the company.
$54
$53.35
$52
$50
$48
$46
$44
10 JUN Investors frustrated about whispers of Allied World merger but no announcement.
3 NOV 13 JUL
$42
Transatlantic confirms receipt of unsolicited proposal from Validus.
T
he world’s biggest insurers have remained profitable despite taking a beating from natural catastrophes in the first nine months of 2011. But not all performed equally well, and results were a decidedly mixed bag. The message coming from Swiss Re’s results is that it is firmly back on track. After making heavy losses in 2009 from its investment portfolio, the company, under the guidance of chief executive Stefan Lippe, has gradually got its strength back. Swiss Re made a $1.64bn profit for the first nine months of 2011, which, while only 3% higher than the $1.59bn it reported in the same period last year, came after a multibillion-dollar catastrophe bill for the firm. Swiss Re’s natural catastrophe losses at the first half of 2011 were $2.47bn. What’s more, the company regained its coveted AA- rating from Standard & Poor’s, which it lost in early 2010 after the full extent of the 2009 horrors was revealed. For the third quarter alone, which had a lighter catastrophe burden than the first half, Swiss Re made a profit of $1.3bn, up 118% on the $618m profit it made in 2010. Munich Re’s results, on the other hand, were less positive. The world’s largest reinsurer’s nine-month 2011 profit dropped 96% to €80m ($108m) from €2.1bn in the same period last year. The company also reported a 62% decline in its third-quarter profit, to €290m from €761m. Munich Re sustained the bulk of its catastrophe losses in the first quarter, when it made a €948m loss. The subsequent profits in the second and third
The comebacks and the climb downs The nine-month numbers Jan-Sep ’11 Gross written premiums
Munich Re
Swiss Re
Hannover Re
$50.53bn $22.77bn $12.33bn
Net claims and claim expenses $42.02bn $13.68bn $8.08bn Underwriting result
-$405.2m
n/a
-$562m
Investment income
$4.82bn
$4.21bn $1.29bn
Profit
$108.8m
$1.64bn
Shareholders’ equity
$30.21bn $27.77bn $63.75bn
Non-life combined ratio
117.9%
104.6%
$519m
105.0%
MUNICH RE AND HANNOVER RE’S RESULTS WERE CONVERTED TO DOLLARS AT THE EXCHANGE RATE ON 30/9/2011
Transatlantic confirms receipt of revised Validus exchange offer with current market value of $53.35.
quarters have barely made a dent in this, however.| Its total major loss bill for the first nine months of 2011 was €4bn. As a result, Munich Re’s expectations for 2011 are modest. The company acknowledges it will miss its long-term target of a 15% return on risk-adjusted capital and believes that, while it will end the year in profit, there is little hope of getting close to the €1.4bn profit it made in 2010. Fellow German reinsurer Hannover Re fared much better, though its performance is still down compared with 2010. The company made a net profit of €381.7m in the first nine months of 2011, down 34.4% on the €582m it made in the same period last year. The dip in profitability comes after a €743.2m natural catastrophe bill for the 2011 year to date. Despite the dip in profitability, Hannover Re said it is still on track to hit its €500m profit target for the full year. Although the three reinsurance groups all remained profitable, the impact of the catastrophes was plain to see in their non-life reinsurance combined ratios. Munich Re’s was 117.9% (nine-month 2010: 102.1%), Swiss Re’s 104.6% (ninemonth 2010: 95.8%) and Hannover Re’s 105% (nine-month 2010: 99%). While the largest reinsurers expect to emerge from one of the toughest years on record profitably, plenty of challenges await them in 2012.
RESULTS ROUND-UP GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 15
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News Agenda The costliest earthquakes in history Mar ’11 Jan ’94 Feb ’11 Feb ’10 Sep ’10
Japan USA New Zealand Chile New Zealand
Ten US disasters costing more than $1bn in 2011
$30bn $21bn $9bn-$12bn $8bn $4.4bn
04 APR-05 APR Tornadoes $1.6bn (insured)
08 APR-11 APR Tornadoes $1.5bn (insured)
SPRING-SUMMER Drought, heatwave & wildfire $5bn (economic) SPRING-SUMMER Flooding $2bn-$4bn (economic)
27 AUG-28 AUG Hurricane $5.5bn (insured)
The cost of US windstorm damage in the first six months was over twice that of the previous year
29 JAN-03 FEB Blizzard $1.1bn (insured)
2011 (H1)
$12bn $5bn
25 APR-30 APR Tornadoes $6.6bn (insured)
22 MAY-27 MAY Tornadoes $5.9bn (insured)
SUMMER Flooding $2bn (economic)
14 APR-16 APR Tornadoes $1.4bn (insured)
CATASTROPHE LOSS
Apocalypse now *
Natural catastrophes in 2011 have mounted up, with H1 losses of $70bn already reaching more than half of 2005’s all-time annual high of $119bn. After six years of softening rates, one more costly disaster could prove to be a tipping point that finally forces the market to raise its prices.
* Well, based on 2011’s figures so far, it’s certainly shaping up that way
All-time high of $119bn
Insured catastrophe losses 1991-H1 2011 $100bn $90bn $80bn ’91 ’92 $70bn $60bn $50bn $40bn $30bn $20bn $10bn
’93
’94
’95 ’96 ’97
’98 ’99 ’00
’01 ’02 ’03 ’04
’05 ’06
2010
’07 ’08 ’09
27 AUG ’11
2011 Half-year $70bn ’10
5
Atlantic hurricane $2.25bn$5.5bn 20 MAY ’11
US tornadoes and storms 4 $5.9bn
DATA: SWISS RE, RMS, LLOYD’S, NATIONAL CLIMATIC DATA CENTER, NOAA, COMPANY REPORTS
3 25 APR ’11
US tornadoes and storms $$6.6bn
Top 10 reinsurers’ H1 losses Reinsurer Munich Re Swiss Re Hathaway Re Hannover Re Lloyd’s SCOR Everest Re Partner Re Transatlantic ACE
2010 shareholders equity $30.52bn $25.34bn N/A $6.39bn $29.58bn $6.16bn $6.28bn $7.21bn $4.28bn $22.97bn
Reported losses at H1 $4.77bn $2.47bn $1.2bn $952.4m $4.5bn $594.1m $620m $1.6bn $398m $543m
Losses as a % of 2010 shareholders’ equity 145.9% 9.7% N/A 14.9% 146.1% 9.6% 9.9% 22.2% 9.3% 2.4%
2011: The five costliest disasters
1 25 APR ’11
2 25 APR ’11
New Zealand earthquake $9bn-$12bn
2011 major Lloyd’s market losses Japan earthquake and tsunami $1.9bn New Zealand earthquake $1.4bn US tornadoes $600m Australian floods $300m Hurricane Irene $300m-$600m
Japan earthquake and tsunami $9bn-$12bn
16 NOVEMBER/DECEMBER 2011 GLOBAL REINSURANCE
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News Agenda
M
ergers and acquisitions in 2011 are best summed up as ‘two’s company, three’s a crowd’. But take a closer look and you’ll find that some transactions bring together a whole host of players. Global Reinsurance has dug beneath the surface of this year’s most newsworthy targets – US reinsurer Transatlantic Re and Lloyd’s insurer Omega – and found that the various ties that bind these companies speak volumes about the deals themselves. While there are some obvious connections between companies and people, there are a few surprises. Allied World chief executive Scott Carmilani’s appetite for acquisition did not begin with his bid for Transatlantic, for example. In fact, he was AIG’s president for the mergers and acquisitions insurance division earlier in his career. No guesses, then, how it felt for Carmilani to take reinsurance powerhouse and fellow suitor Warren Buffett out of the running for Transatlantic. Perhaps the best example of the interconnected nature of these deals is the Byrnes. Insurance elder Jack Byrne is the founder of White Mountains, board member of son Mark’s company, Haverford, and former chief executive of Buffett’s GEICO. Mark is founder and board member of Haverford and Flagstone Re and former board member of Jack’s White Mountains. Still with us? Once these Byrne connections are tied together, the two seemingly separate acquisition targets of Omega and Transatlantic become quite intriguingly interlinked.
The tangled web of Transatlantic/Omega Check out who’s connected to whom in our map of this year’s two biggest acquisition stories
M&A
Omega
Flagstone Re
Other business relationship
Subsidiary
Current chief exec/executive/ board member
Acquisition target
Company
Barbican
Mark Byrne
Merger or attempted merger
Founder
Former chief exec/executive/ board member
Merger suitor
Person
Jack Byrne
Mark Byrne
Flagstone Re
White Mountains
Haverford
IPC
Alterra
Validus
GEICO
Jim Bryce
Michael Watson
Canopius
Omega
Transatlantic
Aliseo Re
Trenwick
Max Capital
Barbican
National Indemnity
Joe Brandon Berkshire Hathaway
Allied World
Marty Becker
Harbor Point
AIG
GenRe
Scott Carmilani
GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 17
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HOSTED BY
ORGANISED BY
DATE
11 TH -13TH MARCH 2012 PLACE
DOHA VENUE
RITZ CARLTON, DOHA
Join us at the next middle east reinsurance rendezvous in doha and discover the perfect place to do business
WHAT IS MULTAQA QATAR?
APPLY NOW
perfect place to do business. th tthe he h ep pe erf r
FOR YOUR INVITATION TO ATTEND TEEEN ND Online at www.multaqa.com.qa a If you would like more details about the event, nt, t, p pl please eas e ase se e co con contact Debbie Kidman | debbie.kidman@globalreinsurance.com glob oba ba b allrre eiin nssu urra u
Hosted by the Qatar Financial Centre Authority and organised by Global Reinsurance, Multaqa Qatar is the Middle East’s leading insurance and reinsurance event. Now in its sixth year, Multaqa Qatar promotes thought leadership in (re)insurance, providing a real and important platform for local, regional po and international nattio ona a decision-makers to come together err a and d sha sshape ap pe the direction of the industry. Combining world-class business programme, om mb bin nin ng gaw wo orld networking, leisure activities and a sstructured st rruc uctu urre u ed dn ne etw truly international audience, Multaqa Qatar is ttru uly in u inte errna
WHAT DOES IT COST TO ATTEND? W There is no cost to attend and interested professionals should register their request for an official invitatation online at www.multaqa.com.qa
WHO SHOULD APPLY TO ATTEND? Senior executives at reinsurers, insurers and brokers.
QatarVI_GR_DPS_ND11.indd 2
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JUST SOME OF THE EXPERTS AND COMPANIES THAT YOU WILL MEET AT MULTAQA QATAR 2012
LUKAS MÜLLER
ANDREAS POLLMANN
MANFRED SEITZ
EMMANUEL CLARKE
CHARLES DUPPLIN
Director – Head Market Underwriter, Middle East and Africa Division, Swiss Re
Head of Middle East and North Africa, Munich Re
Managing Director, Berkshire Hathaway
President and Chief Executive, PartnerRe Global
Chief Executive, Hiscox Bermuda
JOSE RIBEIRO
HEATHER GOODHEW
GEOFF BROMLEY
AJMAL BHATTY
DR ROBERT P. HARTWIG, III
Director – International Markets, Lloyd’s of London
Managing Director, Aspen Re
President, International, Aon Benfield
President and Chief Executive, Tokio Marine Middle East Ltd
President and Chief Economist, Insurance Information Institute
ACE
Besso Ltd
Lloyd’s of London
Q-Re LLC
ACR
Lockton
Qatarlyst
Aspen Re
Boubyan Takaful Insurance Company Clyde & Co
London Marine Insurance Services Ltd
SEIB Insurance Co
ADNIC Al Fajer Re
Cunningham Lindsey International
Malakut Insurance Brokers
Alpha Lloyds Insurance Brokers LLC
Daman
Massoun Insurance Services LLC
Societe de Courtage en Reassurances SA
AM Best
Ernst & Young
Misr Insurance Broking
Swiss Re
Amlin Re Europe
Echo Re
MNK Re Ltd
Tokio Marine Middle East Ltd
Aon Benfield International
Financial Supervisory Commission, Taiwan
Munich Re
Transibb Re
Noor Takaful PJSC
GIC of India
PartnerRe Global
Underwriting Risk Services (Middle East) Ltd
Gulf Re Hanover Re
Pioneer Insurance and Reinsurance Broker
WIASS Insurance Broker
Hiscox
Protection Insurance Services W.L.L
Willis Energy
Howden Insurance Brokers
Qatar Financial Centre Regulatory Authority
Willis Re
APEX Insurance ARB ARIG Asia Capital Reinsurance Group AUL Underwriting Agency Ltd Berkshire Hathaway
QatarVI_GR_DPS_ND11.indd 3
JLT
Sirius International Ins. Corp. Ltd
XL Re Europe
18/11/2011 10:53
Profile
‘‘
There is hardly any seat you can sit in and get to see what you do in this job
‘‘
By virtue of his job title alone, Lloyd’s performance management director Tom Bolt is a formidable character. But as Ben Dyson finds, there’s no reason for the industry to fear him … too much
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ProямБle
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Profile
P
erhaps Tom Bolt has better things to be doing. During his conversation with Global Reinsurance in the crowded lounge area of the lavish Brenner’s Park Hotel in Baden-Baden, the Lloyd’s performance management director is constantly looking around and checking his Blackberry. At one point he spies his lunch appointment out of the corner of his eye and breaks off the interview to wonder why he is wandering around. All this activity gives the initial impression of a lack of interest and a strong desire to be elsewhere. But it soon becomes apparent that he simply has a highly active, inquisitive mind, and is on a constant lookout for stimulus and input. As if confirming this, when we ask Bolt what he likes about his job as gatekeeper to the world’s most famous insurance market, he says: “Some people say I have the attention deficit disorder answer to an insurance job. If you have that personality trait, this is God’s gift to you as a job.” Just as his eye is constantly drawn by the bustle in Brenner’s, Bolt admits that the variety of business he gets to see in his current role remains fascinating. “There is hardly any seat you can sit in and get to see what you can see in this job. That is a key attraction. It wasn’t a life-long lust to be a referee.” It would be easy to assume that someone with as powerful a job as Bolt’s could be rude and dismissive. On his word, a syndicate business plan can be torn up or entry into the market refused. He has also worked in the upper echelons of the reinsurance industry, having spent 25 years at the aloof and secretive Berkshire Hathaway Group. Most recently, he was managing director of Lloyd’s underwriter Marlborough Managing Agency, which Berkshire bought from what is now Aviva in 2000 and subsequently sold to Flagstone Re. But nothing could be further from the truth. While never saying more than he has to, he is affable and jocular, occasionally spicing up chat about keeping syndicates in check with amusing off-record anecdotes. He is also a straight talker, preferring plain, direct language to jargon and waffle. His approach is as straightforward as his language. “If you show up at my doorstep and tell me you have a problem, we’ll bust a gut to try to help you with it,” he says. “If we show up on your doorstep to tell you that you have a problem, that’s a different discussion.”
Core communication
He is also humble enough to listen to and accept others’ opinions. When asked what he has brought to the market, he immediately refers to his predecessor Rolf Tolle’s achievements. “Rolf was pretty good,” he says. “It’s hard to find much that he wasn’t already doing.” Bolt regularly seeks the counsel of the rest of the franchise board, on which he sits. “I don’t want to be doing this all on my own,” he says. “I want to be responsible for it but I don’t
THE MAN
Age: 55 Hometown: Kansas City, Kansas. Currently lives in London First insurance employer: Berkshire Hathaway Interests: Running marathons, Chelsea football team In his own words: ‘Some people say I have the attention deficit disorder answer to an insurance job. If you have that personality trait, this is God’s gift to you as a job’
THE COMPANY
Gross written premium (H1 2011): £13.5bn ($21.3bn) Employees: 896 (Corporation of LLoyd’s) Market view: Since Reconstruction and Renewal closed in 1997, LLoyd’s has gone from strength to strength and taken the world’s biggest disasters, such as the September 11 terrorist attacks and Hurricane Katrina, in its stride.
expect to be making every decision all by myself. Over time we are going to have some tough issues and you would like to have as much thought as you can in coming up with the right answer to those.” Nor does he revel in rubbishing others’ business plans or being a figure of fear in the market – which he claims he is not. Rather than fighting against syndicates, Bolt contends he is working with them. “I work for the market. I am here trying to support the market in its endeavours,” he says. “We try to take the role of a critical friend, with equal emphasis on both words. We want to take a critical eye to business ideas and business plans, but the way that we approach that is that we are hoping and pushing for success for the people that we are working with.” Bolt is going to need all his faculties and market support to cope with the challenges ahead. Unlike Tolle, who presided over syndicates’ business plans from 2003 until Bolt’s arrival in 2009, when market conditions were largely favourable, Bolt is in charge of market performance amid challenging times. Catastrophe rates are hardening where large losses have occurred but rates elsewhere are stubbornly soft. This is when the Lloyd’s performance manager has to get tough, and therefore more unpopular, with market practitioners. The market is awash with tales of the increasingly strict access policy at Lloyd’s as a result of the soft market. Several companies have tried to launch new Lloyd’s underwriting operations to no avail. One such firm, Lloyd’s reinsurance broker BMS, set up a new MGA, Pioneer, after being snubbed by Lloyd’s. It was understood to be one of eight companies that were turned away at the time. One source described it as Lloyd’s bringing the shutters down. Several other brokers have reportedly abandoned plans to set up Lloyd’s underwriting operations, including Aon. In addition, run-off purchasing firm Randall & Quilter, which has recently made the move into acting as a turnkey syndicate manager for start-ups, said at its annual general meeting in June that its turnkey operations had grown more slowly than expected. Then there is the persistent accusation that the increasingly intrusive performance management at Lloyd’s is stifling the market’s legendary creativity. Bolt gives short shrift to the criticism. He denies that he and his department have become more stringent in today’s difficult climate. “We kept using the same standards, but the market got soft, so those same standards began to bite a little earlier,” he says. “I don’t think we changed our standards at all. It is just that in a soft market we will tend to discourage more activities.”
Methodical measures
To those that feel Lloyd’s abruptly started turning away new syndicates, Bolt points out
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PHOTO: CARL COURT
Profile
that there have been a handful of new entrants over the past year, the most recent being Sirius’s Syndicate 1945, revealed in May. “Sirius had a very attractive accident and health book, with a loss ratio better than the Lloyd’s average over the last seven years,” he says. “It’s hard to say no to somebody bringing in good business and doing good things.”
BERKLEY RE UK ON TRACK TO START WRITING AT 1/1
FIND OUT MORE ONLINE
goo.gl/GUv7q
Those that were turned away may simply have not had the appropriate business plans. “In such a market, the only way you can typically build your business – unless you already have some business under your wing – is to be more aggressive on price, more generous on terms or more generous on brokerage – all of which would take you over the potential break-even mark,” Bolt says. “In which case, I’m not supposed to approve your business plan. It becomes an easy discussion for me: ‘I’d love to help you out but why don’t you come back when you have a business plan that I can say yes to.’” Despite the number of brokers that have apparently been refused entry to Lloyd’s, Bolt insists there is no blanket ban on intermediaryrun managing agents. “I don’t have a religious opposition to a broker setting something up as long as he has a business plan that is expected to make a profit,” he says. When asked if the brokers who tried to enter Lloyd’s had unprofitable business plans, Bolt simply smiles, and says nothing. But he does indicate that having a single intermediary source, as a broker-controlled managing agency would be likely to have, is not the ideal model for a Lloyd’s syndicate. He points to the attempts to establish Lloyd’s as a captive domicile in the late 1990s. “It wasn’t disastrous but it doesn’t exactly set things up the way I think a robust business should be. If you are going to build a business that is going to last 25 years, you’re going to have a variety of sources of risk and a variety of providers of that risk.” His rule of thumb is that no syndicate owner should be responsible for supplying more than 20% of its business. “That rule seems to be a sensible one to impose that shouldn’t stop good underwriting businesses from making something happen,” he says. On the accusations about tight Lloyd’s controls stifling creativity, Bolt replies simply: “Telling us what you’re doing shouldn’t stifle your creativity if you truly have some.” Despite the robust set of guidelines, Lloyd’s faces performance-related challenges. One is UK motor business. For the past two years, the UK motor market as a whole has reported a combined ratio of 120%. In its 2010 results, Lloyd’s revealed that its UK motor combined ratio was 151.5%. “We have been working very closely with the folks who have trouble, as we do with anybody who has a particularly loss-making year,” Bolt says. And while financial institutions business is arguably lower risk following the lessons the market learned by the collapses of Enron and Worldcom in 2002, some still talk of a D&O disaster waiting to happen. “To the extent that we might have some exposures in Europe on a financial institutions E&O or D&O basis, we have been checking the markets’ pulse to see how they are doing, which I think you would expect given the nature of it,” Bolt says. The market may be flat in rating terms, but there’s plenty to keep Bolt occupied. GR GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 23
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Special Report: Latin America
Touching ground Signs that reinsurance rates are flattening in Latin America are welcomed by those who have seen the market get softer and softer. But are this year’s low interest rates enough to offset the market’s excess?
D
espite being the most expensive insured event ever to hit Latin America (at around $8.5bn), last year’s Chile earthquake only led to localised increases in reinsurance pricing. Elsewhere, rates continued on their downward trajectory. But now there is a glimmer of hope. The spate of expensive catastrophes worldwide in 2011 – including the Japanese earthquake and tsunami, Christchurch earthquake and severe weather in Australia and the USA – have had a perceptible and widespread impact on rates at the mid-year renewals. “We experienced increases of between 0% and 10% at 1 July,” says Guy Carpenter’s chief executive of Latin America and Caribbean operations, Aidan Pope. “The variation depended on exposure to wind, how buyers had behaved in previous renewals and their previous loss history.” Estimated to have cost reinsurers $70bn in the first half of the year, the nat cat losses have burnt off much of the excess capital in the market globally and some reinsurance carriers have felt the pain more than others. “$70bn is the largest half-year cat loss figure on record,” says managing director and head of EMEA insurance at Fitch Ratings Chris Waterman. “It exposes the industry to further cat losses this year. “The expectation is that if we had a material hurricane that resulted in large insurance losses, that probably would start to put upward pressure on premium rates,” Waterman continues. “At the moment, the comment tends to be that first-half losses are an earnings issue rather than a capital issue, because underlying profitability
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is quite strong despite the low interest rate environment.” While the hurricane season is not yet over, it is drawing to a close. Hurricane Jova, which made landfall along a sparsely populated stretch of Mexico’s Pacific coast on 11 October as a weak category 2 storm, will cost insurers less than $52m, according to AIR Worldwide. The event that could have definitively turned the market – Hurricane Irene
‘Softening rates have already stopped this year. Especially in the July renewals’ Oliver Futterknecht Swiss Re
– which travelled up the Eastern Seaboard of the USA in late August, weakened as it made landfall in New Jersey and New York, with likely insured losses reaching no more than $4bn.
Hardening up
But it is the tough global economy and not just the catastrophe losses this year that are having an impact on rates across Central and South America, thinks Oliver Futterknecht, Swiss Re’s economist dedicated to Latin America. He believes the low interest rates are eroding the investment result of the industry, increasing the pressure on technical results. “We are seeing that softening rates
have already stopped this year,” he reveals. “Especially in the July renewals, which is when most of the Latin American treaties are renewed, we saw some increases in rates.” With the exception of Argentina and Brazil, Latin America is highly exposed to natural catastrophes, and property catastrophe insurance is by far the biggest line of business, with high cession rates to global reinsurers. This means the market is highly influenced by trends in the wider property catastrophe business. The potential for sizable losses in Chile – which has the highest insurance penetration of all countries in the region – was demonstrated by last year’s Maule earthquake. But there are growing exposures in other countries too, thanks to economic development and continuing insurance take-up. Before the Maule quake, Hurricane Wilma was the region’s most expensive catastrophe after it caused severe damage to Mexico’s Cancun region, costing between $1.5bn and $2bn. Even those regions typically not associated with catastrophe losses are being re-evaluated. In April 2010, heavy rains inundated northeast Peru and in Brazil the country’s heaviest rainfall in 48 years led to severe flooding, killing 256 people and causing an estimated economic loss of $207m, according to reinsurance broker Aon Benfield. “Brazil is a unique market in the region because it doesn’t have exposure to earthquakes or hurricanes like Mexico,” Futterknecht says. “But flood risks are becoming an issue for the insurance industry.”
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Special Report: Latin America Yet, despite the increasingly heavy cat burden in the region and elsewhere, rates continued to soften in recent years as reinsurance capacity went on flooding the market. Nowhere is this more apparent than Brazil, where the reinsurance market was opened to competition in 2008. Global players flocked there, seeking licences to write business in the world’s fifth-largest country with its impressive growth rates and BRIC economy status. “What we’ve seen since liberalisation of the reinsurance market is a lot more capital and capacity, which has pushed rates down,” Futterknecht says. “Now, with a stricter regulatory environment, one can expect rates to start going up. Still, the situation is not that easy as competition remains very strong and [the international companies] are trying to exploit profitable growth.”
Competitive market
This interest in Latin America is a factor that keeps depressing rates year after year. While Latin America only represents around 1.5% of global reinsurance premium, with ongoing regulatory and rating agency pressure to diversify their business platforms international reinsurers continue to see Latin America as a market of potential growth and one that may earn them some diversification credit. In May, Swiss Re announced it was opening an office in Miami to service the Latin American and Caribbean market, joining Odyssey Re, Transatlantic Re and White Mountains – which have had Miami offices for some time – and other newcomers including Aspen, Catlin, Endurance and Validus. Many of the larger brokers also have offices in Miami. The increasing involvement of brokers and risk managers in the market has also led to more vigorous price negotiation in recent years. “We’ve been in this soft cycle for a long time and for the last three years, every year we say we’ve finally touched ground and prices will go up,” says director-general and chief executive of Mexico-based Patria Re Manuel Escobedo. “And then more capital comes in and more reinsurers remember Latin America is the region of tomorrow. They forget that it has been the region of tomorrow for the last 50 years. “There were some shortfalls at the last renewal, which is generally considered a good indication that the market is turning,” he adds. “But I’m
not seeing the facultative market going up in Mexico, for instance. There’s a glimmer at the end of the tunnel that gives us hope but it still seems to be quite far away.” Escobedo blames new solvency regimes in part for flooding the market with capacity and in some cases leading to undisciplined underwriting. Under the internal models developed for Solvency II by many international reinsurers and insurers, there is a capital credit for geographical diversification. “There is a big suspicion that if you get a lot of credit on your capital for writing business in emerging markets
‘Reinsurers then remember Latin America is the region of tomorrow. They forget that it has been the region of tomorrow for the last 50 years’ Manuel Escobedo Patria Re
like Latin America then it all of a sudden becomes good business to lose money.” “In some cases, they hire underwriters with previous experience in Latin America but in other cases you have new reinsurers with no experience,” he continues. “You find underwriters from Asia writing business in Latin America from Paris or London, when they have never visited the place. They usually write very small shares but it’s a contribution to a generally messy market.”
Growing attraction
While economic growth has slowed in Latin America since the financial crisis, it is picking up again, aided by government stimulus programmes. The growing middle class in Brazil and other economies is expected to spark a steady rise in demand for insurance, particularly compulsory covers. “Latin America may be relatively small, but the recent growth in catastrophe exposures and the potential of countries like Brazil and Colombia are attractive to reinsurers,” Guy Carpenter’s Pope says. “Add to that economic and political stability – plus reinsurers’ interest in tapping into the opportunities that arise from
products associated with the burgeoning new middle class – and it becomes quite an interesting combination.” He thinks prospects will come from the growth and increasing complexity of insurance products in all areas, particularly in personal lines business. Finding solutions for the large cat exposures that will arise from this is a key challenge. There will be a role for public-private partnerships to provide disaster risk financing on both a macro and microinsurance basis. While still only a small slice of the premium pie, casualty business is also set to grow across the region. Companies exporting goods to highly regulated markets such as the USA and Europe buy more product liability insurance as international corporations insure their Latin American operations. Economic growth could provide new opportunities for reinsurers if they are able to branch out from the more traditional property cat placements. “The market has started to develop in other directions,” Swiss Re’s Futterknecht says. “Specialty lines like engineering and surety are benefiting from investment in infrastructure across the region, but you also see solutions for governments or development banks. The reinsurers that are more able to tap these noncommoditised markets will benefit the most.” As this year’s cat losses have shown, Latin America is not isolated from global events. Many economic experts predict a shift in the global economy from the West to the East, as developed economies stagnate. While such a change would ultimately benefit a developing region like Latin America, it also exposes it to further economic slowdowns. “Will the USA and Europe go broke and therefore become smaller while emerging markets become more important?” Escobedo asks. “That’s not impossible to imagine. But the size of that crisis would imply that the whole world would come to a standstill for a while, or that we should really be thinking about a new world, since this one would have come to an end.” GR
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Special Report: Latin America
The ring of fire The magnitude 8.8 earthquake that struck the Maule region of Chile on 27 February 2010 was a test of the country’s resilience, its strong adherence to building codes and its high take-up of insurance and reinsurance
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itting along the Pacific Rim’s ‘ring of fire’, where multiple tectonic plates converge, Chile is one of the most exposed countries in the world to seismic activity. Last year’s Maule earthquake occurred at the boundary between the Nazca and South American plates at a depth of 35km, triggering a series of aftershocks and a tsunami that caused significant damage. There was previously a magnitude 8.0 event in 1985 off the coast of Valparaiso and the 1960 Valdivia earthquake, which is still the most powerful recorded at magnitude 9.5. But due to its history of large earthquakes and volcanic eruptions, Chile has the highest insurance penetration in Latin America (at 6%), with a large proportion of property cat treaties ceded to international reinsurers. More than 75% of larger industrial and commercial operations buy fire and earthquake cover, although only 24% of the country’s homes have earthquake cover. “It’s very well known that Chile is an earthquake-exposed market and as such reinsurance rates reflect the exposure to earthquakes – it is part of the business – you have earthquakes some years and then you have loss-free years,” says Oliver Futterknecht, Swiss Re economist dedicated to Latin America. It is due to the high penetration that last year’s earthquake became the region’s biggest-ever insurance loss at $8.5bn, according to Aon Benfield, with an economic loss of $30bn. Up to 95% of the loss fell to reinsurers – the average is 50% for US events – and there was a 60:40 split between facultative and treaty losses. This is a result of limited appetite among domestic carriers to retain earthquake risk, coupled with strict regulatory requirements. “The legacy of the Chile earthquake was to remind the international
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‘The Chile earthquake reminded the international reinsurance community that Latin America has come of age’ Aidan Pope Guy Carpenter
reinsurance community that Latin America has come of age,” says Guy Carpenter chief executive of Latin America and Caribbean operations Aidan Pope. “It is also interesting to note that the insured loss was around a quarter of the economic loss, which is a high fraction even by developing country standards. GDP growth is now higher than it was before the earthquake.” While reinsurance rates rose by an average of 40%-60% in the aftermath of the event, in the rest of the region and in other property catastrophe markets there was little reaction to this major event, even though at the time it was the costliest earthquake since Northridge in 1994. The earthquake only provided “a respite in sliding rates” for earthquake cover across Latin America, and did not impact rates globally, said Aon Benfield. Excess capacity in the market offset any upward pressure on rates elsewhere and the fact the loss did not come out of one of the more developed reinsurance markets also played a part. “The largest loss coming out of Latin America in the
last 10 years is probably Chile,” says Patria Re’s director-general and chief executive Manuel Escobedo. “What happened because of Chile in the reinsurance rating market? Nothing. Why? Because Latin American represents about 1.5% of the premium.”
Lessons from Chile
While the country was well-prepared for a major earthquake, there are a number of lessons insurers and reinsurers have taken from the event. The complexity of claims and difficulty in getting loss adjusters to damaged sites across a wide area was one element of difficulty. The preference for local claims adjusters added to the bottleneck. The number of claims after the earthquake corresponded to the figure of nine regular years, says Futterknecht. “Reinsurers supported insurers in handling these claims and they have introduced some changes in underwriting and claims handling so they are more prepared for future events.” Another lesson was the level of damage from the tsunami and the very large losses that arose from business interruption and commercial claims. The industry’s catastrophe models must take into account non-modelled perils like tsunami and the impact of business interruption on overall losses in future in order to better reflect the likely damage following a massive earthquake. As Aon Benfield states: “Improving tools to reduce the gap between estimated and actual losses will build insurers’ confidence in using models as a risk assessment tool.”
Earthquakes don’t kill people, buildings do Many comparisons have been drawn between the Maule earthquake, which caused over 500 deaths, and the Haiti disaster. In Haiti, a country where there was no earthquake preparedness and lax building codes, the weaker 7.0 temblor became a humanitarian disaster, killing over 200,000 people. By contrast, few of the buildings in Chilean cities such as Santiago and Concepción fully collapsed and so many lives were saved. This
pointed to a strong adherence to building codes. “Overall, Chile’s building stock performed well,” says AIR principal engineers Dr Guillermo Franco and Dr Tao Lai, and AIR senior research engineer Guillermo Leiva in a post-disaster briefing. “Only one modern reinforced concrete building in Chile suffered a complete collapse, and perhaps 100 other modern engineered buildings will have to be demolished due to severe damage.”
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Special Report: Latin America
The new world A year of major catastrophes, a continuing global economic crisis and new solvency regulation are just some of the dynamics shaping the future of the Latin American reinsurance market. Patria Re looks at the big picture
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n the first quarter of the year, the industry was hit by significant catastrophic losses. Q1 losses including the Japanese earthquake add up to almost $55bn, compared to total 2010 cat event losses of $36bn. Weatherrelated losses during Q2 represent an additional $15.3bn bringing the total catastrophe claims to $70bn for the first half of the year. Given that earthquake losses take time to develop, the current estimation of the Japanese loss will probably increase further. As a consequence of these losses, the industry as at June 2011 is suffering a negative net result and a reduction in equity compared to year-end 2010. In the worst cases, this represents a variation of up to 20%, though most companies saw changes of between 0% and -10%. In spite of this, industry shareholder funds have only dropped by about $3bn compared to year-end 2010. Though they are expected to keep falling, dedicated reinsurance capital remains very strong even if the sector’s excess capital position has been significantly diminished. Interest rates, changes in reserves, inflation, cashflows and Solvency II – among other factors – could bring about an important change in the current situation. But for the time being these factors are actually softening the emerging markets even more. Emerging markets are relatively small compared to developed markets and in the current environment it would seem some players have come to the conclusion that it is good business to lose money.
Global economic shake-up
Credit markets and institutions around the world have been seriously affected by the enormous losses provoked by the collapse of the American real estate credit markets, requiring substantial support from their governments to prevent the disruption of the credit system. This in turn has caused a reaction from governments to take steps to ensure that they will not be required in
the future to use taxpayers’ money to save credit institutions from insolvency. Although a relatively small amount of insurance institutions had to be bailed out by their governments, the fact they are a part of the credit market means they too will be affected by this change. Many insurers have lost substantial amounts due to investments in subprime debt and the markets in general, which will affect underwriting capacities in years to come. This will make the markets less soft and more profitable. Overall, the developing world has coped far better than the first world countries with the after-effects of the financial crisis. Today, developing countries that are not experiencing banking crises, that are benefiting from the export of cheap labour and are attracting direct foreign investment,
Developing countries that are not experiencing banking crises have very strong growth potential have very strong growth potential. The participation of the local insurance sector in the national economies is still very weak in these countries and therefore also has strong growth potential. In view of the situation of global financial markets, Latin American insurance markets could become more attractive. But our feeling is that the main reinsurance groups are regarding this market as only a service line to diversify their core operations.
Regulation as an after-crisis reaction: Solvency II
In the context of the internal models developed for Solvency II, the effect of diversification generates an important
capital relief and therefore an additional incentive to write business in developing markets. Solvency II represents a new and more comprehensive view of risk, where decisions are preferably based on quantitative information and a transparent policy. Responsibility of risk measurement can no longer rest on a third party, as the 2008 confidence crisis in rating agencies demonstrated. That is why Solvency II starts by involving the highest authority within the companies – the board of directors – in an active monitoring of risk management and using the independent opinion of actuaries and other experts in making informed business decisions. In relation to Solvency II regulation, there is a lot of work to do in order to reach agreements between the various stakeholders. Whereas supervisors are seeking to hold the executive board responsible, seek greater solvency and question the validity of risk management, the board is looking for a limitation of their responsibilities, greater capital efficiency and seeking to show off their company’s ability to manage exposures. Due to the role of insurers and reinsurers in stabilising economies and fostering a culture of prevention, coupled with the fact that the industry is less susceptible to systemic crises, we are confident that this new rational management will be to the overall benefit of the sector. Miguel Escobedo is chairman, Masashi Kikuchi is chief control officer, Ingrid Carlou is joint managing director and chief operating officer and Manuel Escobedo is managing director and chief executive at Patria Re.
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Cedants Swedish mutual insurer Länsförsäkringar’s reinsurance general manager explains why ‘slow and steady’ will win the race in the current market
&A Q Tor WITH
Mellbye
‘The A reinsurers are trying to talk up the prices, especially for the larger risks and catastrophe-type business’
s both a writer of inwards reinsurance and a buyer, Swedish mutual insurer Länsförsäkringar’s Tor Mellbye can appreciate the buying process from both sides of the fence. “I have always had two hats,” he says. The Norwegian-born executive started his career in Oslo but has lived in Stockholm for almost 25 years. As with many of his peers, he fell into reinsurance buying. “It was coincidence really,” he admits. With his dual role, Mellbye doesn’t have much time to relax – though he does enjoy running in his spare time. Nevertheless he says he is very happy with his lot. “I enjoy life, my work and my sports. I have many friends inside and outside the business, and I have a nice social life as well.”
Q. How would you evaluate the state of the market? A. PHOTO: WILLIAM LEACH
The reinsurers have had a lot of losses, so the results this year are not
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Cedants very good. They are trying to talk up the prices, especially for the larger risks and catastrophe-type business. I think prices will go up on the larger programmes, especially where you have had losses, but not everywhere. On the other hand, as I see it, the amount of capacity is still the same, the players are the same and the market hasn’t changed very much. For some business the price should really go down, because there is plenty of capacity. It is a mixed picture: some programmes will have increases. A lot of business will be under pressure and might even have some small reductions. We are not talking big changes. I will keep this opinion until I see some changes in market capacity, and I haven’t seen that yet. It is a fairly disciplined market – there is not silly competition like we had in the past. But as long as the capacity is there, not too much can happen.
Q.
How are market conditions affecting your buying strategy?
A.
We buy a big pillar of catastrophe protection and the rest of the programme is relatively small limits. I think the catastrophe portion will remain rather stable. There are opportunities to have reductions on the rest of the programme, because there are smaller limits|and we have a clean loss record. With losses, the situation would be slightly different. It really depends on whether you are prepared to keep your existing panel or if you want to make some changes and get in some newcomers. Then it might be possible to achieve some small reductions. However, we are conservative and not changing that much. There is no need to because we have done that quite a lot in the past to achieve changes in the price, structure and terms and conditions of contracts. We are careful – we don’t utilise this to the maximum that we could, because we want to be a company that shows continuity. If you use this technique to the extreme you get a bad reputation and, in the long run, you don’t benefit much from it. You have to find a balance. The introduction of RMS version 11 could have an impact in some countries, but I don’t think companies really want to use it yet. They want to understand a bit more how it works first. It will have some impact on pricing, but I think a lot of companies will leave it until next year.
‘It is a fairly disciplined market, there is not silly competition like we had in the past. But as long as the capacity is there, not too much can happen’
Q. How do you approach the buying process? A.
Today it is really important to utilise the cat models. We subscribe to RMS and we also get help from our brokers. The first step is to analyse the book to know what you should buy. This involves a lot of data collection. We start the process in May and the data collection takes place during the summer. The data is compiled in September and October in close co-operation with our brokers – Guy Carpenter and Aon Benfield – resulting in a renewal information package. In the meantime, we also have board meetings because limits and retentions are decided by our board. That usually happens in October. We then approach the market. We get some broad ideas of what we want to do, normally in Monte Carlo and even more in Baden-Baden. The renewal information package is finished just after Baden-Baden. We send it out to brokers and then we start discussing pricing and structures with our leading reinsurers. We normally agree on terms and conditions in early December and then we go out and place it. We use brokers on most of the programme. We deal a little bit direct as well.
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project. But I don’t think it will be that important for our reinsurance buying.
Q. How much business do you cede to reinsurers? A.
We cede in excess of Skr400m ($60.8m), so it’s not huge amount. We only buy excess-of-loss. The retentions have been pretty stable over the last 10 years. There have been some increases but they are still rather low. We are slightly different from the stock [non-mutual] companies and so we should buy a bit more reinsurance than they do. So we are buying lower down, and the limits have increased over time, especially for catastrophe. The retentions have also increased a little bit, but nothing dramatic.
Q. What qualities are most important in reinsurers and brokers? A.
For brokers the servicing of the account is very important: the claims service and their negotiating power. That today also includes having the modelling capability and knowledge of the modern tools. It is about being able to handle the business in a good way, place it, and be technically professional. On the cat side, there is a very limited number of brokers you can choose. For reinsurers it is willingness and ability to pay claims. We determine this not only by the rating but also knowledge we have about whether they are good or bad payers. We are not really that interested in the servicing from companies when it comes to Solvency II. We do that ourselves.
Q. How did you get involved in buying reinsurance? A.
Coincidence really. I started working for a company named Polaris in 1981 and I was both an underwriter and I placed their excessof-loss programme, so I have always had two hats.
Q. How will Solvency II affect the buying process?
Q.
A.
A.
It doesn’t look like we need to make any changes. For catastrophe we buy up to a one-in-200-year event and as a group we are quite well off capital wise, so I don’t think Solvency II will impact our buying behaviour that much. We are of course preparing ourselves for Solvency II. It is a big
How do you relax?
I never relax! I like running, I do a lot of sports. But I don’t have much time to relax. It is a lot of work, a lot of sport and a lot of fun. I enjoy life, my work and my sports. I have many friends inside and outside the business and I have a nice social life as well. I am a very happy man.
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Claims
$20
A buyer’s market
This illustrates the extent to which space insurance and reinsurance – though there is an argument that Virgin Galactic technically falls under aviation cover – has an excess of capacity. As a result, prices are tumbling and just a handful of serious incidents can result in a loss-making year for the market.||| Munich Re head of space underwriting Ernst Steilen says
Final frontier WATCH THIS SPACE
The prospect of space travel has insurers tingling with excitement – now they just need to get past the problem of overcapacity. Mark Leftly reports
that there has been “huge overcapacity” for at least three years. There is $600m of cover available for every risk, but only demand for between $200m and $300m. Only when an Ariane rocket – which might have two spacecraft with a cumulative risk of $700m – launches is the market stretched. “This is definitely a buyer’s market,” Steilen says. “Prices are now less than 50% what they were in 2001. The rates decrease was deserved because of the improved technical performances of vehicles and satellites, but the extent [of the softening] is because of overcapacity.” One consequence of this is that insurers and reinsurers are often chasing the same work. As a result, reinsurers write primary business and insurers are covering their rivals’ risks.
“Space doesn’t have a distinction between primary insurers and reinsurers as it is such a small market,” Steilen explains. “For example, a launch in Japan would be covered by a local fronter and it would come to the European market as reinsurance [which a primary firm might cover], as otherwise they will not be able to write it. Risk is usually written on a syndication or a co-insurance basis.” With only about 30 carriers regularly teaming up, the bulk of the players in this sector can be hit by any one incident. In 2011, there have been three: in May, one of the two main reflector antennas of Intelsat’s New Dawn telecommunications satellite failed to deploy; later that month, one of the solar panels of the Telstar 14R satellite did not work; and, in August, Russia’s $265m Express AM4 satellite
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pace travel is becoming big business. Already, more than 450 people have paid their $20,000 deposits to secure $200,000-a-pop seats on Virgin Galactic, Richard Branson’s commercial spaceship, which is set to start transporting tourists by 2013. The White Knight Two aircraft will launch from a $209m port in New Mexico and at 45,000ft will release the VVS Enterprise spacecraft into the upper reaches of the Earth’s atmosphere, allowing passengers to experience a few minutes of weightlessness. The venture has captured the imagination of the public and is likely to prove yet another success for the Virgin empire. It has also fascinated the insurance and reinsurance industries, which see a range of opportunities from passenger to hull cover. Initial insurance cover “wasn’t particularly difficult” to secure, says Will Whitehorn, who was president of Virgin Galactic until the start of the year and is still an adviser. This was despite concerns over the frequency of catastrophes in space travel – estimated at about one in every 64 take-offs when Virgin Galactic started looking for cover in 2006.
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Claims
0bn The space insurance market’s current worth
According to a report by Swiss Re, space debris has the potential to destroy highvalue satellites with revenue losses in the billions. Below, a computer generated image, supplied by NASA, shows objects that are currently being tracked in the Earth’s orbit. Around 95% of the objects in this illustration are orbital debris, in other words, not functional satellites
briefly went missing because of problems with the proton rocket that launched it. The total impact of these losses is $550m. Steilen argues that one more major catastrophe, from the four or five launches that remain in 2011, could make this “a bad year” – read loss-making – for the market. He expects rates to improve slightly next year, but not everyone agrees. Aon’s International Space Brokers subsidiary space business unit leader Clive Smith argues that compared with other sectors three to four incidents is a small number. This is why demand does not tally with supply of cover, and prices will remain depressed. “If there are no further incidents, the market will continue to soften,” Smith says. “At the moment, the market is breaking even – no more than that.” A source in the space division at one of the world’s biggest reinsurers also points out that there is “plenty more capacity coming into the market”, so competition to provide cover will grow even fiercer and force down prices even further. Although space might not be the most profitable line, it is a global business and can help insurers and reinsurers drive their international growth ambitions. Bermuda-based underwriter of specialty insurance and reinsurance products Argo Group, for example, added aviation to its international portfolio in October last year. Four months later, the group expanded that burgeoning operation with the hire of Hiscox global risks underwriting director Bruno Ritchie, who was tasked with developing products for space and aviation clients.|| Meanwhile, Swiss Re, which insures more than 110 commercial satellites, believes that it has identified one growing risk that could grow the space insurance market, which is currently worth $20bn. In a recent study, Space debris: On collision course for
insurers?, it said that the amount of orbital debris is double that of the early 1990s and 30% more than just five years ago. One area, the geostationary orbit that lies directly above the equator, has more than 500 defunct satellites, 200 spent rocket bodies and thousands of smaller pieces of debris. The result is an increased risk of collision. Should active satellites run into one of them, explosion is all but guaranteed. The report states: “Space debris is no longer an academic issue. Nor is it merely an ‘environmental’ problem; rather, debris has the potential to damage or destroy high-value, operational satellites with resulting revenue losses in the billions of dollars.” There are few precedents in national or international law on space debris losses, so it is an area in which liability will be difficult to identify. Also, insurers will have to work with those they cover to find ways of encouraging debris mitigation, so that losses do not reach unacceptable levels. Either way, Swiss Re has identified something that could help to harden rates for at least some cover in the space sector.
Rising demand
John Gurtenne, senior executive for underwriting at the Lloyd’s Market Association (LMA) and secretary to the organisation’s aviation committee, points out that the sector’s customer base is also on the increase, which could eventually raise demand for cover. “The trend of recent years is that space activities are increasingly moving out of the governmental arena into the commercial arena,” Gurtenne says. “There are now television satellites and weather forecasting satellites that are commercial.” Then there is Virgin Galactic’s whole new proposition of turning space travel into tourism. With the first flight perhaps little more than a year away – though this cannot be taken for granted, as the project has been fraught with delays and 2007-08 was the initial launch target – space insurers and reinsurers are hopeful that a major new client will be up for grabs next year. But they will face a fight for the business from more traditional aviation suppliers. Aon’s Smith says that the flight is “not orbital”, so will not end up on his books, while the source at a major reinsurer argues that, by definition, Virgin Galactic is “definitely” space.
Aviation reinsurance The LMA’s Gurtenne says that the broader aviation market is seeing neither major losses nor significant price increases. “The market does not command the kind of prices that it would like to,” he says. “There have been no major losses [this year] and if there are no losses customers wonder why they should pay that much premium. There are quite a few players in the market and people can shop around.” In February, reinsurance intermediary Guy Carpenter estimated capacity to be in excess of 200%, which meant that primary insurance rates were almost certain to drop in 2011. As a result, insurers will not pay big money for reinsurance, dragging down the secondary market’s prices. At the Monte Carlo Rendez-Vous in September, Hannover Re said that the aviation rate level should remain stable or decline slightly. But it did point out that the emerging BRIC (Brazil, Russia, India, China) economies could present “attractive business opportunities” in 2012. As these countries grow, compensation for insurance policies such as aviation increases, resulting in greater demand for reinsurance to offset the risk. The recent fall in losses goes against the broader trend since the onset of the financial crisis, accentuating the overcapacity. Swiss Re head of aviation reinsurance Alan Beacock has previously pointed out that, for primary insurers, the sector is “one of the most volatile classes of business” and that there have been an increased number of large claims since 2007. This is because many claims have ended up in the US legal system, where generous compensation claims are commonplace. As a result, reinsurance supply has greatly increased over the past few years. Beacock said: “The existence of ample capacity to meet the insurance requirements for all aviation risks has resulted in a very competitive environment.”
Munich Re’s Steilen puts it best when he chuckles: “Virgin Galactic: it’s not clear where risks will be insured – with space or aviation. The space guys will say it is space, the aviation teams will say it is aviation.” It seems certain that the “space guys” will fight hard for that work. With so much spare capacity, they need all the clients they can get to bring rates up to a decent level. GR
GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 31
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21/11/2011 09:30
Country Focus COUNTRY FOCUS
BERMUDA
Out of the shadows Long esteemed for its speedy approval of new companies and low taxes, Bermuda has lately lost some of its gloss. Lauren Gow examines the impact of market instability and asks if it can once again be a (re)insurance shining light GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 33
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Country Focus clear Bermuda has been hit hard by catastrophes.
Global reach
But Bermuda does not orbit in isolation. Macro-economic factors are also heavily influencing the Bermudian market. Hiscox Bermuda chief executive Charles Dupplin says: “There is pressure everywhere on the public purse. This is likely to be an increasing issue and potential differentiator between jurisdictions.” To make matters worse, policies from the EU and USA are keeping interest rates low. |ABIR president Brad Kading says inflation is putting considerable strain on the market. “Companies are looking at an interest rate of maybe 2%-3% that they could earn on conservative investments. There is speculation that
‘The industry still has abundant excess capacity not being used and it is not clear that is there is a need for extra capital coming in’ Brad Kading ABIR
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inflation rates are already at 3%-4% so how do you make any money when your low investment returns are being eroded by inflation?” | Kading says the grim forecast on the asset side is prompting underwriters to try to claw back an underwriting profit. “(Re)insurers are looking at a market where investment income would be expected to be less than forecast and so that investment income would be expected to be low for at least the mid-term,” he says. “Due to this, underwriters are trying to focus on getting an underwriting profit without consideration of an investment income.” || One issue that has haunted the market for several years is excess capital in primary insurance and global reinsurance companies, meaning increased pricing pressure on commercial insurance and global reinsurance premium rates. Positively, for the market as a whole, there is new capital entering the market meaning continued investor interest in catastrophe reinsurance. But new capital depressed rates, making it more difficult for underwriters to make
money on the business they have. Dupplin says: “There is a movement away from fully fledged class fours and towards more temporary forms of capacity. This is good for the Bermuda market, as the local regulatory and tax environment is structured well for this, and already experienced at it.” Kading believes the global attention natural catastrophe events in 2011 attracted has piqued investor’s interest in the market and led them to conclude that more capital needs to be put in play. “I don’t necessarily agree but that is what investors seem to be thinking. My view is the industry still has abundant excess capacity and it is not clear that is there is a need for extra capital coming in.” Modelling uncertainly remains a major risk for the market. Reinsurers need the ability to add a pricing buffer to allow for any errors or revisions; a particularly important factor if modelled risks severely under-estimate actual damage. Following the release in February of the controversial new US hurricane model from Risk Management Services (RMS), otherwise known as RMS v11, Bermudian insurers fired up. Deutsche Bank analyst Joshua Shanker visited the island soon after the RMS release, writing in a research note that said seven out of eight insurers he spoke to have a “visceral contempt” for RMS v11. Shanker noted Bermudian reinsurers’ backlash against the new RMS model was due to increased capital costs, as well as rejecting “one or multiple conclusions that the model makes”. The main concern for Bermudian (re)insurers is their exposure to probable maximum loss (PML) estimates in areas of heavy coverage, including the US East Coast and Gulf of Mexico region. A June report by global broking firm Guy Carpenter noted that due to severe catastrophe activity in the first half of 2011, as well as the release of RMS v11, the reinsurance market has been particularly volatile. But RMS v11 has another positive influence, according to Kading. “What I hear people saying is that the RMS model changes have increased PMLs, which is going to drive insurers to buy more cat protection against those higher PMLs. That might be something that is attracting outside attention.”
Into the unknown
Given their typically heavy propertycatastrophe focus, coping with the uncertainty of model revisions is a fact of life for Bermudan reinsurers. They have to balance this with charging the correct price for their exposures and
PHOTOS: GETTY IMAGES
T
he light shining on the Bermudian reinsurance market has dimmed a little in recent years. What was once a beacon for new market entrants is now a market with a future that is far from certain. The burden of unfavourable pricing conditions, new tax regulations, the fight to gain Solvency II equivalency, competition from more attractive jurisdictions and the uncertainty of a fragile global economy means Bermudian reinsurers are not sure what to focus on first. But after three years of unpredictability, the market is preparing for a fight. The International Global (Re)insurer’s Underwriting report, conducted by the Association of Bermuda Insurers and Reinsurers (ABIR), shows some positive growth in the market. Gross written premium in the first half of 2011 were $37.1bn, up 3% on the $36.1bn for the same period in 2010. Full-year 2010 gross written premium also rose 2% to $61.9bn, up from $60.8bn in 2009. While the growth may be marginal, it does show some encouraging signs for Bermudian (re)insurers. But underwriting results paint a less rosy picture. In the six months to 30 June 2011, reinsurers as a whole made an underwriting loss of $3.24bn, compared with the underwriting profit of $1.7bn for the same period in 2010. Full-year 2010 figures also show an underwriting profit of $5.2bn, which was down 28% from $7.2bn in 2009. The market’s 2010 figures were undoubtedly better than expected. Despite declining rates in most lines of business and higher-than-normal catastrophe activity in the first half of 2010, the market was gifted a relatively quiet North Atlantic hurricane season, contributing to a strong overall performance for the year. By comparison, 2011 catastrophes have lost the industry more than $70bn in losses so far. The first half of 2011 gained the salubrious title of the ‘costliest half on record’ according to Swiss Re, following a spate of losses in Australia, New Zealand, Asia and the USA. According to ABIR figures, the losses and loss-adjusted expenses for Bermudian (re)insurers in the first half of 2011 totalled $20.9bn, equalling an unprofitable combined operating ratio of 114.7%. Compared with full-year 2010 losses of $29.4bn and a profitable COR of 93.2%, it is
34 NOVEMBER/DECEMBER 2011 GLOBAL REINSURANCE
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Country Focus ensuring that they generate an appropriate shareholder return from their volatile books of business. Bermuda is fighting fires on every front. The battle to gain Solvency II equivalence before 2012 is not just a compliancy issue, it is a fight to remain competitive in the global marketplace. “People are very focused on Solvency II compliance in Bermuda. We had 17 consultation papers with the BMA [Bermuda Monetary Authority] last year and we have a lot more this year,” Kading says. Bermuda’s failure to attain Solvency II equivalency could present a number of challenges for reinsurers with operations both on the island and in Europe. Bermudan groups’ European entities would have to be overseen by a European regulator rather than the BMA because of the Bermudian regulator’s lack of equivalent status. Furthermore, the Bermudian subsidiaries of European groups would have to abide by Europe’s rather than Bermuda’s capital requirements. And thirdly, there is the imposition of collateral requirements on a cross-border basis. Bermuda has received a draft European Insurance and Occupational Pensions Authority report, which identified 13 areas of concern. All will need to be reconciled by summer 2011 when a final Eiopa assessment will take place. A final report to the European Commission before 2012 is needed to make equivalence a possibility. “Solvency II is a big concern for the Bermudian market. It is really about getting equivalency. Some of the ABIR memberships have two-thirds of the business written in Europe so we really need to make sure that Bermuda is in a position to gain equivalence so there aren’t capital penalties,” Kading says. What historically attracted companies to Bermuda was the speed to market, meaning companies were able to launch new operations in the market quickly to take advantage of business opportunities, as well as the low tax environment. Validus Re chief underwriting officer and executive vice-president Kean Driscoll says: “Bermuda will need to compete with other jurisdictions that will continue to offer attractive alternatives. To only just stay relevant but to be a leader, Bermuda will need to be more nimble than its competitors.” After all, there are other attractive low tax environments in the world – perhaps it is time for the old dog to learn some new tricks. GR
COUNTRY FOCUS
Bermuda
Bermuda’s gross written premiums are up 3% on the same period last year, but underwriting losses of $3.24m – compared to the previous year’s same period profit of $1.7m – indicate that the country has some way to go before it finds the market appreciation it once enjoyed. Solvency II and RMS v11 will add to the challenge Population: 64,268 GDP: $5.715bn
GWP: $61.94bn Major exports: pharmaceuticals
Bermuda’s top 10 (re)insurers by assets, premiums and net income By total assets 1 ACE Ltd 2 XL Group plc 3 PartnerRe Ltd 4 AXIS Capital Holdings Ltd 5 Arch Capital Group Ltd 6 Catlin Group Ltd 7 Allied World Assurance Company Holdings, AG 8 Alterra Capital Holdings Ltd 9 Aspen Insurance Holdings Ltd 10 RenaissanceRe Holdings Ltd
$83.35bn $45.02bn $23.36bn $16.44bn $15.77bn $12.08bn $10.42bn $9.91bn $8.83bn $8.13bn
By premiums earned 1 ACE Ltd 2 XL Group plc 3 PartnerRe Ltd 4 Catlin Group Ltd 5 AXIS Capital Holdings Ltd 6 Arch Capital Group Ltd 7 Aspen Insurance Holdings Ltd 8 Everest Reinsurance (Bermuda) Ltd 9 Validus Holdings Ltd 10 Hiscox Ltd
$13.50bn $5.03bn $4.77bn $3.21bn $2.94bn $2.55bn $1.89bn $1.78bn $1.76bn $1.74bn
By net income 1 ACE Ltd 2 AXIS Capital Holdings Ltd 3 PartnerRe Ltd 4 Arch Capital Group Ltd 5 Oil Insurance Ltd 6 RenaissanceRe Holdings Ltd 7 Allied World Assurance Company Holdings, AG 8 XL Group plc 9 Validus Holdings Ltd 10 Everest Reinsurance (Bermuda) Ltd
$3.1bn $8.56m $8.52m $8.42m $7.81m $7.02m $6.65m $6.43m $4.02m $3.91m GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 35
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Rewind
Monty
Our man keeps his cool in the face of industry cheek and, gasp, beer rationing Time gentlemen (to go elsewhere …)
A sure thing
When I joined my old risk management chums in Stockholm at Ferma this year, we all expected a big bash but boy, were we left high and dry. Ferma’s welcoming party was missing one key element: celebratory drinks. The event, held at the Radisson, ran out of booze and glassware in 45 minutes. And, to add insult to injury, any of us who were desperate for a drop were forced to wait in line outside the hotel in the rain, only to be told upon arrival at the refreshment table that we were limited to half a bottle of beer each. Next year, I’ll be sure to bring my hipflask.
For those of you who are convinced that insurance underwriting and dabbling in the bond market are akin to gambling, I have just stumbled across a product that combines all three. Online lottery giant MyLotto24 has bought a three-year insurance-linked security that protects it against paying out more than it would like to in jackpots. Surely this could be classed as a punt wrapped in a wager tied up in a flutter.
Mouthing off
One of my favourite things about this industry is the ability of the big cheeses to hit the nail on the head with a well-crafted one-liner. Take Allianz board member Clem Booth, for example. Many of you will no doubt remember him from his days at Munich Re and Aon Re. He announced during a presentation at Baden-Baden that his shift to insurance from reinsurance in 2006 had simultaneously increased the IQ of both industries. Nice one, Clem, and thank you for doing everyone such a big favour with that selfless move.
Plane sailing
Still on Ferma and the good folks at ACE Insurance sure know what makes the industry tick. While most of the exhibits I strolled through were the usual bore of tinned mints and corporate pens, ACE kitted theirs out as a replica airline lounge. The experience came complete with Swedish air hostesses to tend to my every whim and need. One cheeky ACE gent told me: “It wasn’t our idea. We are just here ‘facilitating’”. Now that’s what I call servicing your customers.
To sunnier climes
This month, I am tipping my hat to Damien Smith, Hiscox’s new underwriting director in Bermuda. While many of us dream of giving up the metropolitan drudgery of big city living, few of us ever have the opportunity to head for sunny skies and sand. But I hear Damien gleefully threw in his towel after 17 years in London, saying he is looking forward to “the short commute and wonderful weather”. He forgot to add the threat of hurricanes for six months of the year, but I’m sure he’ll soon learn.
One for the team
Thank goodness for actuaries. Saves brokers taking all thefl ak
Another man to get a big laugh at Baden-Baden was KBW analyst Chris Hitchings. He’s usually found giving hell to insurance executives who don’t give him enough numbers, but in his presentation he turned his fi re on a group of people who arguably pump out too many numbers – actuaries. On putting up a particular slide on the state of pricing, he added “apologies to any actuaries – or perhaps not”, raising a hearty chuckle from the great and the good. Thank goodness for actuaries. Saves brokers taking all the flak. GR
36 NOVEMBER/DECEMBER 2011 GLOBAL REINSURANCE
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