OCTOBER 2010
MONTE CARLO Less scandal, more opportunity at this year’s Rendez-Vous
SOLVENCY II Will reinsurers be in greater demand?
Comeback In an exclusive interview, politico Mike McGavick reveals how a return to the industry to run XL Group held rather more than he bargained for
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Cover illustration: Ron Borresen
The true test of underwriting discipline will be how companies behave as rates continue to soften
Leader
There is a strong sense that the reinsurance industry has become more professional. Many commentators point to the greater use of both risk and fi nancial modelling, allowing reinsurers to get a better handle on the exposures they are assuming and the type and amount of capital they need to hold against them. Executives extol the virtues of underwriting discipline and turning business down if pricing does not meet rigorous standards. Some have credited the lack of price increases after the heavy first-half catastrophe losses as testament to the industry’s pricing prowess. Others go so far as to suggest that the boom and bust days are over, and that the high-profi le failures seen in recent history are things of the past. Despite all the positive noises, however, reinsurance underwriters continue to be at the mercy of the pricing cycle. Reinsurance executives express concern about the generally softening rates across the industry, but they seem powerless to stop the downward slide.
The most common response to the question of what it will take to stabilise or harden rates is: “a large catastrophe or series of events�. There can be little doubt that underwriting techniques and quality have improved. Catastrophe modelling alone continues to make huge advances. And the top-line reductions at some companies shows that executives are not just talking about spurning unprofitable business. But the true test will be how companies behave as rates continue to soften. The industry has enjoyed generally hard pricing since 2001, and a truly soft market is a distant memory for many. Perhaps the reinsurance industry should only describe itself as professional when the prices it charges are governed by its assessment of the risks being assumed, rather than external pressures.
Ben Dyson Assistant editor Global Reinsurance GLOBAL REINSURANCE OCTOBER 2010 1
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October The impact of Solvency II, page 16
G LOBAL RE I NSU RANCE.COM
Rory Barker is all about security, page 34
Motor hits the wall, page 40
News
Cedants
1
Leader
27 What cedants want Ingredients for the perfect relationship
4
News digest
34 Q&A
10 Over-ripe for the picking
Where is all the M&A activity?
12 Imprints of Monte Carlo Talk of excess at the Rendez Vous 14 Glacier goes down 16 News agenda
36 Lust for life The life market presents a wealth of opportunities
Claims 40 Should we stay or go?
People & Opinion 21 Up the ladder
Lines & Risks
Investors are withdrawing
Will Solvency II boost reinsurance demand?
20 Clive O’Connell
Rory Barker is playing the long game at Hiscox
A softening market demands extra caution
Willis Re’s Peter Hearn knows the industry
The motor industry is hurting
Special Report 45 Unease in the East
A focus on perils in Asia
is not immune to a ‘black swan’ type event
22 Profile Mike McGavick is finally at the ‘fun part’ of his job at XL
Regional Focus
56 Diary
53 New heights
Monty refuses to accept the lack of gossip at Monte Carlo
Editor-in-chief Ellen Bennett Tel +44 (0)20 7618 3494 Email ellen.bennett@globalreinsurance.com
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What are Switzerland’s main attractions?
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2 OCTOBER 2010 GLOBAL REINSURANCE
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To see whether a risk poses a threat, don’t we have to see the big picture?
The future is like an iceberg. Most of the time what we can see before our eyes is only half the story. So how do we know the unknowable? Only those with relentless drive, expertise and foresight can see the whole picture — the risk that lies beyond. At Munich Re, seeing more is what we do. We work in interdisciplinary teams, each pair of eyes viewing something from a different perspective, all focusing on the best solution. With our worldwide network we can pinpoint complex global patterns when they arise. When it comes to grasping our future, we are never satisfied with half the story. To find out more about what lies beyond, check out our website at www.munichre.com NOT IF, BUT HOW
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News Digest
NO NEW BUSINESS AT ECCLESIASTICAL Specialist churches and charities insurer Ecclesiastical will stop writing London market business and place the portfolio of Ecclesiastical Underwriting Management Ltd into run-off, Insurance Times reported. The unit will stop writing new business and renewals from 30 September. (tiny.cc/ITEcclesiastical) NIG WIND-DOWN KICKS IN A swift wind-down process has begun at the personal lines business of UK insurer NIG. Notifications to brokers, seen by Insurance Times, show the company is targeting late September/early October for halting new PL business. Renewals will be stopped from late October/early November. All current policies will be honoured and brokers will be able to make changes. (tiny.cc/IT-NIGRunoff )
Broking COOPER GAY PARTNERS UP Cooper Gay has entered into a partnership with Underwriting Management & Actuarial Consultancy Services to provide quantitative reinsurance reviews and capital modelling services to Cooper Gay’s clients, reported Post. Cooper Gay says this will enhance its capability to deliver actuarial analytics to its underwriting teams. A ABOUT TINY.CC: Type the tiny.cc address into your web browser to access our recommended articles from globalreinsurance.com and its sister titles
New Zealand: Earthquake shakes C
Claims NEW ZEALAND EARTHQUAKE LOSS ESTIMATE LOWERED Risk-modelling fi rm EQECAT lowered its loss estimates for the magnitude 7.1 earthquake that hit Christchurch, New Zealand on 4 September, reported Global Reinsurance. The company now expects total insured damage of $1.5bn$2.5bn, and total economic damage of $2.5bn-$3.5bn. (tiny.cc/GR-NZQuake) HURRICANE KARL DAMAGES Catastrophe-modelling fi rm AIR Worldwide says Hurricane Karl’s damage in Mexico on 17 September will cost insurers at least $100m and possibly as much as $200m, Bloomberg reported.
‘Switzerland’s tax regime really helps when trying to recruit’ Mark Humphreys, PwC
>>> see Country Focus, page 53
Ratings OMEGA OUTLOOK IS ‘STABLE’, SAYS AM BEST Omega’s ratings have been assigned a stable outlook by AM Best, after months of instability within the group, Insurance Times reported. Both Omega Specialty Insurance (Bermuda) and Omega US Insurance have been rated A-. Additionally, AM Best has affirmed the Lloyd’s Syndicate 958 rating of A. The group was placed under review six months ago but AM Best’s concerns were alleviated after Omega appointed a new chief executive and board, who conducted a wide-ranging review of operations within the group. (tiny.cc/IT-OmegaStable)
SCOR GETS AN ‘A’ Rating agency AM Best has upgraded French reinsurer SCOR’s financial strength rating to A from A- and revised the outlook to stable from positive, reported Global Reinsurance. The upgrade reflects the continuing resilience of SCOR’s risk-adjusted capitalisation, consistent operating performance and the quality of its enterprise risk management, the rating agency said. (tiny.cc/GR-SCORRating) POLISH RE RATING UPPED AM Best has upgraded the financial strength rating of Polskie Towarzystwo Reaskuracji (Polish Re) to A- from B++ and its issuer credit rating to a- from bbb, Global Reinsurance reported. AM Best said the actions reflect new and explicit support provided to Polish Re by its ultimate parent, Canadian (re)insurance group Fairfax Financial Holdings, in the form of a binding guarantee. (tiny.cc/GR-PolishRe)
PHOTOS: AP PHOTO/NEW ZEALAND HERALD/GREG BOWKER, REX FEATURES ILLUSTRATION: PATRICK BLOWER
Run-off
WILLIS BACK ON LOOK-OUT FOR INDIA PARTNER Global broker Willis is seeking a new joint venture partner in India, following the termination of its agreement with Bhaichand Amoluk Consultancy Services Pvt Ltd, Global Reinsurance reported. The move follows a decision by India’s Insurance Regulatory and Development Authority not to renew the broking licence of the joint venture, Willis India Insurance Brokers. (tiny.cc/GR-WillisIndia)
4 OCTOBER 2010 GLOBAL REINSURANCE
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News Digest s Christchurch
A 300-TEMBLOR IMPACT A magnitude 7.1 earthquake rocked Christchurch, New Zealand on 4 September. A strong aftershock rocked terrified residents of the earthquakestricken city four days later. Officials have been forced to double estimates for repairing the damage caused by nearly 300 temblors in five days.
Reinsurers RODER EYES HONG KONG Former AIA fi nance boss Steve Roder is seeking up to $1bn capital to start a Hong Kongbased reinsurer, reported Financial Times. Roder is understood to be working with Franz Josef Hahn, formerly chief executive of Swiss Re’s China business. Hahn would take the role of chief executive and Roder would be fi nance chief. The as-yet-unnamed reinsurer would initially focus on property and casualty business in China, Hong Kong and Taiwan. It would challenge large international reinsurers, Bermudian companies and Lloyd’s platforms for business in the region.
SCOR STARTS SYNDICATE French reinsurer SCOR is in the advanced stages of an application to start a Lloyd’s syndicate, for a 2011 start, Insurance Insider reported. SCOR has identified former Liberty Syndicates director of underwriting Tom Corfield as active underwriter for the syndicate, which is aiming for a first-year capacity of £60m-£70m ($94m-$110m). NOVAE RE GOES INTO CREDIT AND SURETY Novae Re, reinsurance arm of Lloyd’s Novae, is to start an underwriting credit and surety business, reported Global Reinsurance. Former Swiss Re senior underwriter Stefan Lorenzini will head the new division, having held previous positions at DG Bank in commercial banking and at Credit Suisse in export fi nance. Rodolfo Bretscher has been appointed regional head of credit and surety. (tiny.cc/GR-NovaeSurety) MUNICH RE HAS PLAN FOR OIL RIG THIRD-PARTY LIABILITY German reinsurer Munich Re has proposed an insurance solution for oil rigs that could boost the third-party liability coverage available to US oil drilling operations to up to $20bn, Global Reinsurance reported. In direct response to the Deepwater Horizon disaster, Munich Re’s bold proposal would insure individual projects rather than individual members, increasing available coverage limits to between $10bn and $20bn. The company would be prepared to put up $2bn of capacity itself under the facility. (tiny.cc/GR-MunichOil)
View from StrategicRISK: Aon’s GRIP ‘In a soft market, avoid deals that are too good, particularly reinsurance that is too cheap’ Clive O’Connell, Barlow Lyde & Gilbert
>>> see People & Opinion, page 20 WILLIS RE GOES EXTREME Willis Re launched a new brand at Monte Carlo’s Rendez-Vous, and will now trade with the strap line ‘managing extremes’, reported Global Reinsurance. Chairman and chief executive Joe Plumeri claimed the new brand reflects the changing risk climate in relation to hurricanes, volcanoes and earthquakes, and climate change. (tiny.cc/GR-WillisRebrand) NEW LIFE FOR SCOR French reinsurer SCOR wants to increase its organic growth by 5% per year and launch new life and non-life initiatives, reported Global Reinsurance. In its new business plan for 2010-2013, SCOR aims to increasing its risk appetite and maintain a level of fi nancial security equivalent to an AA fi nancial strength rating. (tiny.cc/GR-SCORLife)
Catastrophe bonds
$ 5 trillion The potential size of the micro-insurance market
With rates softening, many reinsurers are looking to return their excess capital to shareholders in the form of stock buy-backs and dividends. However, reinsurance broker Guy Carpenter believes that reinsurers should instead be looking to innovate and fi nd new areas of growth. In a presentation at the Monte Carlo Rendez-Vous, president and chief executive of Guy Carpenter’s international operations, Henry Keeling, highlighed micro-insurance – low-cost coverage for those unable to afford standard products, particularly in emerging markets – as a potential growth area for the industry. “We see micro-insurance as a way to create social good, but also as an opportunity for the industry of unprecedented size,” he said. According to Keeling, the market currently generates $1bn of premium, but this could eventually grow to $5 trillion.
In Germany, ill will is growing over the attempts of large brokers to generate additional streams of income. Market sources revealed that Aon has been asked by Deutsche Bank to no longer store data about its risks in the broker’s international information system, the Global Risk Insight Platform (GRIP). At this stage, only a few other companies have made similar demands. While Aon confirmed this was the case, Deutsche Bank did not want to comment. Using the GRIP system, Aon collects information about all types of risks and the insurance offered in various markets. The database offers a detailed overview of market trends and the broker can then sell this information to industrial insurers for a high fee. The data is passed on anonymously. Insurers can use the data to do such things as test their competitors’ appetite for certain risks. Allianz Global Corporate and Specialty, Talanx, AXA and Zurich are all understood to have engaged with Aon over the use of the data, according to German financial journalist Herbert Fromme, who investigated the story on behalf of StrategicRISK . Some risk managers are extremely resistant to the idea that the GRIP information should be sold on to insurers, mainly on anti-competitive grounds. They believe the information shared between client and broker is confidential and should be treated as such. Cost pressures on the big brokers, however, are so huge that they are looking at all possibilities to generate new income. For more news and views from the risk management industry, visit:
.co.uk
GLOBAL REINSURANCE OCTOBER 2010 5
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News Digest Hurricane Igor: Costs may stay under $100m Capital markets RMS ADDS TYPHOON INDEX Catastrophe modeller Risk Management Solutions has added a parametric loss index for Japanese typhoons to its existing list of four industry loss indices, reported Global Reinsurance. The index, Paradex Japan Typhoon, combines wind speed data from a network of stations operated by the Japan Meteorological Agency with industry exposure data to calculate insured loss estimates. (tiny.cc/GR-RMSIndex)
>>> see Profile, page 22 AON’S SCHULTZ HOPES FOR MORE NON-US CAT BONDS Aon Benfield Securities president Paul Schultz believes more non-US cat bonds will soon be launched to balance out the heavy weighting towards bonds covering US windstorm risks, Global Reinsurance reported. “We would like to see a little more balance and think that will start to happen,” Schultz said. In particular, he believes there is potential for more bonds covering European windstorm and Japanese natural perils. Schultz added that February’s Chilean earthquake and the earthquake that struck New Zealand earlier this month could Find our more also provide impetus foronline non-US globalreinsurance.com issuance. (tiny.cc/GR-Schultz)
M&A APOLLO ENLISTS CVC Private equity fi rm Apollo has joined forces with CVC Capital Partners to pursue its £10.75 ($17)-a-share offer for Lloyd’s insurer Brit, reported Global Reinsurance. A consortium formed has made an indicative proposal to acquire the entire issued and to-be-issued share capital of Brit. In addition to the £10.75-a-share offer, the consortium will offer shareholders a so-called contingent value right, under which they will receive up to a further 25p a share if Brit’s 2010 net tangible asset value is greater than £10.75 a share. (tiny.cc/GR-ApolloCVC)
ENDURANCE BUYS SLICE OF GLACIER RE Endurance Specialty Holdings has acquired a portion of Swiss reinsurer Glacier Re’s international and US property catastrophe and global specialty reinsurance business through a quota-share treaty and renewal rights purchase agreement, reported Global Reinsurance. Glacier Re announced on 27 August that it would go into runoff. (tiny.cc/GR-EnduranceGlacier) POTENTIAL XL BUYERS FBR Capital Markets says Warren Buffett’s Berkshire Hathaway or Prem Watsa’s Fairfax Financial would benefit from buying XL Group, reported Bloomberg. Berkshire and Fairfax could “take a more aggressive approach to investing XL’s invested asset base, as these larger companies have higher risk tolerances and a greater ability to absorb market volatility given their capital positions”, wrote FBR analyst Bijan Moazami.
ILLUSTRATION: RON BORRESEN
Mike McGavick, XL Group, clarifies his intention to leave his political ambitions in the past
SOCGEN CIB HAS NEW EDGE ON CONTINGENT CAPITAL French investment bank Société Générale Corporate & Investment Banking (SocGen CIB) has launched event-driven guaranteed equity (EDGE), a contingent capital facility for insurers and reinsurers. The facility will provide an alternative source of risk capital to the traditional reinsurance and retrocession markets, reported Global Reinsurance. This news closely follows the announcement on 10 September that French reinsurer SCOR had secured a three-year €150m ($200m) contingent capital facility through Swiss bank UBS. The capital is available in two separate tranches of €75m. Under the arrangement, SCOR will issue new shares to UBS if SCOR’s aggregate losses from natural catastrophes hit certain pre-defi ned thresholds over the three-year period. (tiny.cc/GR-SocGenEDGE)
PHOTO: GERRY BROOME/AP
‘I’m an insurance executive – full stop’
TROPICAL STORM Catastrophe modelling firm AIR Worldwide says Bermuda’s high building standards mean Hurricane Igor’s damage will probably cost insurers less than $100m, Bloomberg reported.
6 OCTOBER 2010 GLOBAL REINSURANCE
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24/09/2010 10:26
News Digest Roundtable: What do cedants really want? People
Sullivan: Willis’s new deputy chairman
EX-AIG MARTIN SULLIVAN JOINS WILLIS GROUP In a controversial move, Willis hired ex-AIG chief executive Martin Sullivan as deputy chairman of Willis Group Holdings and chairman and chief executive of a new business unit, Willis Global Solutions, reported Insurance Times. Sullivan will report to Willis chairman and chief executive, Joe Plumeri. (tiny.cc/IT-Sullivan) A ABOUT TINY.CC: Type the tiny.cc address into your web browser to access our recommended articles from globalreinsurance.com and its Find our more online sister titles globalreinsurance.com
LET’S BE CLEAR Cedants and reinsurers met at our Monte Carlo roundtable to discuss what their relationship thrives on >>> see Roundtable, page 27
PINETTE MOVES TO GUY CARPENTER TOP JOB Reinsurance broker Guy Carpenter has appointed Franck Pinette as chief executive of its European life reinsurance operations, as of 1 December 2010, reported Global Reinsurance. Pinette’s previous position as head of Bermudabased PartnerRe’s worldwide life reinsurance has been fi lled by its current deputy head, Dean Graham. (tiny.cc/GR-Pinette) BRIT GAINS AON’S CARVER Brit Insurance appointed Richard Carver as underwriting director in its reinsurance strategic business unit, reported News Insurance. Carver joins from Aon Benfield, where he was executive director in its reinsurance team for the past eight years.
‘Glacier Re is too new a business for a lot of people to take on’ John Winter, Ruxley Ventures
>>> see News Analysis, page 14
WATSON JOINS MSIU Former Willis account executive Mike Watson has joined Mitsui Sumitomo Insurance Underwriting (MSIU) at Lloyd’s as reinsurance manager, reported Global Reinsurance. Watson has 30 years’ reinsurance experience, having previously worked at Sedgwick Re and Alexander Howden. Joining Watson at MSIU are Mark Brock as head of personal insurance and Ajay Gupta as business planning manager. (tiny.cc/GR-Watson) VILLERS STEPS DOWN AFTER NINE MONTHS AT ASPEN Rupert Villers is stepping down from his role as chief executive of Aspen’s insurance business after only nine months in the role, reported Insurance Insider. He will retain a part-time role with the company, taking responsibility for the oversight of fi nancial institutions. Villers informed staff at the Bermudabased reinsurer that he would step down in 2011 when a successor is in place. MEAD IS NEW CHAUCER COO Chaucer named former Willis managing director David Mead as chief operating officer of its newly created Chaucer Syndicates, Chaucer’s Lloyd’s managing agency and main operational subsidiary, from 1 November 2010, reported Insurance Times. Mead will assume direct responsibility for Chaucer’s key operations functions from Chaucer chief executive Bob Stuchbery. (tiny.cc/IT-MeadChaucer)
View from Insurance Times: Willis Willis chairman and chief executive Joe Plumeri has rubbished rumours that new deputy chairman Martin Sullivan has been brought in to replace him. Plumeri told a press conference at last month’s Reinsurance Rendez-Vous in Monte Carlo that he had no plans to leave the broker. He also defended the appointment of Sullivan, who is famous for running AIG from 2005-08 when it was at the height of its well-documented financial troubles, which led to millions of dollars of government aid and the break-up of the group. Plumeri said: “This is about what he is going to do here – I can’t concern myself with the past.” He said that Sullivan would help Willis “be better”, adding: “He has been in the business for four decades, he knows a lot about the business and he knows a lot of people. “To have the opportunity to have someone like this join us and help us manage extremes all over the world is great.” For more news and views from the general insurance industry, visit:
.co.uk
PHOTO: AP PHOTO/LAWRENCE JACKSON, ED WRIGHT IMAGES ILLUSTRATION: BRETT RYDER
GLACIER GAINS NEW HEAD Swiss reinsurer Glacier Re has appointed Andreas Zdrenyk as chief fi nancial officer and chief operating officer with immediate effect, replacing founding chief fi nancial officer and operating officer Glenn Campbell, who resigned, reported Global Reinsurance. The company said it was “extremely sorry” for Campbell’s departure, but that the move was understandable considering Glacier’s 27 August announcement that it was going into run off. (tiny.cc/GR-GlacierCOO)
8 OCTOBER 2010 GLOBAL REINSURANCE
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News Analysis Mergers and acquisitions
Over-ripe for picking As rumours fly about XL Group, and Brit looks set to agree to a takeover, Lauren Gow looks at why the industry is not seeing more merger and acquisition activity, and what needs to happen for the situation to change
Not without challenges In addition, softening rates and falling demand means there are few prospects for organic growth in the reinsurance industry, making growth by acquisition a natural step. Chief executive of Lloyd’s insurer Canopius, Michael Watson, tells Global Reinsurance that his fi rm is looking for acquisitions in the wholesale insurance and reinsurance sectors. “Meaningful organic growth in the context of our size is a difficult and dangerous proposition,” he says. “Mergers and acquisitions are not without their challenges but we have shown we can do that and we are keen to fi nd other opportunities.”
According to analysts, the Bermuda market is ripe for M&A. “In Bermuda, you still have a fair amount of reinsurers who are small but looking to get scale,” AM Best ratings analyst Greg Reisner says. “If you look at some of the Class of 2005 in general, some of them are looking to diversify, grow or get scale, so there is potential for deals to happen based on that.” However, with the exception of the continuing attempt to buy Lloyd’s (re)insurer Brit by private equity fi rms Apollo and CVC Capital Partners, the reinsurance M&A market is quiet, despite the seemingly favourable conditions.
Obstacle course Low valuations are both a blessing and a curse for M&A. Buyers are reluctant to pay book value or above, but sellers are equally keen not to sell their assets at a discount. “Companies and boards aren’t willing to come to terms on a deal where there isn’t a reasonable premium on the table for their shareholders,” AM Best ratings analyst Robert DeRose says. “I think the valuations themselves are muting the number of deals that are being done.” Gallant agrees: “Sellers are frustrated because their stocks are cheap, so I think they would like to realise some of that value and sell.” Also, the egos of chief executives of merging companies can get in the way of a good deal. “There are issues with management teams – who gets to survive, who will run the company if the companies merge?” Gallant says. Another deal dampener is the prospect of taking on another fi rm’s liabilities. The target company’s underwriting standards may be lower than those of the acquiring fi rm, and any poorly underwritten business could come back to bite the buyer. In relation to XL, one observer says: “If you acquire that XL balance sheet, there are certain legacies that will come with it. You have to be willing to take the risk associated with those legacies.” Big changes are required to awaken the mergers and acquisitions market. Better valuations require better prospects, which in turn would need a hard market, and the onset of fi rmer pricing is usually triggered by a large loss event. However, while buyers’ and sellers’ expectations from M&A deals diverge, market pressures could force them together. “Perhaps companies will suddenly decide to sell below book value. Otherwise, you are looking at a group that will steadily shrink,” Gallant says. “They are not going to be able to tolerate that for too long.” GR
ILLUSTRATION: BRETT RYDER
In a 7 September report, FBR Capital Markets insurance analyst Bijan Moazami highlighted Bermuda-based XL Group as a possible acquisition target, citing the low value of the (re)insurer’s stock relative to book value, favourable tax status and its potential to generate a high return on equity (ROE) with the right partnership. He named Canadian insurance group Fairfax Financial Holdings and billionaire investor Warren Buffett’s Berkshire Hathaway as potential suitors, as well as global (re)insurers Munich Re, Swiss Re, Allianz and Zurich. “XL has plenty of opportunities as a stand-alone company but you can’t deny, looking at the price and knowing what the company is worth, that there could be interested buyers,” Keefe Bruyette & Woods (KBW) equity analyst Cliff Gallant says. XL is not alone in having obvious potential as a takeover target. Insurance and reinsurance industry stocks are, in general, trading below book value, making the companies potentially attractive to buyers looking to acquire assets at a discount. In a presentation at this year’s Monte Carlo Rendez-Vous, reinsurance broker Guy Carpenter pointed out that the US property/casualty insurance sector’s share prices had been between 0.8 and 0.9 times book value so far in 2010, compared to a 20-year average of 1.3 to 1.4 times book value. Furthermore, the reinsurance industry as a whole has a glut of excess capital, as evidenced by the number of share buy-back programmes and special dividends. Guy Carpenter estimates that the industry was overcapitalised by as much as $20bn at the beginning of 2010. Reinsurers could put this capital to work by buying their rivals.
10 OCTOBER 2010 GLOBAL REINSURANCE
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22/04/2010 14:21
News Analysis The Rendez-Vous
Imprints of Monte Carlo The annual meeting in Monaco was dominated by what to do with excess capital, dealing with low valuations and problems with private equity, reports Ben Dyson. But has the industry become boring now that the worst companies have gone?
are unimpressed by the industry’s potential. Some have asked Despite the lack of major rating actions, mergers, failures or weather whether there are more such closures to come. “A lot will be driven events (unless you count Monday’s torrential downpour) to dictate by the appetite investors have for the reinsurance business and the a central theme of this year’s Monte Carlo Rendez-Vous, there was business models companies are putting forward,” law fi rm Barlow plenty to discuss. Lyde & Gilbert’s reinsurance head, Clive O’Connell, said. A big talking point was reinsurers’ levels of capital, and what Reinsurers have clearly fallen out of favour with the investment should be done with any excess. The general perception is that the community, judging by the low valuations, prompting Guy Carpenter reinsurance industry has too much capital – a position supported by chief executive of analytics Bill Kennedy to comment that the industry the fact that heavy catastrophe losses in the fi rst half failed to budge is being “unfairly punished”. rates. Reinsurance broker Guy Carpenter, for example, estimates that the industry was overcapitalised Big opportunities by as much as $20bn, or 12%, According to one delegate, there at the beginning of 2010, which Key announcements at this year’s Rendez-Vous: were notably fewer banks at this caused rates to fall by as much year’s Rendez-Vous. However, as 6% in the renewals. • Munich Re proposed a marine energy liability solution that it seems banks are still willing Guy Carpenter started the to provide capital to the debate early, postulating in could offer coverage limits for oil drilling projects of up to $20bn. reinsurance industry. French its Saturday evening press Hannover Re voiced support for the idea, but described Munich Re’s reinsurer SCOR announced conference that returning suggested limits as ambitious. shortly before the event that it capital to shareholders through has secured a $150m contingent buy-backs and dividends is not • Guy Carpenter questioned the wisdom of reinsurers returning capital facility in conjunction the best way to create long-term capital to shareholders through buy-backs and dividends, arguing with investment bank UBS, and value for shareholders, arguing they were “sacrificing longer-term returns”. Société Générale CIB launched a that the call for buy-backs is contingent capital facility called being driven by short-term • Willis chief executive Joe Plumeri defended his appointment of EDGE (event-driven guaranteed investors. Instead, the broker ex-AIG chief Martin Sullivan to head a new division, Willis Global equity) during the event. said, reinsurers should innovate Solutions, saying that Sullivan would “help Willis be better”. The reinsurance industry and seek new ways to put the is also clearly not devoid of capital to work. • AM Best aimed to explode myths about rating agencies, attacking opportunities. Not everyone agreed with the notion that Solvency II would diminish the need for ratings. One notable attempt at this suggestion, however. product development during the Some pointed out that funds Rendez-Vous came from Munich that appear to be excess Re, which unveiled plans for a new third-party liability scheme for oil capital could be required urgently if a large event were to hit. Others rigs. The solution will cover the projects themselves, rather than the highlighted the risks inherent in pushing into uncharted waters. individual joint venture partners, and will aim to provide coverage “There are numerous examples of companies diversifying and limits of between $10bn and $20bn. Rigs backed by a three-strong destroying value,” Standard & Poor’s director of fi nancial institutions joint venture can currently only expect limits of up to $4.5bn. rating services Mark Coleman said. The project got a lukewarm reception from Hannover Re, which said Monte Carlo wouldn’t be Monte Carlo without talk of rates, terms it supports the concept but considers the coverage limits ambitious. It and conditions, of which there was plenty this year. will not match the $2bn capacity that Munich Re itself is putting up – while declining to give an amount, chief executive Ulrich Wallin said Investors’ appetite is crucial The consensus will make uncomfortable reading for reinsurers, that Hannover Re’s capacity in such a venture “would defi nitely not however. While they are keen to maintain price levels or even raise them, go into the billions”. Other insurers and reinsurers are understood to the feeling is that, outside catastrophe-hit lines, prices will continue to be mulling their response. erode if there are no major events. “The reinsurers may try to talk the While there was no shortage of talking points at this year’s Monte market up here and in Baden-Baden but the only way is down,” Cooper Carlo, there is a sense that some of the events that have defi ned the Gay managing director of reinsurance Andrew Hitchings said. conference in previous years, in particular spectacular failures, will Reinsurers’ long-term growth prospects, and the chance of be in short supply in future. potentially richer pickings elsewhere, could prompt private equity One chief laments that the industry has become boring, in part investors to turn their backs on the industry. Glacier Re closed its because the worst companies were no longer around. “It has become doors two weeks before Monte Carlo, ostensibly because its owners a professional industry,” he said. GR 12 OCTOBER 2010 GLOBAL REINSURANCE
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News Analysis Capital and reinsurance
Glacier goes down Hedge funds’ involvement in reinsurance through Glacier Re has been short and sweet, writes Tim Evershed. The decision to put the company into run-off is not down to losses but investors’ desire to withdraw
Opportunistic by nature With the advent of significant hedge fund capital in the early to mid2000s, questions were frequently asked as to how the new carriers would react to a high frequency of loss. Would hedge funds, by nature a short-term source of capital, be capable of sustaining long-term investment and interest in such an unpredictable sector as the catastrophe market? Glacier Re was founded at the end of 2004 in response to the four major hurricanes (Charley, Ivan, Frances and Jeanne) that hit the USA
that year and in anticipation of the hard market that would follow. One reinsurance broker says: “The issue of longevity has always been at the heart of hedge fund-driven reinsurance. Would the capacity they provided be maintained? Hedge funds are opportunistic by nature and if another sector promises better returns, they will want to move on.” As Glacier Re was a medium-sized player and the reinsurance market is currently well capitalised, the company’s entry into runoff is not expected to have a significant effect on capacity or rates, according to the broker. AM Best noted the loss in Chile when it placed the fi rm’s ratings under review earlier this year. The ratings agency said at the time: “As a result of losses incurred from the Chile earthquake, the company is expected to report a technical loss in 2010, compared to the excellent [technical] profit of $51m achieved in 2009. The 2009 result benefited from favourable rating conditions for Glacier Re’s main lines of business and benign catastrophe experience. Overall earnings in 2010 are still expected to be positive, despite the technical loss, due to net investment income and the proceeds from the sale of Glacier Insurance.” The technical profit calculated by AM Best excludes items such as investment income.
No surprise? AM Best’s Miles Trotter tells Global Reinsurance that the move into run-off was unexpected, adding: “It is not down to losses, but rather the desire of investors to withdraw. We expected the company to be profitable for the full year.” Operators in the European legacy market are less surprised by the move. “Some rumours were circulating,” Ruxley Ventures’ chief executive John Winter confi rms. There are, however, raised eyebrows at the company’s decision to manage the run-off process itself rather than selling to a specialist legacy operator. “They are not a run-off operation,” says Winter, although he notes that legacy players may be reticent to take on the business. He says: “Glacier is very different. Anyone would need to look at them closely. It is too new a business for a lot of people to take on, and it wouldn’t interest Ruxley as we specialise in asbestos, pollution and environmental hazard.” Winter concludes: “The hedge funds are going to be watched very carefully by regulators, but the hedge funds could really drive an acquisition and lots of people could already be in talks with them.” GR
ILLUSTRATION: BRETT RYDER
The surprise move of European reinsurer Glacier Re into run-off was prompted by its owners’ frustration at the depressed state of reinsurance net asset values (NAVs), according to market watchers. At the end of August, Glacier announced that following a strategic review it would no longer accept new business. It also said it would self-manage the run-off process. “After several months of effort and strategic review, Glacier’s board has decided to cease underwriting and to seek the orderly wind-down of its operations. This unfortunate step will best achieve our investors’ objectives within a reasonable time,” Glacier Re chief executive Todd Hart said in a statement. The company is owned by the hedge fund HBK Investments and Soros Fund Management, which put the business up for sale as part of a strategic review last year. Although the Swiss company did manage to sell its direct and facultative arm, Glacier Insurance, to Torus Insurance earlier this year for an undisclosed sum, potential buyers for the reinsurance business have been thin on the ground. In addition, valuations in reinsurance have been happening at significant discounts to NAVs, according to experts. Last year, Glacier Group cut back business by 17% while delivering a $34m increase in net profit to $60m. The company scaled back gross written premium to $469m for 2009 from $569m the previous year. HBK and Soros each took a 45% stake when Glacier Group was launched, with Benfield taking the remaining 10%. Equity capital at launch was $300m. The past couple of years have been notable for catastrophe losses, and whereas a new reinsurer only benefits from the industry’s previous hits, this time around Glacier has absorbed its fair share. In 2008, it was hit by Hurricane Ike, which is expected to cause its Nelson Re catastrophe bond to fall to a loss, and this year by the Chilean earthquake.
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Our growth in underwriting cat bonds is equally impressive. In a world where the volatility of the markets is surpassed only by Mother Nature herself, is it any wonder that Swiss Re is increasingly the partner of choice in underwriting cat bonds? In this business there is simply no substitute for experience, expertise and depth of resources. As a result, no one transfers more insurance-linked risks to the capital markets than Swiss Re; since the inception of the sector, Swiss Re has underwritten over USD 15 billion in cat bonds. Good news for us, yes, but even better news for our client partners. When risk is the raw material, our solutions are your opportunity. Find out more at www.swissre.com
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News Agenda
Ready Solvency II is likely to lead to extra business for reinsurers, writes Ben Dyson. However, every expert has their own view on the effect of the new regime. Will it mean a greater demand for capital or expertise, or both?
for
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News Agenda A glance at large reinsurers’ strategies indicates that the industry is bullish about new business arising from the introduction of the European Commission’s Solvency II capital regime in January 2013. In a recent interview with Global Reinsurance, Munich Re’s head of reinsurance Torsten Jeworrek said he expected Solvency II to prompt insurers to buy more reinsurance, particularly from higher-rated companies. The prospect of new business is also one of the reasons for a recent flurry of entrants into the Swiss market. The argument goes something like this: the expectation is that insurance companies will have to hold more capital against business they write under Solvency II. This leaves them with a choice of writing less business, merging with other fi rms to obtain a diversification credit, or boosting capital levels. As an easily obtainable, efficient and familiar source of capital, reinsurance could top many insurers’ lists.
The good news Some think that reinsurers may be right to expect more business. “Reinsurance is an efficient form of risk mitigation,” Fitch Ratings managing director (insurance) Chris Waterman says. “It is possible under Solvency II that demand could increase because it is simpler than raising capital, going through complex M&A transactions or even de-risking your balance sheet.” Martin Davies, responsible for capital-related reinsurance transactions within the brokerage division of consulting fi rm Towers Watson, agrees: “I think there are a lot of cases where reinsurance will be bought to demonstrate to regulators that the business is being run to certain tolerances,” he says. Quota-share reinsurance in particular could increase in popularity given its ability to transfer risks completely to a reinsurer. “We have already seen a pick-up in buying of that type of reinsurance over
‘Demand under Solvency II could increase because it is simpler than raising capital or going through complex M&A transactions’ Chris Waterman, Fitch Ratings
the last couple of years,” says Davies, adding that the main driver for this activity so far has been the fi nancial crisis and resulting pressure on insurers from rating agencies and regulators to ensure they have strong balance sheets. “It will probably be given additional impetus under the Solvency II regime which does give credit for that sort of purchase of reinsurance,” says Davies. “From the point of view of the insurance company, they can cede all of the risk but retain often a good ceding commission for producing the business, so effectively they have got risk-free income, which is very positive from a solvency perspective.”
Short-term fi xes But perhaps reinsurers should not start celebrating a sure-fi re increase in business just yet. Some observers say that while Solvency II will affect insurers’ reinsurance buying practices, this will not necessarily translate into more work. “There is a big hope that Solvency II will boost reinsurance demand, but we don’t think it will,” PricewaterhouseCoopers partner Achim Bauer says. Bauer argues that Solvency II will affect the quality, rather than the quantity, of reinsurance bought. “We will see insurance structures migrating more to the sophisticated, structured end, which is more excess of loss, whole account solutions. These are
intrinsically lower volume but higher margin,” he says. “The business will be of better quality in terms of profitability, but it will defi nitely be lower volume.” Equally, while the directive may result in some fi rms needing increased reinsurance, the greater clarity it will bring to capital structures and the effects of different reinsurance could highlight to others that they need less. “Companies might drop reinsurance purchases if they see it is not necessarily needed for the regulatory purpose,” says Davies at Towers Watson. Others argue that, an initial increase in demand for quota-share reinsurance may die down as Solvency II beds in. Under the directive, insurers can either use the directive’s standard model for determining capital adequacy, or their own internal model, subject to the model’s approval by regulators. As it is not company-specific, the standard model is expected to impose more stringent capital requirements than an internal model would. While many insurers with internal models, typically larger fi rms, are seeking approval for them to be used, not all will be approved on time, and these companies may seek to temporarily fund the additional capital requirement of the standard model with proportional reinsurance or quota shares. “Given the poor level of preparation of many small to medium-sized insurers at this stage, they will be looking for quick fi xes in the run-up to Solvency II, of which proportional reinsurance is one,” Standard & Poor’s managing director of insurance ratings Rob Jones says. “Further down the path, when they become more bedded into the process, there may be a reversion to other forms of reinsurance and other forms of risk mitigation. As more insurers seek and receive internal model approval, then the nonproportional forms of reinsurance become more capital efficient.” He adds: “I think the short-term benefits of Solvency II to reinsurers’ >
take-off
GLOBAL REINSURANCE OCTOBER 2010 17
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News Agenda “Exceedance probability curves will be calculated based on a particular reinsurance structure, so customers can tell immediately how much capital relief they would get under Solvency II with a particular type of reinsurance.” The introduction of Solvency II could also remove a longstanding frustration of highly rated reinsurers: that buyers are unwilling to pay them higher premiums than lower-rated fi rms to compensate them for the greater security and the expense of maintaining it. Solvency II would make this cost more explicit. “Under Solvency II we would calculate our reinsurance pricing for expected losses and brokerage, and add on cost of capital and administration,” Gräber says. “This would be very transparent and could enhance cedants’ willingness to pay us our cost of capital.”
business volumes are fairly clear but the longer term ones less so.” The increased demand for quotashare reinsurance in the early stages is by no means a foregone conclusion, and can depend on market conditions in both the reinsurance and capital markets. The attractiveness of the product to buyers depends greatly on whether it is more cost-effective than other options. “The usefulness of a quota share depends on spreads for surplus debentures,” Hannover Re board member Jürgen Gräber says. “If they are wide, the quota shares will fly, but if they are narrow they won’t because insurers would rather go to banks and secure fi nancing another way.” Quota shares’ attractiveness to the seller can also vary according to market conditions. “In a hard market reinsurers would probably rather write nonproportional business because it would carry larger margins,” Gräber says.
Need for expertise
Greater clarity One expected consequence of Solvency II is a fl ight to quality. Cedants will be given greater credit for placing business with higher-rated reinsurers, which in theory should mean they will get more business. However, reinsurance buyers also get greater credit for diversifying their panel of reinsurers, which could counteract this benefit. “If you were a very well-rated reinsurer and used to getting 100% of somebody’s reinsurance, [the diversification credit] might actually work against you, simply because of the concentration risk,” Davies says. While there are a lot of variables that could challenge reinsurers’ assumptions about winning more business from Solvency II, many are insistent that the introduction of the new capital regime will be a net positive for the reinsurance industry. Any shift to more structured types of reinsurance under the new regime need not be at the expense of more traditional coverage purchases. Gräber argues that traditional and structured products are typically bought by different parts of a primary company. “We would talk to the chief fi nancial officer and chief risk officer at primary level, not necessarily the reinsurance manager [for structured reinsurance],” he says. The greater clarity Solvency II provides on the effects of reinsurance could lead to more informed discussions between cedants and reinsurers about capital and risk transfer. “There will be more transparency about the capital companies’ need and their benefit from buying reinsurance,” Gräber says.
‘Reinsurance business will be of better quality, but it will definitely be lower volume’ Achim Bauer, PricewaterhouseCoopers
The true effects of Solvency II are still unclear. The industry will be engaged in the fi fth quantitative impact study, known as QIS5, until next month. This will inform the calibrations of the models that will determine insurers’ and reinsurers’ capital requirements. The industry and the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops), the entity charged with ensuring consistent insurance regulation across EU member states, are pulling in different directions, with insurers wanting less stringent requirements and Ceiops aiming for tougher ones. While the uncertainty makes it difficult to determine whether there will be an additional demand for reinsurers’ money, it may spur a need for their expertise. Reinsurers’ experience in capital management could be valuable to insurers trying to make sense of the new regime. “For property/casualty business, some insurers will use the expertise of reinsurers in respect of risk management and in restructuring their reinsurance programmes due to potential new capital requirements,” says a Swiss Re spokesman. Gräber adds: “There have been years where reinsurers’ advisory capacities were not in demand. Now, with Solvency II on the horizon, customers are willing to listen to us again.” GR FIND OUT MORE ONLINE: IT ALL ADDS UP To read this feature, and for more on Solvency II, see globalreinsurance. com or tiny.cc/GR-AllAddsUp
18 OCTOBER 2010 GLOBAL REINSURANCE
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TYPHOON FANAPI COULD COST $1BN Heavy rainfall caused severe flooding in parts of Taiwan and China strategicrisk.co.uk
SOLVENCY II TO TRIGGER TAKEOVERS, ACCORDING TO STUDY Mergers and acquisitions likely to increase next year insurancetimes.co.uk
In my view You can’t be too careful With a soft market seeming inevitable, businesses will have to rely for survival on good practice built since the chaos of the late 1990s. But Clive O’Connell argues that both brokers and underwriters will also need to adopt unprecedented levels of care and caution There has been much talk in recent weeks about the size of catastrophe loss that would be needed to reverse the general downward trend in reinsurance rates. The figures being discussed are huge: $50bn or more. Given the passing of the equinox and the cooling of sea temperatures, the chance of a massive and costly Atlantic storm before the renewal season is decreasing, and the likelihood is that reinsurance rates will soften further and possibly reduce to a level that can, for the fi rst time in almost a decade, be described as a soft market. The last soft market, which ran from around 1997 until 2000 or early 2001, caused many problems for the reinsurance sector. Whether undisciplined underwriting is what causes a soft market, or if it is the product of a reduction in rates, is a matter for debate. The fact is that during the period 1997-2001, there were numerous instances of undisciplined underwriting that created severe problems for the companies involved and for those doing business with them. While headlines were made from problems such as the personal accident spiral and the fi lm fi nance fiasco, there were also numerous incidents when underwriters wrote business that should never have been written, on totally unacceptable terms, simply because they felt an obligation to utilise the capital available or because they felt that they were able, somehow, to exploit a gap in the market and outperform their competition. These mistakes took many years to unravel. In some instances, it was held that the underwriters were the victims of sharp practice and in others that the underwriters’ behaviour itself was worthy of rebuke. Either way, the uncertainty of litigation or
arbitration, together with its cost, cast a shadow over many members of the market for quite a while. The soft market of 1997-2001 was not alone in giving rise to issues. Indeed, an examination of the timing of soft markets going back to the 1970s shows that every soft market has given rise to a flurry of disputes caused by underwriting or broking indiscipline. If rates are decreasing today to the level of a soft market, two questions arise. The fi rst is whether market conditions and
infrastructure have changed sufficiently over the past decade to allow the market to avoid the abuses of the past. The second is, if indiscipline is inevitable in the marketplace, what can individual companies do to avoid those problems? Since 2000, the market has changed substantially. Regulators and the ratings agencies have imposed minimum standards upon the industry that have created huge margins of solvency. This will, at the very least, minimise if not eradicate the domino effect of insolvencies that occurred in the
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People & Opinion BROKERS DEFEND LLOYD’S Research shows more than 80% are ‘very positive’ about doing business with the market strategicrisk.co.uk
early 1990s. Companies themselves have implemented enterprise risk management (ERM). Checks and safeguards are in place. Underwriters are no longer a law unto themselves, but must report every risk to be scrutinised. It is fair to say that the market is well placed to face a soft market. It must also, however, be recalled that in 2008 the banking industry was subject to regulation, rating and ERM, yet these were not sufficient to protect that industry from catastrophic failure. Sadly, regulation, both formal and informal through rating agencies, cannot protect against every rogue broker or underwriter – and neither can ERM. Market-wide issues are not the only threat to a company. One badly written risk has in the past, and will in the future, imperil a company’s solvency. In soft market conditions, one must apply additional caution to the way in which business is done and not rely simply on ERM. Weak premium rates will lead to losses, and losses to disputes. No one disputes a profitable contract. A counter-party hit by its own indiscipline will seek or be forced to recoup its losses elsewhere. Careful underwriting coupled with additional caution is required. Maintain evidence of every conversation, however banal, as that evidence may be essential in proving a case. Keep records, particularly models and calculations. Record why decisions were made and upon what information. Most of all, avoid deals that are too good, particularly reinsurance that is too cheap. Look carefully at wordings and ensure that they reflect the bargain that has been priced. In an uncertain time, do not enter new markets or try to take on new classes of business. If the market does soften, problems will arise. The survival of any business in this environment requires investment in caution today. GR Clive O’Connell is a partner and head of the commercial risk and reinsurance team at law firm Barlow Lyde & Gilbert
Weblog Globalreinsurance.com joined the rest of the industry at Monte Carlo this month, bringing you a host of stories from the Reinsurance Rendez-Vous, along with dedicated email alerts to subscribers. Willis chairman Joe Plumeri always interests our readers, so it was no surprise to see his comments concerning the headline-grabbing appointment of former AIG boss Martin Sullivan popping up in the most-read list. No doubt Sullivan himself will get some stories into the charts once he takes up his new role at Willis. Another well-known figure in the reinsurance world is Aon Benfield deputy chairman Grahame Chilton, and he also made our top five with his comments on recent management changes. These saw him return to the reinsurance broker from its parent group, while
chief executive Andrew Appel was replaced by co-chiefs Dominic Christian and Mike Bungert. Characteristically upbeat, Chilton praised the strategy and said he was “absolutely thrilled” to be back at the reinsurer broker he helped found by selling Benfield to Aon in an mega-deal two years ago. Outside Monaco, life went on – or rather, it didn’t – for Glacier Re, which got online readers clicking like crazy to read about the reinsurer’s decision to go into run-off after less than six years in business. The story hit the top of our most-read items this month, and you can turn to page 14 of this issue for a full analysis of the move. To contribute to the website, email Danny Walkinshaw at danny.walkinshaw@ globalreinsurance.com
Online top five 1. GLACIER RE CLOSES DOORS Reinsurer shuts down after six years in business 2. PLUMERI SPEAKS OUT ON SULLIVAN Willis chief says former AIG boss will make broker ‘better’ 3. CHILTON ON AON BENFIELD CHANGES Leading reinsurance broker says demand will rise 4. GUY CARP’S LOW VALUATIONS ‘UNFAIR’ Share buy-backs not the best way to deal with excess capital, broker says 5. MONTE CARLO: WILLIS RE REBRANDS Plumeri says new brand reflects today’s world
Up the ladder How did you make it to where you are today? Hard work and being the beneficiary of a lot of other people’s wisdom. I was trained in the London market by my father, who was in the business, and my colleagues at Willis Re have helped me grow. How has the industry changed since you first joined it? While the importance of relationships has remained a constant, there has been a sea change in the level of technical proficiency. The advent of both catastrophe and financial modelling has brought an entirely new dimension to the business. I also think there has been a change in the quality of individuals in the business. I wouldn’t have made it into the ranks today. What would you say are the key challenges ahead for you and the industry? One of the key challenges is determining the role reinsurance plays as companies’ balance sheets grow stronger and their ability to retain risk
becomes greater. In addition, regulatory oversight is rife in the financial services sector, and the advent of Solvency II will create challenges for our clients and business opportunities for Willis Re. It would be naïve to assume that the insurance industry is immune from a ‘black swan’ type of event. The challenge for the reinsurance sector is to provide access to new capital in such an event. What advice would you give to someone starting out in reinsurance? Take advantage of as much training as you can. What comes to mind when you think of your friends and contemporaries in the market? The friends and colleagues I made in London as a young man have stayed with me my whole life. What do you do to relax? I like to shoot, hunt, fish, play tennis and golf, and spend time with my family. Peter Hearn is chief executive of Willis Re
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Profile
Been there, done that Mike McGavick turned his back on the insurance industry in December 2005, quitting his post as chief executive of US insurer Safeco to rejoin the world of politics and run for office in his home state of Washington. However, following his defeat in the 2006 election, where he failed to take a senate seat from incumbent Democrat Maria Cantwell, he decided to return, taking the reins of XL Group from longstanding chief executive Brian O’Hara on 1 May 2008. McGavick’s comeback could be described as a resounding success: he is speaking to Global Reinsurance in his fi rst big interview since returning XL to profitability. It is perhaps not surprising that McGavick came back to insurance. He had been successful during his five-year tenure at Safeco, and is credited with turning the company around. He was named chief executive of the year by Seattle’s Puget Sound Business Journal in 2002 in recognition of his efforts. Joining XL must have felt like a homecoming after his rough treatment at the hands of Washington State’s electorate. And running a company like XL was clearly an attraction, being fi rmly established and well respected in the global insurance and reinsurance markets. McGavick himself describes the company as “one of the world’s great franchises”.
A particularly pressing matter However, McGavick got slightly more than he bargained for when he took over at XL. That is not to say he was expecting a smooth ride. He felt the fi rm’s existing strategy of being a diversified fi nancial services fi rm,
as reflected in its old name, XL Capital, was pulling the company beyond its comfort zone. “When this management team gathered, our view was that XL’s real strength was its core property/casualty insurance and reinsurance operations, and we wanted all the other stuff out of there,” he says. “Since then we have concentrated the fi rm around those opportunities, exiting or running off any businesses that didn’t fit very tightly in that defi nition.”
‘There are very few places that we can say we are so dominant in that space that we don’t want to do any more’ Mike McGavick, XL Group
A particularly pressing matter for McGavick was to sever the company’s ties with fi nancial guarantee business. XL had spun off its fi nancial guarantee units into a separate holding company, Security Capital Assurance, in 2006 and listed it on the New York Stock Exchange. However, XL retained roughly 46% of the fi rm, now known as Syncora Holdings, and had put in place several guarantees and reinsurance arrangements protecting its business. McGavick wasted little time: In July 2008, XL unveiled a plan to terminate the reinsurance policies
and guarantees, in return for a cash payment of $1.775bn to SCA, and transfer its 46% stake in SCA into a trust. This was completed in August 2008 – only three months after McGavick took the helm of XL. The arrangement eliminated $64.6bn of the total net exposure under the reinsurance arrangements, which was $65.7bn as of 30 June 2008. All looked to be in hand. However, the collapse of US investment bank Lehman Brothers the following month plunged the world into fi nancial crisis. McGavick had recognised that XL’s investment portfolio needed de-risking – he says there had been a “reach for yield” in the investments backing XL’s nonproperty/casualty businesses, leading the company to have exposures to asset classes that would not be found on a traditional property/casualty (re)insurer’s books in the same quantities. “The fi nancial crisis really laid that bare because of the tumultuous effects it had on our balance sheet.”
2009 and back in profit XL made a net loss of $2.63bn for the full year of 2008. The loss in the fourth quarter of the year alone was $1.43bn. At their peak at the end of the fi rst quarter of 2009, unrealised losses on the investment portfolio were $4bn. Instead of making a few fi xes, McGavick found himself once again having to overhaul a company. “The job went from ‘solve a problem and get to run one of the world’s great franchises’, which is the job I signed up for, to running a turnaround.” Cut to September 2010, however, and the work is largely done. Having returned to profitability in the full year of 2009, posting a net profit of $206.6m, XL Group made a net profit of $319.8m in the fi rst half of 2010. Having eliminated its exposure to a portfolio of fi nancial guarantees protecting European Investment Bank,
ILLUSTRATION: RON BORRESEN
Former Republican candidate Mike McGavick has a huge reputation after turning round XL Group and Safeco. But, asks Ben Dyson, is his future in business or politics?
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Plenty of opportunity McGavick can now focus on growing the company. Thanks to softening rates in both insurance and reinsurance, growth prospects are thin on the ground. And as a global insurer and reinsurer, XL has few places left to expand. However, McGavick is convinced there are opportunities. “There are very few places that we can say we are so dominant in that space that we don’t want to do any more,” McGavick says. “We can be very opportunistic according to where we think the best margins are. Outside a
McGavick talks to reporters in Seattle, back in November 2005, about his run for a US senate seat
couple of lines of business where we have very healthy market shares, while we tend to be a meaningful player in all of our markets, we still have plenty of opportunity for growth.” However, McGavick is adamant that he will not grow XL at the expense of underwriting profitability. He says that there has been some growth at XL because of clients returning to the company now its troubles are over, but he adds: “The bottom line is our ultimate focus.” While he is now doing the job he wanted at XL, McGavick acknowledges he cannot sit back and relax. “We have many high-quality competitors, and it is our job to keep advancing this fi rm so we can compete effectively with them all the time. I’m pretty sure most of them sit around thinking the same thing, and that makes it a marketplace in which you can never take a breather.” Even so, with the bulk of the heavy-lifting done, it could be assumed that McGavick would be looking for a new challenge. He admits that he viewed Safeco as “a turnaround project” and moved on to try to satisfy his political ambitions. There were rumours when McGavick joined Safeco that he was cleaning the company up for a sale, and similar rumours have persisted with his move to XL. FBR Capital Markets analyst Bijan Moazami wrote in a recent research note: “Among the management teams of the insurers that we follow, we believe that no chief executive has a greater propensity to sell his company than Michael McGavick.” The note also suggested that XL would be better off in
the hands of Warren Buffett’s Berkshire Hathaway or Prem Watsa’s Fairfax Financial Holdings. However, McGavick insists that XL is more than a project. “I came here for a career,” he says.
Wise moves It is also unlikely that McGavick will feel the urge to run for political office again. When asked if he is an insurance
‘I came here for a career. I’m an insurance executive. Full stop’ Mike McGavick, XL Group
executive or a politician, he answers fi rmly: “I’m an insurance executive – full stop.” He has a ‘been there, done that’ attitude to politics. “The people of the state of Washington made a decision that I might not be the right person to represent them in the Senate,” he says. “It was satisfying and fulfi lling to be a part of that, but it also taught me that I have a lot to contribute in the insurance and reinsurance world.” He also feels his choice of company, at a time when US politicians are eager to stem the flow of US premium dollars to non-US (re)insurers, will do little for his political standing. “I don’t think running a global insurer based in Bermuda and headquartered in Dublin is a very wise political move.” GR
PHOTO: AP PHOTO/TED S. WARREN
XL’s outstanding exposure to fi nancial guarantee business is now minimal – McGavick estimates it is about $500m. The company also placed its life reinsurance business into run-off at the end of 2009, which McGavick says marked the completion of the exit from XL’s non-core business. “It is now just the grind of getting the last bits done,” he says. “I am back to the part of the job that I came to take – the fun part.” Part of the credit for the turnaround must go to McGavick’s fresh perspective, having come into XL from outside, rather than moving up in the company internally. Also, his experience at transforming Safeco’s fortunes played a role, both in terms of experience and giving staff confidence that they were in good hands. However, McGavick also credits the loyalty of XL’s staff. “I strongly believe that the reason we survived this is because our people stayed together,” he says. “Everybody was expecting an exodus from XL in late 2008 and into 2009, particularly entering the bonus season in 2009, which is a typical time for fi rms to lose a lot of people. In fact, our 2009 staff turnover was lower than the prior year.” Foresight, coupled with a small amount of luck, also helped XL weather the storm. XL raised $2.875bn from an issue of ordinary shares and equity units in 2008 in relation to its decision to commute the reinsurance policies with SCA. McGavick recalls that the company deliberately raised more than it needed to pay off SCA to provide an extra capital cushion against hurricanes and the fact that McGavick was concerned about XL’s investment portfolio. It was a good thing it did: hurricanes Gustav and Ike hit the fi rm as well as the fi nancial crisis. “If we hadn’t raised that additional capital for those purposes, it could have been even more challenging than it was,” McGavick says. “That decision held us in good stead as history has played out.”
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Roundtable: Cedants
What cedants want
The secrets of relationships that last for better or worse
GR CEDANT ROUNDTABLE PRESENTED IN ASSOCIATION WITH:
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Roundtable: Cedants Trust, flexibility, security of capital and acute awareness that begins at the underwriting stage are all key to confidence in the relationship between cedants and reinsurers. Ellen Bennett joined players from both perspectives to share insights at a GR roundtable Gavin Coull, Steptoe & Johnson
David Priebe, Guy Carpenter
Relationships and trust were top of the agenda when, bright and early on Monday morning, a select group of reinsurance buyers and reinsurers joined Global Reinsurance for the cedant roundtable: an opportunity to explore the all-important relationships at the heart of the industry, and ask the allimportant question: what do cedants really want? First, the group talked about what makes a good trading relationship. It was clear that trust, transparency and flexibility were at the top of the list. Argo group senior vice-president, head of corporate risk, reinsurance and business development, Barbara Bufkin, said: “The fi rst thing that comes to my mind is having trust and transparency; so building a trading relationship with our reinsurers as a partnership. Reinsurance is a core component in terms of capital, and capital management, and we look at those relationships to help us manage the cycle. “The more transparency, the more we can share with our reinsurers. Certainly some products are more based upon syndicated risk, but in the long run the ability of Argo to be successful has been very much with our partnership, our reinsurers.” Torus Insurance’s global chief strategy officer, Printhan Sothinathan, pointed out that skills were also central to the partnership between cedant and reinsurer. He said: “We would like to partner with fi rms that understand our business, that can appreciate the value of our underwriting, and can identify with the differentiation that we bring to the table, when we bring it to the table. We think that has enormous value.” Arch Worldwide Reinsurance chairman and chief executive Marc Grandisson added: “Beyond the trust, honesty is very important. It’s important at multiple levels – fi rst to getting the information in the right way for both parties to really understand what’s at stake, and it also helps to alleviate any possible issues that could arise if a dispute were to take place.” Steptoe & Johnson partner Gavin Coull suggested that things could go wrong between a cedant and a reinsurer
when trust breaks down. He said: “It is a long-term relationship. Where it goes wrong is when you get surprises. Nobody likes surprises, so [you have to] maintain a good relationship throughout, and remember you are buying and selling a product, and it is a reinsurance product, and that it responds in a certain way. “If you understand what you are selling and what you are buying, it takes out the risk.”
Security of capital As well as the softer elements such as trust and honesty, Liberty Mutual manager of ceded reinsurance, Elaine Caprio Brady, said that security of capital was a fundamental requirement for cedants. “One of the qualities that we look for in reinsurers is their capital, and the extent of their capitalisation. That is one of the fi rst things that I think most companies look at, especially when they are evaluating reinsurers for purposes of approving them in their credit committees.
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Roundtable: Cedants
“Secondly, you buy reinsurance so that reinsurers pay your claims – that is the number one reason, and sometimes during the underwriting process there can be a tendency to forget about that. Ceding companies defi nitely do recognise reinsurers who pay their claims promptly and appreciate that in terms of current relationships and future relationships. “It’s all about maintaining a longterm relationship with your reinsurer, and recognising that we are in a longterm trading relationship, and that each one of us is assuming risk; the risk that we are retaining for the ceding company, and the risk that you are assuming as the reinsurer, and that there are going to be periods of the market cycle, or when catastrophes occur, where there are going to be hits to your capital, and of course there will be hits to ours. GR CEDANT ROUNDTABLE PRESENTED IN ASSOCIATION WITH:
“And fi nally, with respect to Barbara’s comment about transparency, I believe that the transparency relates to both the fi nancials of the reinsurer, not only in a group position, but in an individual risk-bearing entity position, and in addition transparency with respect to PMLs [probable maximum losses], especially when it comes to cedant companies purchasing property catastrophe reinsurance.” Torus’s Sothinathan said: “If you were the buyer for the cedant company, I would think that if you looked at everyone as equal – if they had equal security, capitalisation, equal longevity in the business and everything else – it really does come back to your point on actually having a true partnership between a reinsurer and an insurer. I know it gets said a lot, but it really does come down to that, because it’s the differentiation of what a partnership can bring to the table rather than a non-partnership commoditised kind of business.” Munich Re’s board member Peter Röder said: “One thing I haven’t heard about yet is flexibility. I’m talking about the willingness to listen, adapt and respond to the needs of the client, be it in terms of product or in terms of approach. We have to adopt a differential line with clients as regards their strategy, their exposures, and their capital management requirements. “That’s what a true partnership is all about, and that’s what we feel most of our clients are looking for. They genuinely want to engage with their reinsurance partner to make sure we are working cleverly together to deliver a holistic solution.” Managing director of Eureko Re Margreet Van Ee added: “When you talk about understanding the client, there is also this cultural aspect. Eureko comes from a co-operative background, and so what our clients have expected of us since 1811 is continuity and solidity. That’s what we are looking for in reinsurance relationships.” Arch’s Grandisson pointed out some problems on the horizon. “We are selling a promise to pay as a reinsurer. It’s a promise to pay in the hard times, and when we are paying the claim to our client it’s never in a very wonderful environment. If you wanted to provide a property coverage for a client, you will most likely have losses throughout your portfolio when the world will have losses everywhere, and I think this is >
Tatsuhiko Hoshina, Tokio Millennium Re
‘Our clients expect continuity and solidity from us. That’s what we are looking for in reinsurance relationships’ Margreet Van Ee (above), Eureko Re
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Roundtable: Cedants Julie Batch, Insurance Australia Group
‘The problem most reinsurers found themselves in in the mid-1990s is that they did not do the work properly when they underwrote the risk’ Marc Grandisson (above), Arch
where I personally have seen a shift over the past 15 to 20 years in the industry. “There are a lot more disputes going on. Most of you here will have been involved in a dispute, or will have heard about a dispute, or disputes between clients. Of course, every case has different points to it, but there are a lot of cases that seem to be pretty straightforward and there are still arguments over them. And often, as a reinsurance provider – I will speak on behalf of my brethren – we have found ourselves in a place where we don’t really want to pay, as opposed to having the willingness to pay, for reasons that may have nothing to do with the relationship. “People talk about relationships being flexible, which is all good. When there is no loss, it’s a lot easier to deal with the client going forward. If you are renewing by 10%, 5%, being asked ‘Can you include that region in my cover?’, if there is no loss it’s a lot easier. But when you really prove that this relationship stands, and that you have done the right stuff, is when there is a big loss and you actually come through and pay the claim. “Whenever we have a claim in our company we have a faculty of operation, and we go through the claim and say ‘Was this claim a valid claim? Is this claim really a claim we should be paying?’ And funnily enough we should pay all those claims. The problem that most reinsurers found themselves in in the mid-1990s, and I’m hoping it has changed, is that they actually did not do the work properly at the beginning of the process, which is when they underwrote the risk. “Peter mentioned differentiation. We are very, very conscious of a differentiating client when we do the underwriting. I know it might drive some of our clients crazy, but we are really, really focusing on this. [If there is] a client that we are going to put X limits, millions of PML with, we understand the issues of what could go wrong. And when it does go wrong, we are going to pay. We just don’t want to be in the position where we have to dispute all the claims we have, which might make us appear a bit more conservative, but I think prudent is probably the better word to use. “And thankfully as an industry we have been great. There have been an amazing amount of claims from [Hurricanes] Katrina, Rita and Wilma, and we have been paying them with not a whole lot of disputes. But, again, I would differentiate between renewing when there is no problem, and then where it’s really a problem, being able
to step up to the plate and really do the right thing. Sometimes it doesn’t have to be the contractual thing, but doing the right thing sometimes goes beyond just what’s written in the words.”
The perils of underpricing Munich Re’s Röder agreed: “I can only underline that. Claims as such are not the biggest problem, because that’s what we are here for, as insurers and reinsurers. I would like to differentiate to the extent that, in a long-term relationship, we have a normal fluctuation. We sometimes have big claims and have to pay for them. That’s okay, that’s fluctuation. “But if we have to deal with structurally underpriced business in underwriting, then the relationship will run into problems. We can see that in advance, and I think both sides shouldn’t write underpriced business. So that there is no misunderstanding, when a claim occurs, it has to be paid. But the business should be priced properly.” Again, it all comes down to the underwriting, the delegates agreed. Steptoe & Johnson’s Coull said: “If you
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Roundtable: Cedants Torus’s Sothinathan added: “Disputes are always going to arise, but it is down to the fact of: was it known about at that point in time, was the underwriting thorough, both from a direct perspective and a reinsurance perspective? There are some instances that catch underwriters out on a direct basis as much as they catch out reinsurance underwriters, and if it’s a surprise to our underwriters and it’s a surprise to reinsurance underwriters, I would suspect that it’s a genuine surprise to the industry.”
Learning from disaster
break it down, there are cases where you have to have a genuine dispute, there is nothing wrong with it, but as Marc is saying, if you take out as many problems as you can at the underwriting stage then there should be fewer [disputes].” Insurance Australia Group’s head of reinsurance, Julie Batch, replied: “That’s really the critical thing. As a buyer, I want to buy a contract from a reinsurer who has priced it appropriately, who understands the risks that they are taking on, who has listened to what I want to purchase, isn’t selling me their product, and is taking a holistic view of my company, and a sustainable approach to reinsurance. “So I don’t want to have to continually adjust my price after a claim, I would like to pay the fair price of reinsurance upfront to take those surprises out. But so frequently you have post-loss reaction to risks that should have been understood and should have been priced appropriately.”
Liberty Mutual’s Caprio Brady pointed to the lessons that could be learned from Hurrican Katrina. She said: “We have all learned an enormous amount from how Katrina ultimately affected us in terms of the city being shut down, and how we defi ne this event. If you thought about wording changes that occurred as a result of that, you have an obligation to work through those upfront with your reinsurers. Put some loss examples forward – again, I don’t think we need to be shy about that level of discussion at the front end of our negotiation – give some examples and ask for reinsurers to respond, or allow the reinsurers to give examples of how they interpret the wording. We are learning in this process, it’s not a static environment at all, and the Deepwater oil spill is going to teach a lot.” GR’s Ellen Bennett asked the group how important personal relationships were in maintaining professional partnerships. Eureko’s Van Ee said: “You have a relationship with an organisation fi rst, because you look at all the criteria, like fi nancial stability, expertise, things like that, and if there is a cultural fit between your organisations, on a personal level it probably will work as well. “But if too much changes on the personal side, then it gets hard because you want your reinsurer to know your business, and to know how you do business, and you want the long-term approach. And if you have a new face in front of you every year, it’s hard to live up to that message.” The delegates agreed that Monte Carlo itself was the perfect example of how important personal relationships remain to the reinsurance industry. Torus’s Sothinathan said: “Even in this group, there are people that I have known for more than 20 years and this pays off. The >
‘If you thought about wording changes as a result of Katrina, you have an obligation to work those through upfront with your reinsurers’ Elaine Caprio Brady (below), Liberty Mutual
Printhan Sothinathan, Torus Insurance (UK)
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Roundtable: Cedants ‘The continuation and stability of a certain capacity is sometimes, I think, even more important than price’ Peter Röder (below), Munich Re
more difficult a situation you are facing, whether it’s claims payment or a new product, the more important it is that you have a personal relationship. “Also, from a structural point of view, we are not working in a perfect market. There is not perfect transparency or perfect oversight, we have limited insight, and therefore I think as a market we can only work as efficiently as we should if personal relations come into play as well.” Liberty Mutual’s Caprio Brady concluded: “It supports accountability. If you do have a professional personal relationship, it absolutely relates to the accountability that a company has. And an individuals in the roles we play as buyers, we are communicating a lot of information, and I think you must feel accountable to that relationship professionally.”
Be transparent about limitations
Barbara Bufkin, Argo Group
GR’s Ellen Bennett asked how important relationships and underwriting skills are in comparison to chief executivelevel business strategies. Munich Re’s Peter Röder replied: “First of all you need to understand the client; you need to know what his structure is, what his strategy is, and you need to understand it, and then really get it all together and present it to the client in such a way that it’s really clear that the whole concept is adding value. “We usually work with clients who are present in five continents, and they have very specific problems, very specific issues and we need to bring it all together. In the end it’s not just about, let’s say, stability of price, it’s also about continuity of capacity. We have been concentrating more so far on the stability of price, and what’s going to happen if a claim is coming in. The continuation and stability of capacity – of a certain capacity – is, I think, sometimes even more important.” Liberty Mutual’s Caprio Brady replied: “I think we are realistic. If a reinsurer is discussing the fact that they are truly full up in a zone, and they really do believe they have reached their maximum rational amount of risk that they can retain then we, as buyers, just need to know that, and then we have the ability to manage our portfolios going forward. So if we have that transparency – we are using this world a lot, but it’s so applicable here – if we know where the capacity constraints are with every insurer, and they are coming to us early
enough in the process, we can then manage the capacity needs we have.” Argo’s Bufkin added that reinsurance buyers themselves must take responsibility for advising their chief executives. She said: “I think we have a huge responsibility as buyers to keep our chief executives informed and make sure they understand what some of the issues for our reinsurers may be. So we are really not only working closely with external partners, but also with our chief executives. We have a huge spend that we are responsible for, and it does move the needle, and we have an obligation to educate and work with our chief executives so they understand the market dynamic.” So once again it seems that good relationships, transparency and honesty are key, other constraints notwithstanding. With this in mind, after a lively and fruitful discussion, the delegates headed out to start their day of strengthening their key relationships at the Monte Carlo Rendez-Vous. GR
GR CEDANT ROUNDTABLE PRESENTED IN ASSOCIATION WITH:
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Cedants
Q&A with
Rory Barker As head of reinsurance buying at Hiscox, Rory Barker is a long-haul player with an unswerving commitment to group security
Rory Barker is practically part of the furniture at Hiscox, having been there for 18 years. He joined the company after Rob Childs, Hiscox’s chief underwriting officer, persuaded him to switch from reinsurance broking and to assist him with Hiscox’s reinsurance buying. After leaving school and working for an underwriter for a year, Barker joined reinsurance broker Minet, which is now part of Aon, and later moved to Carter, Wilkes & Fane, now owned by Willis, until the call came from Childs. While Childs handled the reinsurance purchasing, Barker managed the processing and operations. Following Hiscox’s purchase of its UK insurance company in 1996, the merger of its syndicates into Syndicate 33 in 1998 and Childs moving out of buying reinsurance, Barker relinquished his responsibility on operations to focus on purchasing, which he has done since. Just don’t ask him to buy facultative reinsurance.
PHOTO: CARL COURT
Q:
What do you most look for in your reinsurers?
A: The key thing is their ability and willingness to pay claims. The price of reinsurance or the breadth of coverage
34 OCTOBER 2010 GLOBAL REINSURANCE
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Cedants is meaningless if a reinsurer is not willing and able to pay our claim when it matters. I always tell our underwriters: “The three most important things about reinsurance buying are security, security and security.” At Hiscox we don’t compromise on the quality of security. Aside from that, we are not too keen to trade with naïve reinsurers, as this is counter-productive in the long term. A well-known mantra at Hiscox is ‘no surprises’, and we want to deal with reinsurers that understand the exposures that they are taking on.
Q:
Do you think we have entered – or re-entered – a soft cycle of the market?
A:
Most of our business renews on 1 January. For 2010, there was a gentle softening of catastrophe-exposed business, with a somewhat greater softening in business not prone to catastrophe losses. Overall, reinsurance rates are still adequate in most areas. Next year, who knows? If it is a benign wind season and the earth doesn’t shake, you would expect reinsurance rates to fall a bit, but everyone is using similar exposure models and we are operating in a pretty disciplined and efficient marketplace.
Q:
How do you approach the buying and structuring of Hiscox’s reinsurance programme?
A: The overarching strategy for reinsurance buying is developed at a group level. We set our risk appetite, and reinsurance is just one tool to help us achieve the desired result at various points of the curve. It’s primarily placed to achieve the risk appetite that the group is comfortable with on a net basis, and the main driver of the result for us is the natural catastrophes. One of the toughest jobs I have had over the years is to persuade the underwriting teams not to buy reinsurance down to the low levels they would like to. We have used a dynamic fi nancial analysis model for many years to look at optimising our portfolio. Around five years ago, we analysed all the areas of the business where we bought individual towers of reinsurance protection, and the conclusion was we were generally buying too low. We decided to increase our retention in many areas and to drop the lower layers of cover that had traditionally been purchased. This strategy has proved to be successful.
Q:
How much reinsurance do you buy?
A: Reinsurance is the group’s biggest spend. We buy a significant amount for the syndicate at Lloyd’s, our Bermuda operation and our US business. We also purchase reinsurance via various ‘sidecar’ arrangements, where we essentially write reinsurance business on behalf of third parties. Of the total reinsurance bill, around two-thirds is pro rata and around one-third is excess of loss. There is very little facultative reinsurance purchased and, in most cases, I would rather the underwriters didn’t write the business at all if they feel they need to buy facultative cover. If the facultative reinsurance doesn’t respond – for example if there is a dispute – then our main treaties won’t pick up the loss because they don’t cover the facultative failure. Q:
How has the current pricing environment affected your reinsurance buying?
A: If the market softens or hardens, it may well change the amount of reinsurance we decide to buy or affect the level at which we set our retention, but it doesn’t change the overall process we go through or the strategic role of reinsurance within the group. Q:
How has the fi nancial crisis changed your reinsurance buying strategy?
A: It certainly makes you acutely aware of counter-party credit risk and highlights the dangers of having too many of your eggs in one basket. Hiscox has always had very stringent criteria on reinsurance security and, consequently, we have over many years outperformed the market in terms reinsurance failure and bad debt. The fi nancial crisis has magnified what we already knew. It was a timely reminder. Q:
How will Solvency II change the way you buy reinsurance?
A: It’s a little early to say, but we’re all going to be touched by Solvency II. We think that our DFA model is very robust, and assuming Solvency II makes no fundamental changes to that model, I don’t see much change to our appetite for buying reinsurance. If all of a sudden the impact is that we need to keep more capital to run our
Q: What do you most look for in your reinsurers?
A: Their ability and willingness to pay claims, otherwise the price of reinsurance and breadth of coverage is meaningless business, then we, along with the rest of the market, would need to look at this.
Q:
Describe your average day in the office.
A: I feel lucky to have a very exciting role, and my average day really depends on the time of year. The job varies greatly: co-ordinating our reinsurance information packs (in liaison with underwriters); analysis of business plan numbers; talking to brokers about our plans and structure; ensuring the coverage we require is in place before inception, which involves negotiation with brokers and reinsurers; benchmarking and presentations to the board and regulators, explaining how we did against targets and identifying what we could have done better; travelling to visit our reinsurers to review how the renewal process went; and identifying future opportunities. Q:
Who do you admire in insurance, and why?
A: There are a lot of people I admire at Hiscox at varying levels in the company, but I don’t intend to name names! Outside Hiscox, how can you not admire someone like Warren Buffett? He can take very complex subjects and describe them very simply. His annual letter to Berkshire Hathaway shareholders should be compulsory reading for anyone in the industry. GR FIND OUT MORE ONLINE: HISCOX CHAIRMAN COMES OUT FIGHTING To read this article and for more news on Hiscox, see our sister title insurancetimes.co.uk, or tiny.cc/GR-HiscoxResults
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Lines & Risks The life market has weathered the downturn, with life reinsurance in demand for its stablilising effect, which will increase under Solvency II. Yet prices remain high and the field is left to a battle of the giants, reports Mark Leftly
Lust for
life
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Lines & Risks The summer has marked the return of corporate mergers and acquisitions. The most talked about moves included mining giant BHP Billiton offering $39bn for the extravagantly named Potash Corporation of Saskatchewan, and the Korea National Oil Corporation going hostile for Dana Petroleum. Grabbing fewer headlines, but no less significant, has been the news that Dutch group Aegon has hired advisers at Bank of America Merrill Lynch to sell US-based Transamerica Reinsurance. Munich Re, Swiss Re, SCOR and Hannover Re have all been tipped to buy the life reinsurance group. Executives at those giants must be licking their lips at the prospect of buying a truly global life reinsurer – and one of the top three in the USA – even though it could cost them a cool $1.2bn. Life reinsurance has been remarkably resilient through the downturn and the business can even be said to have been dragged down by poorer performing, more risky general divisions, such as property and casualty. Managing director at Fitch’s insurance rating group, Chris Waterman, says: “Life does reduce the overall volatility of a reinsurance group. Non-life profitability is under pressure, so having a life unit does enhance the credit profi le.”
Hunger for life
‘Life does reduce the overall volatility of a reinsurance group. Non-life profitability is under pressure, so having a life unit does enhance the credit profile’ Chris Waterman, Fitch
Life reinsurance accounts for 42% of business in Europe, with the remainder in general. Some of the biggest reinsurers are looking to adjust that balance and are eyeing up opportunities in the life market, which has shown its mettle since the credit crunch struck in 2007. A rapidly ageing population and developing middle class in emerging markets, particularly China, accounts for the relative strength of life reinsurance, says Waterman. As primary insurers note this potential, they will protect themselves by passing on a slice of that risk to their secondary cousins. Senior vice-president at credit rating agency Moody’s, Scott Robinson, says that its outlook for reinsurance as a whole is negative. But he points out the two groups that are judged purely by life are both rated highly. “Swiss Re’s US operations and RGA are both rated A1 for insurance financial strength by Moody’s, reflecting upper medium-grade credit quality with low credit risk,” he says. “Overall, life operations have weathered the financial storm fairly well. Reinsurers tend to have less investment and more mortality-based risk than primary insurers.” This last point is important. The primary life market has tried to make money by risking its funds on > GLOBAL REINSURANCE OCTOBER 2010 37
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Lines & Risks The primary market has been trying to sell closed life insurance blocks, which reinsurers can manage out as no new policies are being sold, to raise capital. Despite their need for cash, sale prices have remained resolutely high. This has not been helped by evidence that other types of groups are sniffi ng around. PricewaterhouseCoopers partner Achim Bauer points out that, as a result, there have been few trades made between the primary and secondary reinsurers, with prices set to skyrocket. “Asking around, there has been increased interest from private equity funds in closed blocks,” he says. Senior vice-president at US specialist life reinsurer Wilton Re, Don Araldi, says that he has “bid on dozens” of blocks in the past year, but has only bought three. “A lot of the operations that came to market in the last six to 12 months didn’t close because the market was insisting on a higher rate for the capital than we were willing to pay,” he says. “They were asking for a pretty penny.” Wilton Re opened less than six years ago. This is unusual, as the US life reinsurance market is concentrated in the hands of just a few players, with the rivals so big that they represent a stiff barrier to entry for any new group.
investments, which has proved to be unwise as the equities markets have collapsed over the past three years. Instead, reinsurers have tended to take more risks on the likelihood of vast numbers of people dying, as age trends are relatively easy to forecast. The chances of getting the forecast wrong are low. Such prudence might not be great for making a quick buck, but it does make for a fi nancially sound business. Chief actuary at the life reinsurance division of Munich Re, Erwin Schnauder, says that this has resulted in a number of primary insurers looking to reduce their risk by snapping up more reinsurance. “This led to tremendous opportunities for us, which meant that we wrote a lot more one-off life business in 2009,” he says. “Some insurers were suffering from the crisis quite heavily, which meant that demand for reinsurance to help stabilise their capital and earnings base was quite extraordinary.” Schnauder sees life reinsurance as playing an important role when the EU’s Solvency II regulation is fi nalised in 2012. This will force insurers to have more capital on their balance sheet so that they avoid the risk of going under should a catastrophe hit their books. Reinsurers, says Schnauder, will be used by the primary market to help spread the risk of investments failing, resulting in more business. For SCOR, the French reinsurance group, taking advantage of these life market opportunities is a major driver of its 2010-13 strategic growth plan. This includes 10 initiatives to increase the group’s organic growth by 5% a year, of which four are in life.
Only the strong survive
The long haul The most eye-catching is the development of a longevity business. The policyholder receives a chunky payout if they reach a certain grand old age. As people are living longer, this has become riskier for the primary market, so they are buying more reinsurance to cover themselves in the event of a surge in average life expectancy. SCOR has hired a team of four people in the UK, with their fi rst deal with a primary insurer expected early next year. Chief executive at SCOR Global Life, Gilles Meyer, explains: “Only the UK is a mature model for longevity. We think this is a good hedge, diversifying us away from mortality. We will open elsewhere: you don’t want to put all your eggs in one country.” Hungry as some reinsurers are for life, there have been some difficulties.
‘Life operations have weathered the financial storm fairly well. Reinsurers tend to have less investment risk’ Scott Robinson, Moody’s
FIND OUT MORE ONLINE: AEGON SEEKS BUYER FOR REINSURANCE UNIT To read this story, and for more on the Transamerica Reinsurance sale and its potential bidders, see globalreinsurance.com or tiny.cc/GR-TransSale
As a result of this dominance, reinsurers with smaller life operations have been leaving the market. As well as Aegon’s auction of Transamerica Re, New Yorkand Bermuda-listed group XL has been selling up its life reinsurance to focus on its property and casualty units. The UK and Irish businesses are being run off, so no new business is being written. In July last year, SCOR snapped up XL’s US operations for $44.7m. “It was profitable, but small,” an XL spokesman says. According to Munich’s Schnauder, this consolidation, particularly in the USA, means that a few hegemons will be battling for every bit of life reinsurance business. “Fifteen years ago, there were maybe between 25 and 30 life reinsurers in the USA, with perhaps 10 having a significant market share,” he says. “But now there are only a dozen left and only a handful of them with significant clout and size.” For the primary market, this continued bulking up of a few secondary giants will offer them less choice, and they will not be able to diversify their number of partnerships as much as they would like. For those few remaining life reinsurers, opportunities in both acquisitions and writing new business abound. GR
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Claims
Should stay or go Increased claims for injury are affecting UK reinsurers, and new court-imposed periodical payment orders are proving expensive, writes Mark Leftly. Some talk of leaving the UK market, but is there also a chance of growth?
Motor insurers in the UK are hurting. Profitability is, in the words of a briefi ng note by actuarial consultant EMB, “under siege”. Remarkably, that is a bit of an understatement: a typical motor insurer can easily fi nd itself with a severely loss-making combined ratio of 120%, meaning it is paying out £1.20 for every £1 it receives in premiums.
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Claims
do?we Third-party bodily injury claims have soared since the credit crunch struck in 2007, suggesting that a large chunk of the increase can be put down to what has become virtually an industry in its own right: the estimated £1.9bn annual fraud against the general insurance market. Bodily injury claims per vehicle for claims of under £100,000 increased 10% in 2009, with the average compensation payment hitting £3,512 in 2008 and still rising. The relatively small size of these claims means that they do not hit the reinsurance market, which provides back-up for the biggest, most severe personal injury claims of
£2m or more. There is less evidence that claims of this size are increasing as they can take up to two decades to settle; many compensation battles that started since the onset of the financial crisis are still in the courts. It stands to reason, though, that the pattern of increased small claims will be mirrored by rises in the larger market, and the reinsurance majors have at least recognised the risks. Reinsurers could even be forced to leave the UK market should they decide that the risk management needed to protect themselves against the surge in claims is too great. For example, yet more capital will have to be placed on their balance sheets and the reinsurer might well believe that this could be put to work more profitably elsewhere. EMB consultant Naeem Ali echoes this
warning: “Reinsurers will have to have bigger reserve margins and there is uncertainty surrounding the periodical payment orders [PPO]. They can cost a lot more than paying a lump sum. This has the potential to be a big issue.” PPOs – payments in the form of annuities made over a number of years to meet a claimant’s changing circumstances – have become increasingly common across all types of compensation, from insurance to divorce settlements, over the past five years. In April 2005, the courts were given powers to award compensation in the form of PPOs rather than a lump sum, regardless of the views of the parties involved. Many judges have concluded that a lump sum might resolve the matter quickly, but > GLOBAL REINSURANCE OCTOBER 2010 41
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Claims that it is too difficult to assess the amount needed to meet the injured claimant’s future needs. A PPO means that a payment can be made according to whether, for example, the claimant’s health improves or deteriorates, and is therefore viewed as a more accurate form of compensation. The Court of Appeal’s January 2008 judgment on the Thompstone v Tameside & Glossop Acute Services NHS Trusts case was key, as it found a way of inflation-proofi ng future payments by using a different measure to the Retail Price Index. The alternative measure is typically 2% higher, meaning that even if future healthcare costs rise above the rate of inflation, they can be easily covered. Since this judgment – and because judges increasingly believe that lump sums do not guarantee fi nancial security many years hence – PPO awards have risen significantly. This means, then, that the risk is passed from claimant to insurer: an injured party had to eke out an admittedly large amount of money for the rest of their lives, now the companies have to administer a complicated regular payment system that increases at a rate higher than inflation. While this can occasionally end up cheaper for the insurer, as care can turn out to be cheaper than might have been anticipated when paying a lump sum, on average it is more than 40% more expensive.
Cost of care The cost to the reinsurer is even greater, which is why more capital reserves will have to be pumped on to the balance sheet. Ali suggests that it will take evidence of 10-20 years of paying the claims to know whether such prudence was necessary, showing why reinsurers are unnerved by the lack of certainty surrounding PPOs and the huge increase in injury claims. Munich Re’s senior executive manager for the UK and Ireland, Manfred Aldag, says he is “not surprised by the recently observed claims inflation”, pointing out that the business is closely monitoring changes in their number, severity and payout pattern. A recent Munich Re report, the doeswhat-it-says-on-the-tin ‘Severe personal injury claims in Europe relating to motor insurance’, points out why Aldag expected the increase. “A problem … is the explosion in the cost of care. As judges and experts have become much more aware of the care needs of victims with brain or spinal cord injuries over the years, so the extent of care granted has greatly increased,” it says. “Professional round-the-clock care is now the compensation norm. Prices are likely to
impacted the cost of severe bodily injury claims … We expect that this effect will intensify and may last for several years. This specific development is unique to the UK when compared to other European countries and consequently severe bodily injury claims in the UK are experiencing higher claims inflation.”
Not blaming motor
‘In a broader market … we saw motor reinsurance as somewhere we could exploit an opportunity’ Matthew Fosh, Novae
rise further in coming years as demographic changes [mainly an increase in the number of elderly people] exert more pressure on demand in the care market.” Aldag admits that the changes to the market – though the price of care is also more than 50% of the total cost in Germany and France – have meant that Munich Re has reduced its presence in the UK motor reinsurance market. But Aldag argues that the industry will inevitably fi nd ways of cutting costs in response to the pressure on its margins, which could create opportunities for growth. “The most recent claims inflation and the decreased investment income should trigger an increased market discipline and hence support such a development [expanding Munich Re’s motor reinsurance business in the UK ].” All these claims mean that rates inevitably increase, which could be one attraction to Munich Re once the market has settled slightly. According to breakdown specialist AA, car insurance premiums went up by 11% in the second quarter of this year, with the hike in fraud a major cause. Lloyd’s of London underwriter Novae has recently set up a small motor reinsurance unit of no more than five people and a book of £1m-£2m ($1.58m-$3.17m) to test whether there is money to be made. “In a [broader] market, where rates are so difficult to get hold of, we saw motor reinsurance as somewhere we could exploit an opportunity,” Novae chief executive Matthew Fosh explains. Swiss Re monitors the market through what it has coined the “bodily injury claims landscape”. It has been found that much of the UK’s claims inflation is typical across Europe, with common problems including low interest rates. But the PPO is the great exception that is hurting the UK market. Head of the casualty centre in Swiss Re’s product underwriting division, David Bassi, says: “Both effects [PPO and the Thompstone case] significantly
The main motor market outside of the UK is Germany. Michael Huttner, analyst at bank J.P. Morgan, points out that Germany has had enough problems for at least one of the big players to reduce its exposure to the market, though hints that the overall picture is not as murky as the UK. “A year ago, Swiss Re effectively pulled out [of German motor reinsurance]. We’ve seen the latest [fi nancial] results of the primary and reinsurers and none was too good, but reinsurers did not blame German motor as a main cause of that,” Huttner says. He points to Hannover Re as one player that is still operating in the German motor reinsurance market, but says that this is “mainly because of risk selection”. Hannover Re’s major client is HUK-Coburg, the huge motor insurance mutual that has one-tenth of the German market. Effectively a co-operative, risk is spread among its members meaning that Hannover has a strong client that it can work with to ensure profit margins remain strong through the tough times. Indeed, motor reinsurance is a relatively strong part of Hannover’s book, the world’s fourth-biggest reinsurer expecting to lose €89m ($113m) on the BP Deepwater Horizon oil spill off the Gulf of Mexico. Hannover Re executives also believe that the price war in Germany ’s €20bn motor market has finally reached an end, so is expecting some uplift from its cover over the next few years. The UK market, then, appears to be the most difficult, with reinsurers unlikely to have the data that they so badly crave in order to make a proper judgment of changing risks in motor for at least another 10 years. Should another legal bombshell hit the UK market, however – which is possible with a new government – all that evidence will be worth nought, and reinsurers will be no more comfortable at their exposure to this tightening market. GR FIND OUT MORE ONLINE: HOW LV= HAS AVOIDED THE BODILY INJURY MESS To read this feature, and for more on the trials facing motor insurance, see insurancetimes.co.uk or tiny.cc/IT-LVMotor
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Catastrophe Modelling 2010 A one day seminar hosted by the International Underwriting Association ETC Venues The More Suite, 2nd Floor Dexter House No 2 Royal Mint Court Tower Hill, London EC3N 4QN
Tuesday 12th October 2010
Register now! For registration and sponsorship forms contact Deborah Finch on 020 7617 4451 or email : Deborah.finch@iua.co.uk IUA Member Registration fee £250+VAT General Registration fee £365+VAT Confirmed Speakers to date: • • • • • • • • •
Conor McMenamin – Head of Risk, Capital and Technology, Renaissance Re Paul Nunn – Head of the Exposure Management Team, Lloyd’s Peter Taylor – Research Fellow, James Martin 21st Century School Robert Stevenson – Head of Insurance Operations, Kiln Plc Dr Anselm Smolka – Head of Geo Risks, Munich Re Professor David E. Smith – Oxford University Nicola Stacey – Director, Property and Specialty, Swiss Re Lucy McGill – Chaucer Dickie Whitaker – Consultant Full programme to be available on our website in due course: www.iua.co.uk Subjects to be discussed include: Scenario vs Probabilistic Approaches to Cat Modelling, Communication within the Cat Modelling Food Chain Post Loss Amplification, Exposure to Data Quality, The 2010 Windstorm Season UK Open Access Cat Modelling and Lessons learned from Chile – Can we trust Building Construction Codes?
Sponsors
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The 5th annual MultaQa Qatar conference will be held from
Monday 14 March to Tuesday 15 March 2011 in
Doha, Qatar at the
Sharq Village & Spa MultaQa Qatar offers a unique platform for senior (re)insurance and risk management executives from around the world to discuss regional and global industry issues of strategic importance. Turn boundless opportunities into profitable realities: •
Evaluate the regional (re)insurance landscape and discover new business opportunities •
Examine how global (re)insurers are taking advantage of regional growth in Qatar •
Keep up to date with the latest capital investment projects and understand their insurance requirements •
Understand the regulatory framework in the GCC •
Identify opportunities for captive insurance in Qatar Qatar ‘Case Study’ Clinics: Talent • Lifestyle • Takaful • Ratings
Join us at our next rendezvous in Doha and discover the perfect place to ‘do business’
“I do attend many conferences and MultaQa Qatar is extremely well organised, compared to others.” Yassir Albaharna, chief executive, Arig – Bahrain
“In comparison with other events I believe that MultaQa Qatar has positioned itself as one of the ‘serious’ forums.” Ian Sangster, chief executive, QIC International LLC
Attendance is by ‘invitation only’ and you can register your interest to attend @ www.globalreinsurance.com/qatar or by calling Debbie Kidman on 0044 [0]20 7618 3094 Hosted by
register your interest @ www.globalreinsurance.com/qatar
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46: Aftershock alert 48: The next peak 50: Bespoke modelling 51: Q&A with David Smith
Why the new Asia megacities are so vulnerable to natural catastrophe
Shared strategies are emerging from China’s rapidly maturing market
The region can do more to get the best from its recently acquired tools
SPECIAL REPORT: ASIA PERILS
EQECAT’s senior vice-president discusses work in the region
Uneasy
in the East
ASIA PERILS SPECIAL REPORT PRESENTED IN ASSOCIATION WITH:
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Special Report: Asia Perils The catalogue of natural catastrophes in 2010, in Asia and elsewhere, seems unlikely to translate into firmer rates at the 1 January reinsurance renewals. But the rise of Asian megacities leaves the region vulnerable
Aftershock alert The first half of 2010 was characterised by a large number of natural catastrophes around the world. With more than 440 events, overall losses of $70bn were recorded, with insured losses expecting to reach $22bn – more than double the fi rst half average since 2000 – according to Munich Re’s Geo Risks Research unit. Among the notable catastrophes were the earthquakes in Haiti, Chile and Yushu, China; Winter Storm Xynthia in Europe; and the eruptions of the Icelandic volcano Eyjafjallajökull. While many of these events were human catastrophes – in particular the earthquakes (between 250,000 and 300,000 people died in Haiti and 2,698 in Yushu) – they occurred in areas of low insurance penetration. The most costly event from an insurance perspective
was the earthquake in central Chile in February. Total losses are currently estimated at $30bn, with insured loss estimates ranging from $4bn to $8bn. In the second half of the year, Asia has borne the brunt of natural catastophes. Flooding in Pakistan, landslides in China and an earthquake in New Zealand have caused widespread devastation at a time when the typhoon season is still under way. However, it is unlikely that these events and others around the world are sufficient to turn the region’s soft reinsurance market. FIND OUT MORE ONLINE: ASIA FLOODING CAUSES WIDESPREAD LOSSES – AON To read this story, and for more on the Pakistan floods, see globalreinsurance. com or tiny.cc/GR-AonLosses
Ample capacity and competitive forces continue to keep rates down despite the growing awareness of Asia’s very real catastrophe exposures. “There’s a lot of interest in Asia,” Kiln Asia’s regional managing director, Neil Wray, says. “There are lots of headline growth figures that are reported and that’s increasingly attracting more and more companies to have some sort of representation here.”
Pakistan devastation As the flood waters recede and aid agencies struggle to reach stricken villages, it is clear the destruction wrought by the flooding in Pakistan that began in July is far from over, with waterborne disease a growing concern. As of late August, at least 1,645 people were reported killed in the
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Special Report: Asia Perils floods, with more than 2,479 injured and hundreds more missing, according to Aon Benfield. Over 17.6 million people have been affected in the hardest-hit provinces of Khyber Pakhtunkhwa, Punjab, Sindh and Balochistan – more than the 2004 Boxing Day tsunami, Kashmir earthquake and Haiti earthquake combined, according to Pakistan’s National Disaster Management Authority. There has been extensive damage to property, infrastructure, telecommunications and agriculture over 160,000 km², with an estimated 250,000 homes damaged or destroyed. Economic losses due to crop damage include $925m for cotton (20% of the crop), $600m for more than 80,000 hectares of sugarcane, $247m for rice, $259m for maize, $200m for wheat stock and $518m for fruit, vegetables and fodder. From an insurance perspective, there has been little commercial impact, despite the widespread devastation. Estimates for total economic losses range from $15bn to $43bn, although Aon Benfield reports that a fi nal loss of $20bn “seems plausible”. Large claims are expected from agricultural accounts, including losses for microinsurance providers. With seeds for next year’s crops washed away, it is thought farmers could lose up to two years’ income.
New Zealand has funds In contrast, there have been no deaths as a result of the M7.1 (M7.0 according to USGS) magnitude Darfield Earthquake that struck Christchurch on New Zealand’s South Island on 3 September, but the expectation is for high insured losses, particularly for residential properties that are included in the country’s earthquake pool. Economic losses are currently estimated at $2.5bn to $3.5bn, with insured losses reaching $1.5bn-$2.5bn. However, most losses to residential buildings will be insured by New Zealand’s Earthquake Commission (EQC). EQECAT estimates that of total economic losses of $1.5bn-$2.5bn, up to $1.3bn-$2bn will be covered. The Canterbury plains have suffered relatively little earthquake activity in the past, compared to the north and west of the South Island. The most recent major earthquakes near Christchurch include the 1888 M7.3 Canterbury earthquake, approximately 150km north-northwest of Christchurch, and the 1929 M7.1 Arthur’s Pass
earthquake, approximately 100km northwest of Christchurch. However, geological investigations show the area around Christchurch to be capable of moderately large earthquakes, notes EQECAT. With building codes in force since 1935, damage was highest among older commercial buildings built of unreinforced masonry (URM), some of which partially or completely collapsed (they were empty at 4.35am when the earthquake struck). Only a fraction of the losses to URM buildings is likely to be insured: EQECAT estimates around $200m-$500m of total losses of between
‘Megacities in China are posing inherent problems’ Werner Bugl, Asia Capital Reinsurance
$900m and $1.2bn. It notes that liquefaction-induced damage at the Port of Lyttelton could comprise a significant portion of insured commercial losses. The earthquake is not expected to have a major impact on insurers and banks, according to Moody’s Investors Service. “Due to very conservative reinsurance arrangements, the expected losses retained by general insurers will be minimal,” Moody’s vice-president and senior analyst Wing Chew says. “The bulk will be covered by the EQC natural disaster fund.”
Exposure of Asian megacities Despite the high incidence of natural catastrophes, so far the expectation is that insurance and reinsurance prices will remain soft for catastropheexposed classes on 1 January. However, the Atlantic hurricane season is not yet over and a major loss there could have implications for the Asian market if enough capital is depleted. Locally, there has been some impact on rates from catastrophes, but these have been isolated to loss-hit accounts. “The typhoon [Ketsana] losses have resulted in increases in pricing both by insurers as well as reinsurers,” Asia catastrophe pool practice leader at Asia Capital Reinsurance Group, Werner Bugl, notes. “In contrast, the typhoon Morakot, which caused havoc in Taiwan at about the same time led to heavy economic losses but relatively moderate insured losses and did not affect pricing of (re) insurance covers. In general, hardening rates tend to be experienced only by those markets that have suffered major
insured natural catastrophe events, but not across the whole region.” In China, with the regulator emphasising the importance of catastrophe risk management, and signs that underwriting trends are changing, insurance take-up is expected to grow. A trend away from proportional reinsurance to excess of loss covers should help to maintain price discipline in the market. “The recent nat cat events are shaping underwriting practice,” head of non-life underwriting at Munich Re in Beijing, Fan Weishu, says. “For example, the 2008 winter storms in China have made many insurers more cautious on transmission and distribution lines [T&D] exposures. Some of them completely stepped out of T&D. In recent years, China’s insurance industry has started to become more cautious on flood exposure, avoiding or adding loadings for exposure in high flood risk areas.” The loss scenarios that could turn the market in Asia include a major earthquake or typhoon in Japan. As Asian economies continue to grow and amass wealth, low-frequency/highseverity events could have more impact. “Megacities in China are posing inherent problems,” Bugl says. “By 2070, 10 Asian cities will rank in the top 12 cities notorious for extreme exposed population, namely Tokyo, Jakarta, Kolkata, Mumbai, Dhaka, Guangzhou, Ho Chi Minh City, Beijing, Shanghai and Bangkok. “The rapid expansion of most of these cities is at the expense of non-engineered residential structures,” Bugl continues. “In addition, many of Asia’s coastal cities are threatened by subsidence on account of overbuilding and groundwater depletion. Indonesia’s capital, the so-called ‘Sinking Jakarta’, could possibly be submerged by 2025. “The combination of rising sea levels, storm surges, typhoons, tsunamis and volcanic eruptions, as recently experienced with Mount Sinabung, North Sumatra, which had lain dormant for 400 years, is a very explosive cocktail.” As these cities develop and insurance penetration grows, the potential impact from such catastrophes is likely to become more profound. For now, the burden of losses in most of Asia’s emerging economies will continue to fall to governments. GR
ASIA PERILS SPECIAL REPORT PRESENTED IN ASSOCIATION WITH:
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Special Report: Asia Perils China is vulnerable to every kind of natural disaster, especially in the new boom cities and on the coast. With recent disasters raising the profile of insurance, the rapidly maturing market is set to develop shared strategies
The next peak As China’s wealth grows, so do its insured catastrophe exposures. And as recent events have demonstrated, this vast country is vulnerable to perils – including earthquake, typhoon, inland floods and winter storms. China’s impressive economic growth has continued in spite of the fi nancial crisis. The Chinese government’s $586bn stimulus package (introduced in 2008-2009) helped to lift the country out of the downturn by investing in key areas such as infrastructure, housing and transportation. As global economic power shifts eastwards (China’s economy is expected to outstrip the USA in size in the next 10 to 15 years) and China’s major cities undergo massive development, it is clear that the country’s assets are increasing in value. “Disaster losses are rising dramatically worldwide and Asia is bearing the brunt of it,” Asia catastrophe pool practice leader at Asia Capital Reinsurance group, Werner Bugl, says. “China is one of the countries most seriously affected by natural calamities. Most cities are megacities, in earthquake- or flood-prone locations. Megacities are megarisks. Shanghai, Beijing and Guangzhou are in the [world’s] top 10 cities of exposed populations and asset concentration.” It is thought that the Yangtse flood losses in 1998, which cost the Chinese economy $30bn, would cost twice as much today. Likewise, the outcome of the Tangshan earthquake of 1976 (which had a magnitude of 7.5 and killed up to 500,000 people) would be an even more frightening scenario in economic terms in today’s China. “It is estimated that if triggered by one of the principal perils – earthquake, typhoon, flood, drought, winter storm – a major catastrophe in China today would generate a total economic loss in excess of
$100bn,” Bugl says. Without an increase in insurance penetration, he believes “the gap between economic and (re)insured loss will fall squarely on the government, with severe disruptive effects and adverse implications for stable and sustainable economic development”. Many international insurers and reinsurers have a presence in China, with Lloyd’s recently granted a license to transact direct insurance business by the China Regulatory Insurance Commission (CIRC). In 2009, China reported non-life premiums of $53.87bn, up 19.8% from $44.99bn in 2008, according to Swiss Re’s sigma report ‘World Insurance in 2009’. By contrast,
‘Insurance compensation following natural catastrophes has been minimal to date, leaving the bulk of the loss burden to individuals and companies’ Robert Wiest, Swiss Re
insurance penetration is less than 0.5% of GDP. “The growth was actually much faster than many other emerging markets,” Swiss Re’s managing director for China, Robert Wiest, says. “Given the fast economic growth that leads directly to the high accumulation of asset value, the potential for cat losses is certainly on the rise. And this is especially true for the coastal areas.”
Crisis year FIND OUT MORE ONLINE: DEEP IMPACT To read this feature, and for more on mega earthquakes, see globalreinsurance.com or tinyurl.com/GR-DeepImpact
The year 2008 was a prominent one for catastrophes in China and one that has raised the profi le of insurance and its ability to cover catastrophes. In February, the south of the country suffered the worst snowstorms in 50
years; 129 people died and 1.7 million had to be evacuated. This was blamed on the combination of a very cold winter and a weather pattern related to climatic event La Niña. Economic losses were put at between $15.4bn and $21bn, according to Aon Benfield, as southern centres such as Guangzhou ground to a halt just three weeks before the Lunar New Year holiday. Insured losses were much lower at around $280m to $1.2bn. Then, in May 2008, the province of Sichuan was rocked by a M8.0 earthquake that caused massive loss of life and extensive damage to buildings and infrastructure, as well as triggering landslides and quake lakes. More than 70,000 people were killed (including around 10,000 schoolchildren when up to 100 schools collapsed as a result of suspected building code breaches). More than 138,000 businesses were affected and more than 15 million properties collapsed, causing over $125bn damage. While insured losses were again only a fraction of the total economic cost, this remains the highest insured loss for China to date. “Insurance penetration in China remains at a very low level, especially for residential property and small to medium-scale domestic enterprises,” Wiest says. “As a consequence, insurance compensation following natural catastrophes has been only minimal to date, leaving the bulk of the loss burden to individuals, companies and ultimately to the government. The insurance payout of $260m for the Sichuan earthquake accounted for only 0.2% of the direct economic loss of $125bn. World-average recoveries from insurance are around 15%, with the ratio in some developed countries being much higher.” The low insurance impact from events is set to change, however, as a growing Chinese middle class and maturing insurance market drive insurance take-up. Some predict that in the next decade China will become the next “peak zone” for catastrophe exposure after the USA, Europe and Japan. With its huge geographic area (9,522,055km²), the
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Special Report: Asia Perils country is at risk from all natural perils. “China’s complex climatic and varied geological conditions expose the country to virtually every type of known natural disaster,” Wiest says. “Among these, earthquake, typhoon and floods have the most devastating potential. However, landslides, snowstorms and torrential rainfall also cause significant damage.” He notes an increasing demand for earthquake insurance since the Sichuan and Yushu earthquakes in 2008 and April 2010, respectively.
Flood and typhoon risks According to Munich Re, four of the 10 earthquakes with the highest death toll since 1900 have occurred in China. In the Guangzhou metropolitan area, which includes Guangzhou, Shenzhen and Hong Kong, there is a possibility for insured losses far exceeding $1bn. China is also prone to flooding, particularly in the area around the country’s longest river, the Yangtze, because of the very flat terrain. China’s 10 largest flood events since 1980 accounted for overall losses of over $135bn, but insured losses only accounted for around 1%-2%. Recent events include heavy rain across several sections of the country, leading to flash flooding and landslides. Floods in Gansu, Sichuan, Shaanxi and Yunnan provinces left at least 829 people dead and caused damage to nearly 800,000 homes and over four million hectares of agricultural land. Massive landslides in Gansu caused 1,467 deaths. The economic loss due to floods and landslides this summer is around $40bn, according to Swiss Re, with insured losses for property casualty insurers coming in at around $400m-$600m. Hazards that could contribute to motor losses are of key interest to insurers. The recent floods caused some losses in urban areas, as overtaxed sewer systems led to flooding and damage to cars in underground car parks. The potential for hailstorms could also prove costly, as the 1999 Sydney hailstorm demonstrated when more than 70,000 vehicles were damaged. Of all the perils, insured losses are currently highest for typhoons. Hong Kong and Shanghai both have large exposures. While Hong Kong has seen some claims from ‘black rain’ and landslides, typhoon losses have been moderate in the past two decades. In 2007, Super Typhoon Wipha led to mass evacuation as it moved close to Shanghai. On average, seven typhoons make landfall in China each year. 1998 brought the highest death toll from typhoons in China,
with over 4,000 deaths as a result of widespread flooding. Of the major loss scenarios for a 200-year return period, an earthquake in Beijing could cause economic losses of $120bn and insured losses of $1bn, while flooding in Shanghai could cost $31bn in economic losses and up to $2bn in claims. This is according to a 2007 Lloyd’s report – China: Avenues for Growth – which also puts the cost of a major typhoon in Guangdong at $38bn, with insured losses of $3.5bn. Several recent events have been “near misses for the industry”, senior analyst at Aon Benfield Analytics, Dustin Fabbian, says. “They are very significant events and humanitarian catastrophes – especially in the case of the Sichuan event in 2008 – but in terms of insured losses they haven’t been catastrophic.” A repeat of the Tangshan earthquake is, he says, “one of the loss scenarios we discuss with clients. There is a large accumulation of exposure around the north-eastern economic centre of China that is Beijing, Hebei and Tangshan. Another scenario is a large, very strong, typhoon making a direct landfall in the Pearl River Delta, with significant associated storm surge. Pearl River Delta earthquake risk is another concern.” Scientists think that while the incidence of typhoons is not likely to rise as a result of climate change, the typhoons could become more intense. Climate change is also likely to product rising sea levels that could exacerbate coastal flooding. Hong Kong is typically associated with typhoons rather than earthquakes, but Dr Michael Spranger, an earthquake expert for geo risks research at Munich Re, has recently been studying the potential for quake activity. “If you look along the coast of southern China, it has sporadic M8 earthquakes – maybe 50km100km offshore – and we have no clue how often they are offshore Hong Kong.”
Public-private potential Public-private approaches to insuring catastrophe risk and microinsurance are two ways of tackling the mounting exposures in China. In late 2003, the China Earthquake Administration, with the support of the CIRC and other government bodies, pushed for an earthquake insurance pool, which did not go ahead due to a lack of funding. This option is being revisited following the 2008 Sichuan earthquake. “Given its high exposure to natural catastrophes, China’s risk landscape will become even more complex as economic prosperity grows,” head of non-life underwriting at Munich Re in Beijing, Fan Weishu, says. “Increasing
urban populations and asset values will drive the demand for natural catastrophe covers. “It might make economic sense for the state and municipalities, as the biggest owners of property, to transfer their risk to the worldwide insurance sector,” he continues. “Due to the sheer size and complexity of the exposures, individual risk solutions of single companies will not achieve the breakthrough needed in China. Additionally, the private insurance sector needs relevant data for earthquake, typhoon and flood models.” Reinsurers in Asia have already backed several initiatives. In July 2009, Swiss Re joined forces with the Beijing Municipal Government to reinsure catastrophe risks under the government-funded agricultural insurance scheme for epidemic, livestock diseases, flood, hail, wind and rainstorms. It pools agricultural insurance business in Beijing (covering around 400,000 farming households) and provides reinsurance cover for losses that are between 160% and 300% of the annual premium, with losses higher than that falling onto the municipal government.
Renewed pool push At the East Asian Insurance Congress conference in Hong Kong in November 2008, many experts felt the recent catastrophes, particularly the Sichuan earthquake, would drive greater take-up of insurance and prompt the government to seek public-private ways of covering catastrophes. “The timing has never been better to address these pressing issues,” Bugl said, speaking at the conference. ACR has developed a pan-Asian catastrophe pool, which has built up a membership of 26 since it was launched in 2009. The pooled approach can help to maintain underwriting discipline in a competitive market, explains Bugl. “Pool solutions are viable for sustainable, long-term catastrophe (re)insurance,” he continues. “They have a track record of functioning well in Europe and the USA and where they have been formed in Asia they also work well. “They have particularly proven their worth as a mechanism for residential risks. Pools structured as publicprivate partnerships between insurers, reinsurers, the government and capital markets are effective and powerful catastrophe risk managers.” GR
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Special Report: Asia Perils Asia’s use of catastrophe models is increasingly sophisticated, but the industry still has some way to go to make the most of the concept
Bespoke modelling The increasing resolution of catastrophe models signals an important shift in the approach to catastrophe risk management in Asia. Despite Asia’s disproportionate exposure to global catastrophes, the application of catastrophe modelling is patchy and prone to uncertainty in comparison with more established insurance markets, such as Europe and the USA. However, recent efforts by the catastrophe modelling agencies, brokers, global reinsurers and other stakeholders are enabling insurers to better measure, model and mitigate their exposures. Among the steps forward was the announcement last year by CRESTA [Catastrophe Risk Evaluation and Standardising Target Accumulations] that it was creating new and more specific zones for China, increasing the number of zones from 60 to more than 2,400. Nevertheless, significant issues in relation to exposure data remain. “The resolution of nat cat accumulation from cedents’ submissions is at a provincial level for most cases,” managing director for China at Swiss Re, Robert Wiest, says. “We have also received some submissions in prefecture level, one level below provincial level and the level we have been pushing for. Along with the requirement of the China Insurance Regulatory Commission on better data reporting, as well as increasing risk management conduct by insurers, we believe a more refined data reporting should benefit all stakeholders.” Catastrophe modelling efforts have so far focused on the major Asian markets, in particular China, India and Japan. The major perils are earthquakes, typhoons and floods, with challenges relating to each. While China has a long and extremely detailed historical record of earthquakes, for example, stretching back almost two millennia, cat risk experts must translate the catalogue before they can apply it to the models.
A tale of typhoons Modelling typhoon hazard, which typically brings much higher
ASIA PERILS SPECIAL REPORT PRESENTED IN ASSOCIATION WITH:
precipitation than Atlantic hurricanes, also requires a bespoke approach. In July, EQECAT announced it would release a basin-wide Asia typhoon model encompassing risk across the entire western Pacific basin (including Japan, China, Taiwan, South Korea, the Philippines, Thailand and Malaysia). As individual typhoons can have an impact on multiple countries, it factors in the direct effects of wind, storm surge and typhoon-rainfall-induced flooding, while taking into account local building practices, design and building codes. Also in July, Aon Benfield’s Impact Forecasting launched its pan-Asian typhoon model covering typhoonexposed regions of China, Hong Kong, India, the Philippines, South Korea, Taiwan, Thailand and Vietnam. “The model gives you a loss answer that covers the wind and flood aspect of the typhoon,” senior analyst at Aon Benfield Analytics, Dustin Fabbian, says. “This is important in terms of the relevance to the local market.” He sees signs that local insurers in China are beginning to embrace the modelling techniques. “We try to help our clients as much as possible to understand the issues surrounding catastrophe risk.” Improvements in catastrophe modelling have gone hand in hand with increasing exposures. “The typical approach to assessing catastrophe exposure in the past was for (re) insurers to apply standard actuarial techniques and approaches from traditional markets on historical losses, of which the resulting estimates may be subjected to scrutiny for this region,” Asia catastrophe pool practice leader at Asia Capital Reinsurance Group, Werner Bugl, says. “In recent years, we have witnessed huge economic and (re)insured losses as a result of catastrophe events,” he continues. “Each of the past three decades has seen new records, both in terms of frequency and severity of events, as well as economic and (re) insured losses.” In the period 1980-2009, Asia experienced the greatest number of catastrophes in comparison to other continents. Its share of natural
catastrophes was at 32%, according to Munich Re, but it only accounted for 9% of insured losses. Many of the catastrophes in the last decade – including the Boxing Day tsunami of 2004 and the 2008 Sichuan earthquake have had high death tolls (190,000 and 70,000, respectively). The majority of Asian countries are moderately or inadequately insured. “We see a clear trend that the exposure-based risk modelling approach is gaining popularity,” says head of non-life underwriting at Munich Re, Beijing, Fan Weishu. “Gradually, more insurers are starting to accept the concept of risk modelling, rather than sticking with the traditional loss-data-based distribution approach. “Taking China as an example, the major primary insurers run their nat cat books in vendors’ models through brokers,” he continues. “Some of them even purchase nat cat models and run them on their own. This trend is encouraging. However, in many countries the modelling applications still lag behind the requirements. The advantage of modelling is far from being taken in full. This is especially true when it comes to data input.”
Data quality Primary insurers are becoming more sophisticated in their approach to catastrophes, but the market lacks a unified approach. The availability of quality data continues to be a concern in China, notes Lloyd’s in its 2007 report. “Although all of China is now post-coded, the information is not always provided to the insurers, making it very difficult to establish risk accumulations.” Many insurers continue to collect exposure data at a provincial level, while claims data is often not recorded to geo-coding standards. “Data quality needs to be addressed,” Weishu says. “Besides exposure data, we also need better quality of loss data to validate or calibrate the model output. “We take it as an encouraging sign that more insurers are consulting Munich Re on data quality, model application and other specifics.” GR
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Q & DavidA Smith with
EQECAT’s senior vice-president discusses risk modelling in a region exposed to every natural catastrophe going Q: Asia is a huge region – what are some of the hazards it’s exposed to? A:
It is exposed to pretty much all the natural catastrophes we have in the world: earthquakes, tsunamis and on the weather side, tropical cyclones with some winter storm and tornado hazard. Overall, flood is a very significant peril for the region.
Q: Tell us about EQECAT’s new typhoon model and what it encompasses. A:
This July, we released a brand new typhoon model covering the entire East Asian region. It’s covering eight territories that are subject to Western North Pacific typhoons, including Japan, South Korea, China, Taiwan, Hong Kong, the Philippines, Thailand and Malaysia. For that entire region, the model has also been built to accommodate expansion to additional areas, such as Vietnam and Guam. What’s new about the model is that it has all eight models on one stochastic event set that has 150,000 typhoons, representing the full range of possible typhoons in Asia. That’s important for companies that are concerned with risk across the region. There are a lot of examples where there are significant overlaps of risk – such as Taiwan and China, or the Philippines and China, or Korea and Japan – and that is captured in the event set of a commercially available model for the fi rst time. We have also spent a lot of time developing some new flood components. Traditionally, models have focused heavily on the wind side so with this model, in addition to the wind, we have two flood components. This includes storm surge – where the typhoon wind field drives very high surge heights at the coast and can cause damage in lowlying areas – and then there is rainfallinduced flooding. With this robust new model, EQECAT helps clients set rational expectations about risk.
A:
China has a long historical record of events such as earthquakes – is this helpful from a cat modelling perspective?
just a question of how fast the market evolves to the point where they’re capturing significant amounts of data at these levels. I think we’ll see that, but there is still a lot of data coming in at a province level. It’s also a question of how well defi ned the categories of data are.
A: Such information is very helpful, particularly on the hazard side. We have
‘There’s no question China will be a peak zone as, from the typhoon, flooding and earthquake side, there are enormous levels of risk’ this information in China and Japan; in these countries, it probably goes further back than many other countries in the world, as there have been societies recording such things there for many centuries. But as a caveat, the built environment changes very rapidly, so if you look at a place like China, what was there 20 or 30 years ago is already very different and that means damageability is very different.
Q: Could China one day become a major peak zone? A:
I think it’s only a matter of time. The economic environment is pretty much already there, so it’s just a question of how quickly the insurance market develops. But there’s no question it will be a peak zone because, from the typhoon, flooding and earthquake side, there are enormous levels of risk in China.
Q: Catastrophe risk evaluator CRESTA recently increased its resolution for China – how significant is that? A:
We accommodate the input of exposure data and reporting of results at all these levels in the model, so it’s
Q: How can we assess some of the major loss scenarios for Asia? A:
We have the capacity to run events in our models on a modelled historical basis, which for older events is often very instructive. In Japan, the 1959 typhoon is probably the most significant event that’s occurred there in the last few decades. Obviously, the built environment is very different now than it was in 1959, so running it through a cat model is instructive in a lot of ways to assess what would be the impact if it was to occur today.
Q: How is climate change likely to affect exposures in the future? A:
We’re looking at numerical modelling to get a handle on event frequencies. It’s not so much that we’re going to see severities that are way outside the range we’ve seen in the past. It’s more a question of how cyclicality in the climate and long-term climate change is likely to affect frequencies of events and where they occur. We’ve made some inroads in some of our weather peril models already and, while we haven’t yet directly applied that in Asia, there’s certainly the capacity to do so. One thing that’s very clear with respect to Asia typhoons is cyclicality in levels of activity – high and low periods that last a decade or two is certainly something we’ve seen historically. GR
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Country Focus The tax breaks, the talent and the regulatory advantages are attractive, but access to European business is the main appeal of Switzerland as a domicile. As a glut of reinsurers form operations in Zurich, Wyn Jenkins ponders what its growing influence as a hub could mean for other jurisdictions
New COUNTRY FOCUS
SWITZERLAND
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Country Focus
Gaining ground Rating agency Standard & Poor’s (S&P) points out, in its September report on how reinsurers choose a domicile, that Ace moved its ultimate holding company from the Cayman Islands to Switzerland in 2008. In the same year, Flagstone merged its Swiss and Bermudian operating facilities into one flagship operating facility based in Switzerland, making its Bermudian subsidiary a branch of the Swiss company. It seems that having a Bermuda facility as a subsidiary to a Swiss-based legal entity is also the intention of Amlin and Catlin. S&P says in its report that this is because of the regulatory capital flexibility the Swiss regime offers. “Switzerland is also gaining ground as an attractive domicile for (re)insurers,”
says the report. “This trend among Bermudian (re)insurance groups of forming European flagship companies while maintaining operations and staff in Bermuda (through either wholly owned operating subsidiaries or Bermuda-based branches) has helped to increase companies’ regulatory capital flexibility while maintaining Bermuda as a key underwriting centre.” Deloitte insurance partner Stephen Ross believes that Switzerland’s exemption from Solvency II is an important consideration for reinsurers, but not for obvious reasons. He points out that the Swiss Solvency Test is both robust and well established. Reinsurers moving to Switzerland, therefore, have a greater element of regulatory certainty than some other jurisdictions in Europe. “The Swiss Solvency Test has been developed further and embedded more deeply compared with many regimes,” Ross says. He adds that Switzerland is one of the only countries, along with Bermuda, to be involved in the fi rst round of achieving equivalence to Solvency II, and is on track to be aligned by 2013. J.P. Morgan analyst Michael Huttner expands on this point. “The Swiss Solvency Test is more advanced in its readiness than Solvency II,” he says. “Although it seems likely that the Swiss will ultimately more or less align their own model with Solvency II, it also seems that companies will be more likely to be allowed to get the use of internal models approved. “This should mean that reinsurers will be more able to realise the benefits of diversification than they would under Solvency II, which will not allow you to reduce capital because of operations overseas. The Swiss model should mean more flexibility and some benefits as a result, which will suit many companies.” Being located in Switzerland does also mean some tax benefits, which cannot be ignored. But, again, these might not be the kind of benefits you might assume.
Plus points Analysts and accountants are nonchalant about the benefits at a corporate level. While not discounting advantages, they point out that the size and complexity of the reinsurers in question mean that it is almost impossible to directly quantify such benefits and that it depends on which of Switzerland’s 26 cantons (states) a company is based in. Each has a level of autonomy in terms of tax. Huttner believes, nevertheless, that Switzerland’s tax regime remains more
LOOKING GOOD Switzerland is proving an attractive location for reinsurers, with benefits that stretch beyond competitive tax rates
‘Zurich’s personal tax regime is very favourable, and it is also a nice place to live and work. People want to be located there’ Michael Huttner, J.P. Morgan
favourable than other parts of Europe. “They might achieve perhaps a 2% difference in terms of the corporate tax they pay. It is not massively significant but it is still lower than in Germany, for example.” However, some in the industry feel that Switzerland’s favourable personal tax regime may be a greater pull for companies than any corporate tax benefits. “It is a very favourable regime and helps a lot in terms of attracting talent.” Ross says. PricewaterhouseCoopers (PWC) insurance partner Mark Humphreys agrees that the attraction of talent is
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The news that three reinsurers – Amlin, Catlin and Tokio Millennium Re – have formed new European reinsurance businesses should not be surprising. A solid European base, and the new business and clients that will bring, represent a natural complement to the existing portfolio of each company. But the fact that all three have moved to Zurich – as opposed to a German or French city – and that Amlin and Catlin have done so partly at the expense of their Bermudian operations, have led their competitors and market observers to ponder on some of the wider advantages that being based in Zurich must bring. These benefits are not straightforward and cannot be distilled into one or two fi nancial or regulatory advantages revolving around either tax or the well-documented fact that Switzerland is exempt from Solvency II. Other influences, such as talent, personnel and distribution, are at least as significant. It is also clear that the trend of reinsurers forming Swiss operations is far from new. Switzerland has 70 supervised reinsurance companies, according to Swiss fi nancial regulator Finma, which generate more than Sfr30bn ($30.3bn) of gross written premium a year. Twenty-five of these are so-called professional reinsurance companies, while the remainder are captives. However, Finma says that, given the international nature of the reinsurance business, it is not possible to talk about a Swiss reinsurance market. “The pure business with risks stemming from Switzerland has always been relatively small when compared with the business as a whole, and many reinsurers have long had a very strong international focus,” the regulator’s website reads.
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Country Focus
COUNTRY FOCUS
Switzerland The recent shift in focus from Bermuda to Switzerland as a favoured domicile for reinsurers continues a trend that began in 2008. Some find the Swiss Solvency Test a more sophisticated and flexible regulatory tool than Solvency II, while others are attracted by the pool of experienced staff who in turn are lured by the personal tax breaks and the high standard of living. But a common factor is a view of Europe as the next natural step in expansion, and a hunger for business that does not yet extend to Bermuda or the USA. Population: 7.8 million GDP (PPP) per capita: US$43,000 Unemployment rate: 3.7%
knowledge of the European markets,” Amlin Re Europe chief executive Philippe Regazzoni said recently. But while it seems the tax and regulatory breaks do stack up and talent management should be easier as a result of being based in Zurich, all agree that distribution remains a pivotal factor behind the move.
Think local a critical factor in companies moving to Zurich. “The tax regime helps when trying to recruit,” he says. “But it is also helpful that these companies are locating in a place where there is already a pool of talent in every field of reinsurance. I think you will see some of them building teams around the lines of business they want to target, and at least some of those staff will come from rivals already based in Zurich.” Huttner at J.P. Morgan agrees that the local talent pool is a big attraction. “The talent is strong and there is plenty of office space since Converium moved out. Zurich’s personal tax regime is very favourable, and it is also a nice place to live and work. People want to be located there. That really helps.” He points out that many Converium staff were keen to remain located in Zurich when the company merged with Paris-based SCOR in 2007. This sentiment has also been borne out by what the companies themselves have said about the move. “One of the key drivers was the availability of good-quality, experienced underwriters with an in-depth
Much of the business placed by European cedants does not leave the European mainland and never makes it to the London market or Lloyd’s, never mind Bermuda or the USA. As Catlin spokesman James Burcke put it in an interview with Global Reinsurance in July: “Reinsurance business from the smaller European cedants does not typically cross water. People like to buy locally. If you want to write this business, you have to join the market.” Ross at Deloitte agrees. “The main reason for most (re)insurers going to Zurich will be a distribution play,” he says. “This type of business cannot be accessed through the Bermuda and London reinsurance hubs.” Echoing this point, Humphreys at PWC says: “This is mainly to do with a cycle of expansion for these players, and Europe is the next natural step for many to expand into. You can’t get the same penetration from London because of the broker market and the nature of the close relationships formed in Europe. “On the back of those considerations, I am sure companies have looked at things like tax and Solvency II, but there are too many uncertainties and moving
Recent entrants: Ace, Amlin, Catlin, Flagstone Re, NewRe, PartnerRe, Tokio Millennium Re, SCOR, Swiss Re, Transatlantic Re Zurich, UNIQA Re
parts to make those things the main reasons for going there.” Humphreys also highlights an additional potential bonus stemming from the implementation of Solvency II. “It could mean that insurers need to buy more coverage,” he says. “They will certainly likely seek a more diverse panel of providers, which will benefit the newcomers.” Despite the benefits of their new domicile, entrants into Switzerland should not expect an easy ride. “The real challenge will be for these new entrants to differentiate themselves in the market and cope with the challenge of the existing players,” Ross says. The move of so many companies to Zurich, seemingly at the expense of Bermuda, has also led some to question the island’s future as a reinsurance centre. “We believe other Bermudabased companies could move to do the same in the coming years, although many remain committed to Bermuda as their primary domicile,” says S&P in its report. But few are convinced what is happening can truly harm the importance of the Bermuda market. “We are talking about shifting the legal entity of operations. The people and talent and capacity are all still there. Bermuda will remain and important reinsurance hub for the foreseeable future,” says Humphreys. GR FIND OUT MORE ONLINE: GATEWAY TO EUROPE To read this feature, and for more on Switzerland, see globalreinsurance. com or tiny.cc/GR-SwissGateway
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Rewind
Monty Even a deluge over his finest smart casuals could not dampen our insider’s Monte Carlo spirit
Ugly rumours of the death of gossip
himself quipped, in his typical caustic style: “You’re just congratulating me on not getting fi red.” The question is, what will he do next? One thing’s for certain – he has no plans to follow in predecessor Herbert Haag’s footsteps and become a composer. Apparently our Mr Thiele doesn’t have a musical bone in his body.
Another year, another Monte Carlo, and I must say what a wash-out it was. I’m not talking about the rain on Monday either. It’s not that I didn’t enjoy the annual trip to the Côte d’Azur and the chance to share a few quiet, civilised drinks with my chums in the industry. But come on: where was the juicy gossip, the mergers, the failures? It’s coming to something when no one spills the beans even after a few glasses of champagne at Guy Carpenter’s expense. I asked a couple of people about this worrying lack of rumour and speculation, and the disturbing consensus seems to be that the reinsurance industry is now a more professional place. So where am I going to place my – ahem – more challenging risks now? Thankfully, there were a few raised eyebrows at the concept of there being no more badly run reinsurers left, so perhaps there is hope.
Ajit Jain’s long flotation After years of marvelling at the moneymaking prowess of Warren Buffett, I’ve now got a new favourite: Warren’s righthand reinsurance man, Ajit Jain. The sage himself had this to say about Ajit in his most recent letter to shareholders: “If Charlie [Munger, Berkshire Hathaway’s vice-chairman], Ajit and I are ever in a sinking boat – and you can only save one of us – swim to Ajit.” It’s comforting to know that even this star performer had humble beginnings. Apparently, when he first started going to Monte Carlo 25 years ago, Ajit had to get the bus from Nice airport with the rest of the upstarts.
Losses afoot While many people were talking about a lack of catastrophic losses during the Rendez-Vous. I strongly dispute this. I got caught in the aforementioned downpour trying to make it to the Café de Paris from the Fairmont and completely ruined my loafers. They weren’t cheap, and my insurance company will definitely be getting the bill. There was no shortage of people in the same boat, many of whom I’m sure have even more expensive tastes than my good self. The industry should thank its lucky stars that polo shirts rather than suits are de rigueur at Monte, otherwise it could have been looking at a sizeable unforeseen attritional loss.
No sharps and flats for Thiele’s finale It was good to see outgoing PartnerRe chief executive Patrick Thiele at Monte Carlo, even though he’s ducking out of the industry for good this year. As you’d expect, a lot of people were coming over and wishing him a happy retirement, although the man
Trading faces
There were a few raised eyebrows at the concept of no badly run reinsurers
You’ve got to hand it to the lads and lasses at Canopius. In their bid to make a splash at the RendezVous, they carried business cards made up like vintage football cards, complete with photos of the team members in a special Canopius strip. Naturally, I’ve been trying to get the full set. Anyone want to swap my spare Michael Watson for a Chris Swan?
A different class How’s this for a coincidence: Mike McGavick, who now runs XL, went to the same Seattle school as his predecessor Brian O’Hara. Apparently they never met at school: there is 10 years between them and they only got acquainted after they both started running companies. I have to wonder whether, if they had met in the playground, the pair wouldn’t be as good friends as they are today. GR
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Willis Capital Markets & Advisory (WCMA) is a marketing name used by Willis Securities, Inc. (WSI), a licensed broker dealer registered with the U.S. Securities and Exchange Commission and member of FINRA and SIPC, and Willis Structured Financial Solutions Limited (WSFSL), an investment business authorized and regulated by the UK Financial Services Authority. Both WSI and WSFSL are Willis Group (Willis) companies. Willis is a global insurance broker and through its subsidiaries provides insurance brokerage and risk management services to clients around the world. Securities products are offered in the U.S. through WSI and in the U.K. through WSFSL. Nothing in this communication constitutes any legal or ďŹ nancial advice or an offer or solicitation to sell or purchase any securities.
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