Global Reinsurance September 2011

www.globalreinsurance.com

September 2011

G LOBAL RE I NSU RANCE

Remembering 9/11

How the industry has changed ten years on

GR_OFC.indd i

19/08/2011 16:54

GR_Ad_Page.indd 1

19/08/2011 17:03

Cover image: Getty

As the industry heads to Monte Carlo, thoughts will turn to that fateful September day, 10 years ago

Leader

All eyes will be on Transatlantic Re at this year’s Monte Carlo Rendez-Vous, as its three suitors – Allied World, Validus and National Indemnity – slug it out in the fi nal round of the three-way fight. The prize is anyone’s to take, but few people would bet against Warren Buffett.

September day 10 years ago, when the world changed forever.

Meanwhile, merger and acquisition activity remains high in the Lloyd’s market, with the Omega sale rumbling on and Novae tipped as the next one to go.

The 10th anniversary also provides an opportunity to reflect on how the market has changed in response to the unimaginable.

The huge losses sustained by the market in this half-year’s results will only add to the pressure, as will Solvency II. The new European regulatory regime has been put back yet again – an unwelcome move that will nevertheless provide (re)insurers with the time they need to prepare adequately for the new world. There will undoubtedly be more M&A to come.

■ As the industry heads to Monte Carlo, many people’s thoughts will be turning to that fateful

For many members of the industry, the memory of 9/11 is intensely painful on a personal level, given the devastating loss of life in the Twin Towers. That will never be forgotten.

From new companies and capital models to the introduction of specific terrorism cover, it has responded with intelligence and flexibility, and is a more professional and fit-for-purpose industry than it was 10 years ago.

As Ben Dyson points out in his extensive piece on pages 18-25, the biggest remaining question is: what next?

Ellen Bennett Editor-in-chief Global Reinsurance GLOBAL REINSURANCE SEPTEMBER 2011 1

GR_01 Leader.indd 1

19/08/2011 17:03

September IAG’s Mike Wilkins, page 28

The Queensland floods, page 32

G LOBAL RE I NSU RANCE.COM

Rob Andrews at XL, page 34

News

Claims

1

Leader

32 Swept away The Queensland floods late last year caused

4

News

record levels of destruction and loss of life. But it’s not the fi rst time this area has suffered, so why were the lessons of

12 News analysis The race is on to take over Transatlantic; the long road to Solvency II could lengthen even further; USA farmers and (re)insurers face losses from drought-stricken land

18 News agenda

Ten years after the tragic events of 9/11,

we look at the dramatic impact on the insurance industry and

previous floods not heeded to prevent these losses?

Cedants 34 Q&A

thinks some reinsurers play it ‘fast and loose’. Reliability and

hear the personal stories of those who lived through it

People & Opinion 28 Mike Wilkins A man known for his ‘slash and burn’ approach, IAG’s chief on why he’s sticking with Equity Red Star

40 Diary

transparency is more important qualities for Rob Andrews

Country Focus 37 A tough proposition

Born gossip Monty can’t wait to head to Monte

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

Publisher William Sanders Tel +44 (0)20 7618 3452 Email william.sanders@nqsm.com

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

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

Finance reporter Lauren Gow Tel +44 (0)20 7618 3454 Email lauren.gow@globalreinsurance.com Group production editor Áine Kelly Email aine.kelly@globalreinsurance.com

Managing director Tim Whitehouse Group production manager Tricia McBride Senior production controller Gareth Kime

Deputy chief sub-editor Laura Sharp Email laura.sharp@globalreinsurance.com Art editor (group) Clayton Crabtree Email clayton.crabtree@globalreinsurance.com

Digital content manager Michael Sharp Head of events Debbie Kidman

XL Insurance’s global head of ceded reinsurance

market there worth investing in?

Subscriptions For all subscription enquiries please contact: Newsquest Specialist Media, PO Box 6009 Thatcham Berkshire RG19 4TT United Kingdom Tel +44 (0)1635 588 868 Fax +44 (0)1635 868 594 Email customerservice@globalreinsurance.com Annual subscription rate £269 UK • E410 Europe • $530 US/RoW Two-year subscription rate £455 UK • E697 Europe • $899 US/RoW Three-year subscription rate £599 UK • E920 Europe • $1,190 US/RoW Printed by Warners Midlands Plc ISSN 1358-7420

India is making changes to try

to attract overseas reinsurers. But is it enough to make the

GLOBAL REINSURANCE MAGAZINE is published 10 times a year by Newsquest Specialist Media Ltd 30 Cannon Street, London, EC4M 6YJ, UK Tel +44 (0)20 7618 3456 Fax +44 (0)20 7618 3457 www.globalreinsurance.com © 2011 Newsquest Specialist Media Ltd. All rights reserved. No part of this publication may be used, reproduced, stored in an information retrieval system or transmitted in any manner whatsoever without the express written permission of Newsquest Specialist Media Ltd. This publication has been prepared wholly upon information supplied by the contributors and whilst the publishers trust that its content will be of interest to readers, its accuracy cannot be guaranteed. The publishers are unable to accept, and hereby expressly disclaim, any liability for

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

2 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_02 Contents.indd 2

19/08/2011 17:08

Who will help you deliver if the weather doesn’t?

When does a broken link mean a broken chain? Sometimes the best laid plans are never enough, and this is especially the case in a world where the margins are wafer thin. Globalization and rising demand have placed enormous pressure on the transport sector. As margins are squeezed, cargo values are increasing whilst transit times are decreasing in hyper-efficient supply chains — representing a challenge for transport insurers to think bigger and think beyond. Thus it pays to know a reinsurer that truly grasps every conceivable risk — whether before, after or during shipping.

To find out how to keep business delivering whatever the weather, check out our website at www.munichre.com NOT IF, BUT HOW

GR_Ad_Page.indd 1

19/08/2011 14:42

News

Catastrophes leave trail of destruction at Lloyd’s ● Hiscox hardest hit with £87m loss, while Brit and Beazley suffer … ● … but Lloyd’s highlights underlying robustness and potential for rates rises The Lloyd’s market was left 100% reeling from one of the most First-half results (from company financial statements) COR intense periods of catastrophe losses in history during the Hiscox 116.9% (2011) fi rst half of 2011. Many big 93.6% (2010) players turned in multimillionBeazley 108% pound losses just months after 90% reaping healthy profits.

Hiscox was one of the Brit 104.8% hardest hit, reporting an 96.5% after-tax loss of £87m in the Catlin 116.5% fi rst half of the year, compared 97.5% with a profit of £78.6m year Lancashire 69.5% on year. Its combined 77.4% operating ratio deteriorated significantly to 116.9% from 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 93.6% year on year.

WHAT The insurer attributed made a net operating and New Zealand, the second BEAZLEY’S the loss to the toll of loss of $220m, down quarter saw further industry RESULTS catastrophes including almost 500% on the losses arising from a series of SAY ABOUT floods in Australia in $57m profi t it posted US tornadoes, which caused LLOYD’S January, followed by during the same significant but localised PROSPECTS earthquakes in New period last year. Its damage,” said Lancashire chief FIND OUT Zealand in February COR rose to 116.5%, executive Richard Brindle.

MORE ONLINE and in Japan a month from a profitable “We are pleased to report goo.gl/tDlwz later. It said it was “a 97.5% at 30 June 2010. that these have had a minimal reasonable result in the Novae turned in a effect on Lancashire.” circumstances”. net loss attributable He added: “We were also one Fellow Lloyd’s insurers to shareholders of of the few companies to avoid Brit and Beazley also £24.9m, down from reserve strengthening for felt the pain. Beazley £10.8m profit at 30 recent natural catastrophes.” made a loss after tax of $14.1m June 2010. Its COR was in the fi rst half, compared 111%, 20% of which was with a profit of $97.9m in the put down to fi rst-half major same period last year. Lower catastrophe losses. ● Lloyd’s insurers revenues and higher operating Despite the losses, Lloyd’s expenses added to cat claims insurers retained an have suffered from an to push the insurer into loss. underlying robustness, with unprecedented string of It paid out $154m for the analysts predicting that rates catastrophes, but despite their events in Australia, New could rise as insurers pump heavy losses, the underlying Zealand and Japan, with US more capacity into the market. robustness of the market tornadoes adding about $39m.

The few Lloyd’s remains unscathed. Given last Beazley’s COR climbed to a underwriters without large year’s solid results (93% COR, loss-making 108%, compared exposure to the cat losses £2.2bn profit), underwriters to 90% in that period last year. continued to perform well. were relatively well positioned Brit, which went private in Lancashire made a profit after to take the hit.

April following its acquisition tax of $97.5m in the fi rst half, ● Any additional financial by private equity consortium up 5% on the $93m it made in pressure will only add to the Achilles, made a profit of the same period last year. drivers for M&A, particularly £6.4m. But this was 90.5% The company’s combined as the deadline for Solvency II down on the £67.4m it made in ratio came in at 69.5%, down creeps ever closer. Expect more the same period of 2010. The from 77.4% in the fi rst half of action here soon. fi rm made an underwriting 2010. In the second quarter ● Given the surplus capacity loss for the fi rst half, posting of 2011 alone, Lancashire’s in the market, rates are a COR of 104.8%, compared combined ratio was just 41.2%. unlikely to rise significantly with 96.5% in 2010’s fi rst half.

“After the considerable outside specific areas of Elsewhere in Lloyd’s, Catlin losses in Japan, Australia catastrophe risk.

Going global: Peo 1 Bermuda Alterra chief executive of

reinsurance and board member John Berger has resigned to “pursue a new opportunity”.

Combined operating ratios

3 5

4

1

3 London Chartis has appointed Nicolas

Aubert UK managing director, taking over from James Shea, who has become president of global specialty lines.

5 New York Hedge fund AQR Capital

Management has formed a reinsurance group, hiring former Pulsar Re head Andrew Sterge to lead the new business.

Japan: Prefecture

We say...

4 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_4-6 news.indd 4

19/08/2011 15:26

News eople moves 2 Sydney QBE Australia Asia-Pacific chief

Vince McLenaghan has quit the insurer after 16 years, following a series of reporting structure changes.

6

2

4 Hannover Wolfe Becke, head

of Hannover Re’s life and health reinsurance business, is to retire from the company on 1 January 2012.

6 Hong Kong Swiss Re has appointed

Robert Burr managing director and head of life and health in Asia.

Online top five

Weblog globalreinsurance.com Round and round they go, where they’ll stop nobody knows.

Bidding for Transatlantic Re has become a merry-go-round of activity, with Allied World, Validus and National Indemnity vying for victory. Grabbing all five spots in our web top five, the industry is clearly watching this one closely.

Reinsurers love a good people story. So when Ed Noonan lashed out at Transatlantic’s board after it rejected his “superior” offer, reinsurers clicked feverishly to fi nd out why board members were “wilfully burying their heads in the sand”. We can count on Noonan to say what he thinks.

Not one to walk away from a fight, our second most popular story involved Allied World chief Scott Carmilani hitting back at Noonan’s proposal, describing it as “inferior” and accusing Noonan of attempting to acquire

the reinsurer at a “significant discount to book value”.

In at third is a comment from Global Reinsurance assistant editor Ben Dyson, examining why the Transatlantic and Validus business models are a good fit.

News that Transatlantic’s board had rejected Noonan’s offer took fourth place, Noonan fi ring up a few days later with his “heads in the sand” comment.

And fi nally, Transatlantic chief Bob Orlich sent a letter to clients and brokers titled: “Nothing without you” to reassure them he had their best interests at heart.

As the three-way battle continues, perhaps everyone should take a tip from his letter: “We have faced uncertainty before and business, like life, must go on.”

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

1. NOONAN: TRANSATLANTIC DIRECTORS ‘BURYING HEADS IN SAND’ Board says offer is not superior 2. WAR OF WORDS ERUPTS AS ALLIED HITS BACK Validus proposal ‘inferior’ 3. COMMENT: WHY VALIDUS AND TRANSATLANTIC ARE A GOOD FIT A merger would have a number of compelling features in its favour 4. TRANSATLANTIC REJECTS VALIDUS BID Orlich remains open to renegotiations 5. TRANSATLANTIC CEO MOVES TO REASSURE CLIENTS Orlich writes to clients and brokers

Bank action hits AIG share price

ure storm

● 5% fall after suit against Bank of America proposed ● Insurer chasing £38bn in mortgage security losses

Typhoon Ma-on hit southern Japan on 19 July as a strong tropical storm, intensifying to a category 1 typhoon as it brushed Honshu.

Gusts of 160km/h and 12cm of rainfall prompted authorities to warn of landslides and floods. Around 11,000 households lost power and flooding was reported in the prefectures of Hyogo, Kochi and Shiga, but EQECAT has put insured losses at less than $250m.

PHOTO: GETTY IMAGES

WIND DAMAGE

Shares in AIG fell by 5% at close of trading on 8 August, after its announcement of plans to sue Bank of America over residential mortgage-backed securities (RMBS).

AIG shares opened at $23.74 and hit a low of $22.10 shortly after the announcement, before closing at $22.58.

Bank of America shares also fell by 14% to a $6.51 closing price, after opening at $7.40 and hitting a day’s high of $7.70.

The AIG suit, seeking more than $10bn in losses and $28bn of investments, is said to be the largest mortgage securityrelated action by one investor.

AIG claims Bank of America

and its Merrill Lynch and Countrywide Financial units fraudulently induced AIG to invest in nearly 350 RMBSs for more than $28bn.

In papers fi led at the Supreme Court in New York, AIG claimed Bank of America was “driven by a single-minded desire to increase its share of the lucrative RMBS market and the considerable fees generated by it”.

AIG is reportedly preparing similar suits against other large fi nancial institutions, including Goldman Sachs, JPMorgan Chase and Deutsche Bank, to recover some of the billions lost during the fi nancial crisis.

GLOBAL REINSURANCE SEPTEMBER 2011 5

GR_4-6 news.indd 5

19/08/2011 15:26

News View from

StrategicRISK:

Emerging View markets from

Brazil’s protectionist policies represent a worrying trend in developing areas.

In recent months, Europe’s risk managers, led by Ferma, have lobbied the Brazilian government to change its policies on reinsurance companies.

One rule mandates placement of 40% of business with local reinsurers, which Ferma believes will reduce capacity and increase exposure for firms operating in Brazil.

Brazil recently abolished tax for labour-intensive industries such as clothing and software to favour domestic manufacturers. Procurement rules will be overhauled to give a “25% margin of preference in the bidding process for Brazilian manufactured goods and services”. And import rules are tightening up, with the number of investigators rising from 30 to 120.

For risk managers in Brazil, competition will soar overnight and exposures will change. Brazil’s policies could represent a developing trend of protectionism in emerging markets just when many companies in Europe are turning to them for business growth.

For risk managers, BRIC countries are ever more complex, underlining the need to be aware of regulations.

Nathan Skinner, editor, StrategicRISK

RATINGS WATCH AEGON Moody’s affirmed the A1 rating of the US life subsidiaries, changing the outlook to stable from negative after the sale of Transamerica to SCOR. New Zealand Local Government Insurance Corporation AM Best downgraded its rating to B++ from A after the accumulated impact of the Christchurch earthquakes.

Alterra Bermuda AM Best has revised the outlook to negative from stable and affirmed the A rating following the departure of reinsuranceFind chief John Berger. our more online globalreinsurance.

Hurricane model update brings cat bond caution ● Four new cat bonds in Q2 contrasts with eight-strong issuance last year ● Willis remains upbeat, predicting deals once revised RMS model beds in The market for cat bonds had a slow second quarter, with four Q1 2008 to Q2 2011 (from the WCMA Transaction Database) new issuances compared with eight in the same quarter last $2,500m 2008 2009 2010 2011 year. The issues added $592m of *2010 Q2 excludes $250m Merna Re III private issuance $2,250m risk capital – just over a quarter $2,000m of the $2.1bn in Q2 2010. $1,750m The market was hit by $1,500m the release of the RMS v 11 $1,250m US hurricane model, which prompted Standard & Poor’s $1,000m to lower the ratings of six cat $750m bonds on 12 July. It affi rmed its $500m ratings on the remaining four. $250m Standard & Poor’s said: $0 NA NA $0m “Although modelling Q1 Q2* Q3 Q4 companies periodically update bonds as a whole have indemnity-triggered protection their models, the impact CAT BOND been optimistic, with against US perils including on the profitability of ISSUANCE Munich Re predicting hurricane, earthquake, severe attachment is typically FALLS in January that up to thunderstorm, winter storm minimal. However, in this SHORT OF MARKET $6bn of bonds could be and California wildfi re. For the instance the probability APPETITE issued this year. fi rst time, USAA chose to place of attachment increased The four bonds this year’s transaction for a significantly.”

FIND OUT issued in the second four-year term. The transaction Despite the relative MORE ONLINE will reset each year to the latest lack of activity, Willis goo.gl/MNXhv quarter are as follows: ● Allianz sponsored a AIR model. remained optimistic about fourth takedown from ● Argo Re entered the market the cat bond market. its Blue Fin shelf facility. as a new sponsor. Loma Re Willis Capital Markets A single $40m tranche provides $100m of second event Advisory’s head of was placed, providing coverage over 18 months on a insurance-linked two-year term aggregate per occurrence basis for any securities, Bill Dubinsky, said: coverage against US hurricanes combination of US hurricanes “Investors have cash to invest and earthquakes. Allianz chose and earthquakes, European and remain keen on risk in cat not to seek a rating for this windstorms and Japanese bond form, but are somewhat small tranche size. earthquakes. starved of new issuance, ● The North Carolina JUA/IUA particularly non-US windreturned to the market for the exposed deals. third time with an additional “The cat bond market should takedown from its Johnston see an uptick in deals in the Re vehicle, which provides second half as investors get ● The cat bond market is well $202m of per occurrence more certainty on how the established, so a slow Q2 is not coverage against hurricanes new RMS hurricane model a major setback. Activity is likely in two tranches. As with the will affect pricing. It will also to pick up again later this year as 2010 transaction, Munich benefit from the increase in traditional reinsurance companies Re provides a traditional ex-US cat reinsurance pricing.” look at whether cat bonds could indemnity cover to the sponsor But with 71% of outstanding make sense for them. and retrocedes the risk to the cat bond limit exposed to US ● In the third quarter, the cat bond market. The cat bond hurricane risk of some form, market will have digested the features an indemnity trigger Dubinsky warned that market new information provided by the and uses treasury money performance in the rest of 2011 RMS v 11 hurricane model, market funds as collateral. rests on what happens in the which could lead to more activity. ● USAA sponsored a current US wind season. ● All predictions depend on catastrophe bond issue for the The slow second quarter a relatively quiet US hurricane 15th consecutive year with the followed an active Q1, when season. If this doesn’t happen, Residential Re 2011 transaction. the market environment was and there’s a major US loss, all Res Re 2011 provides $250m of attractive. Predictions for cat bets are off.

Cat bond issuance

We say...

6 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_4-6 news.indd 6

19/08/2011 15:36

EXOTIC FINANCIAL SERVICES PROVIDERS HAVE A CERTAIN APPEAL. OR SHOULD WE SAY “HAD”?

www.hannoverlifere.com

GR_Ad_Page.indd 1

10/08/2011 10:03

News

Lloyd’s gets go-ahead for collateral cut in USA

The big...

Numbers

Champagne corks popped as big reinsurers’ second-quarter results came in.

Swiss Re achieved a 15.6% return on equity after a strong Q2. Its property and casualty unit reported a combined operating ratio of 78.4% (102% last year). Munich Re returned to profit with €738m ($1.07bn), but posted a consolidated loss of €210m for the year so far.

Spender

Warren Buffett won international acclaim with his call on the US government to charge him and his superrich friends more tax. Yes, you heard that right: writing in The New York Times, Buffett outlined the case for a more equitable tax system.

Optimist

Flagstone Re chief David Brown remained sanguine in the face of a net loss of $181.4m for the first half after heavy cat losses.

“Some markets in which we are active are benefiting from significant rate increases. We continue to believe our operational platform can our morewe online access theFind markets find globalreinsurance. attractive,” he said.

We say... ● 100% collateral requirements have long been a bone of contention for non-US reinsurers, so it is good to see many positive steps ● With more states joining Florida and New York in reducing their collateral status, what is holding back the others? ● The global debt crisis could make states more reluctant to lower reinsurers’ collateral requirements, as defaults or downgrades could weaken company balance sheets. ● US reinsurers must be heard in any debate about collateral cuts for non-US reinsurers because this influences potential business and premium pricing.

Texas: Scorched earth INDEMNITIES SET TO INCREASE Texas farmers are struggling under the pressure of the worst drought since record-keeping began 116 years ago, with more than 78% of the state now considered to be in “exceptional drought”. Although the US Department of Agriculture has paid $693m in indemnities on crop insurance, it anticipates the number of claims to grow significantly before year-end. >>> see News Analysis, page 16

ILLUSTRATION: BRETT RYDER

>>> see News Analysis, page 12

Lloyd’s has been granted hold lower collateral in New permission to hold only 20% York. Several, such as Hannover collateral for the reinsurance Re and Tokio Millennium, have business its members also won lower write in New York. requirements in Florida.

The New York Reduced collateral Insurance Department status came into law in has approved Lloyd’s as Indiana on 6 April in life, a Secure-3 reinsurer, property and casualty reducing its collateral lines, and similar laws requirements to 20% came into effect in New ‘Steps taken from 100%.

Jersey on 22 June. by states “Foreign reinsurers Illinois, Texas and are to be play an important part Louisiana are likely to welcomed’ in supporting the US enact similar cuts in 2012, Sean McGovern, insurance industry, and Lloyd’s and the remaining states steps taken by states to should start considering reduce collateral similar legislation. requirements are to be According to US law fi rm welcomed,” said Lloyd’s North Mayer Brown, states have been America director Sean prompted to act in part because McGovern. of proposed amendments to the Lloyd’s has joined a growing NAIC (National Association of list of non-US reinsurers able to Insurance Commissioners).

PHOTO: JAE C. HONG/AP

‘Transatlantic’s board have a lot to consider, but a winner should emerge soon’

● New York Insurance Department approves reduction to 20% from 100% ● Non-US reinsurers also making collateral progress across other US states

8 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_8-10 news.indd 8

19/08/2011 15:20

Associated Companies: s 2ENAISSANCE 2EINSURANCE ,TD s $A6INCI 2E s 2EN2E %NERGY !DVISORS s 2ENAISSANCE2E 3YNDICATE AT ,LOYD S s 4OP ,AYER 2E s 7EATHER0REDICT #ONSULTING s 2ENAISSANCE 2EINSURANCE OF %UROPE

Renaissance House 12 Crow Lane Pembroke, HM 19 Bermuda

Assessing Risk – A Fine Balance We are in the business of assuming risk. In this business, risk management does not equal risk avoidance. That is why we focus relentlessly on our risk evaluation process. We started 18 years ago with the idea that rigorous, state-of-the-art analytics could be incorporated into the broader underwriting process. Ever since, we have assessed risk at the individual deal level while achieving capital-efďŹ cient portfolio optimization across the entire organization.

We are pleased to be one of the few companies in our industry to receive an ERM classiďŹ cation of “Excellentâ€? from Standard & Poor’s, year after year.

Which means consistent risk-based pricing, balance sheet strength and ratings security for you.

Renaissance Reinsurance Ltd.

Top Layer Reinsurance Ltd.

A+ by A.M. Best

A+ by A.M. Best

AA- by Standard & Poor’s

AA by Standard & Poor’s

A1 by Moody’s

+1 (441) 295-4513

www.renre.com

GR_Ad_Page.indd 1

DaVinci Reinsurance Ltd.

Renaissance Reinsurance of Europe

A by A.M. Best

A+ by A.M. Best AA- by Standard & Poor’s

A+ by Standard & Poor’s

19/08/2011 14:45

News

JLT beefs up takeovers team

Bid&Ask The battle for Transatlantic

G

$46.37 per share

$44.22 $44 22 per share sh

Validus chief Ed Noonan

F

E

$3.25bn

Berkshiree Hathaway’s y’s Warren Buffett

D 1.5564 shares C

$52 per share re

23.8%

B

A $21bn

A 12 June: Transatlantic Holdings

and Allied World Assurance Company sign a merger agreement.

The combined entity would have total invested assets of $21bn, total shareholders’ equity of nearly $7bn and total capital of $8.5bn.

B 14 June: Standard & Poor’s places

Allied World’s A financial strength ratings on credit watch with positive implications, but leaves Transatlantic’s unchanged. Moody’s rates Transatlantic’s financial strength A1 and Allied World’s A2.

D 13 July: Bermuda-based (re)

insurer Validus makes a counteroffer for Transatlantic Holdings.

Under the offer, Transatlantic shareholders would receive 1.5564 Validus shares and a preclosing dividend of $8 in cash.

E 5 August: Berkshire Hathaway-

owned (re)insurer National Indemnity trumps Validus and Allied World with an offer that values Transatlantic at $3.25bn.

F 5 August: National Indemnity offer

is valued at $52 per share in cash.

C 15 June: Transatlantic Re’s

biggest (23.8%) shareholder, Davis Selected Advisers, says it may oppose the proposed merger with Allied World, citing “serious concerns” about the transaction.

G 5 August: Allied World’s stock-for-

stock offer values Transatlantic at $44.22 a share. Validus’s cashand-stock offer values it at $46.37 a share on the same day.

STOCKWATCH Lancashire +0.37 (676p) The London-listed (re)insurer bucked the trend of stock losses with a small gain. The rise follows positive first-half results – profit after tax $97.5m, 5% up on the $93m last year – which comes as many peers report losses or much-reduced profit after first-half catastrophes.

Find our more online globalreinsurance.

DATA AS OF 16/08/2011 SOURCE: COMPANY REPORTS

Munich Re -10% (€92.66) A first-half loss of €210m coupled with global debt concerns has rattled Munich’s investors.

Berkshire Hathaway -6% ($107,839) Warren Buffett’s bid for Transatlantic Re has shaken the parent firm’s share price.

● Profit and revenues up 9% as cost-cutting continues ● JLT chief dismisses Aon takeover rumours … again Broker Jardine Lloyd 2010), with the remainder Thompson has bolstered its of revenues coming from mergers and acquisitions team investment income. as it looks to grow its business, The company’s retail broking according to chief executive business reported the biggest Dominic Burke. revenue boost in the fi rst half, Speaking about JLT’s rising 18% (14% on an organic fi rst-half results, Burke said: basis) to £156.3m.

“There is no part of our London market revenue grew business that is not open 4% (3% organic) to £171m. This for growth or acquisitions put total risk and insurance activity. We have revenue up 10% (8% JLT recruited a greater organic) to £327.3m.

AND AON resource in our JLT posted a slump in POACHING WAR corporate fi nance profit after tax to £53.6m CONTINUES department and look in the fi rst half, down forward to hearing from £58.6m in H1 2010.

FIND OUT MORE ONLINE more news from them The company said a in the coming months.” goo.gl/gtu7X one-off tax credit of Burke said that £10.3m had boosted the acquisitions were a key H1 2010 after-tax result. part of JLT’s strategy.

While profits and The broker would look for revenues were up, one-off bolt-on rather than expenses associated with transformational deals.

JLT’s cost-cutting programme “We have the fi repower, we have increased to £24m from have the balance sheet and we the forecast £19m. But JLT have the pipeline,” Burke said. expects the cost savings “We are active on acquisitions derived from the programme internationally, as well as here to increase to £20m a year, up in the UK and the London from £16m. market.”

The cost-cutting programme, Burke was unequivocal in which JLT is streamlining about JLT’s position as a its back-office processes, is to takeover target. Responding to be completed by 30 June 2012. rumours that Aon is looking to buy the fi rm, Burke said: “This organisation is not for ● JLT’s deal in June to acquire sale to Aon. It’s not for sale to anybody. a 50.1% interest in Alta SA – “Our shareholders are the holding company of Chilean delighted with what’s been broker Orbital Corredores de achieved by this management Seguros and reinsurance broker team. I don’t think there is an Alta Re – as well as its earlier acquisition that makes any deal in January to take over sense where JLT would be not Oslo-based real estate broker the leader.”

Tripol AS, demonstrates JLT’s JLT made a profit before tax keen appetite for offshore of £76.4m in the fi rst half of acquisition targets.

2011, up 9% on the £70m made ● With JLT on the lookout to in the same period last year. make further acquisitions, The broking group’s we predict that Aon will need revenues were up 9% to to batten down the hatches – £411.3m from £377.8m. Of this, more team poaches could be £408.7m was attributed to fees on the cards as JLT aims to and commission (the figure secure its best possible team was £375.6m in the fi rst half of going forward.

We say...

10 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_8-10 news.indd 10

19/08/2011 15:20

When stormy winds blow, let’s put them to good use.

In this tough economic climate, the instinct is to run for shelter. But what if that meant missing out on fresh opportunities?

At Swiss Re, our position is clear. Yes, these are uncertain times, but confronting uncertainty has been our business for over 145 years.

We’re here to shoulder the risk and enable our clients and brokers to look beyond the immediate challenges. Because at Swiss Re, risk is our raw material; what we create is opportunity.

Breeze into www.swissre.com

Come and see us at Les Rendez-Vous de Septembre in the Swiss Re pavilion on Avenue de Monte Carlo, 11–14 September. www.swissre.com/montecarlo2011

GR_Ad_Page.indd 1

19/08/2011 14:47

News analysis Mergers

The race is on Competition for Transatlantic Holdings broke into a sprint in August with the entry of Warren Buffett’s National Indemnity. Ben Dyson weighs up the merits of each bid

Indemnity downside

On the minus side, as the offer is all cash, Transatlantic shareholders will not be able to participate in any post-merger benefits. The $52 a share is effectively all they will get from the deal.

It is also unclear what will happen to Transatlantic after a deal with National Indemnity. Berkshire Hathaway typically buys companies and lets them run themselves, but there’s no guarantee Jain will do the same. News reports suggest Jain is driving the deal

with little if any input from Buffett. And it is rumoured that National Indemnity, a known acquirer of run-off books, will put large portions of Transatlantic into run-off – although this remains unconfi rmed.

Validus tactics

While Validus is taking the trickier route of trying to bypass Transatlantic’s board, Noonan has succeeded before. His hostile bid for IPC Re triumphed, despite an already agreed merger between the target company and Max Capital, now known as Alterra. Then, as now, Validus coped with a legal battle as well as a war of words between the parties and an insistence that its bid was inferior.

This time round, Noonan has again presented a strong case for his bid: the share portion of the offer would be tax-free to Transatlantic shareholders and Validus has made a shareholder return of 55% since its IPO, compared with 24% for A l l ied World over the same period.

Validus also had market capitalisation on 10 June of $3bn, as against Allied World’s $2.2bn.

The deal also includes $500m of reserve strengthening, which could calm investor jitters over Transatlantic’s reserving status.

But hostile takeovers are notoriously tough, not least because they lack the information-sharing and board discussion of a friendly takeover. Validus has said it still wants to talk to Transatlantic’s board.

A deal with the incumbent, A l lied World, is favoured by Transatlantic, though it took a while for Allied World to show why its bid was superior. Its August presentation showed that Transatlantic shareholders would only retain 48% ownership under the Validus bid, yet 58% under the Allied World offer, and that the cash portion of Validus’s bid would limit shareholders’ participation in future. It also argued that, on a book-for-book exchange ratio basis, the Allied World bid was worth more than Validus’s: $66.10 a share versus $61.24 a share.

While the face value of the deal is not everything, it will be a strong consideration for shareholders, and on this score Allied World’s is the weakest bid. There have also been concerns raised about a TransAllied deal. Transatlantic’s largest shareholder, Davis Selected Advisers, which has a 23.8% stake in the fi rm, said it had “serious concerns” and that it may encourage Transatlantic to explore other strategic options to maximise shareholder value.

Transatlantic’s board and shareholders have a lot to consider, but a winner should emerge soon. In a letter to clients and brokers, Transatlantic chief executive Bob Orlich wrote: “We expect to have greater clarity by conference season and well before our major renewal season.” GR

ILLUSTRATION: BRETT RYDER

B

illionaire investor Warren Buffett took the battle to take over Transatlantic Holdings up a gear in early August by offering $52 a share in cash for the reinsurer.

Three firms are now in the race to buy Transatlantic. The company had already signed an all-share merger agreement with Allied World Assurance in June, under which Transatlantic shareholders would receive 0.88 Allied World shares per Transatlantic share. In July, rival Bermuda-based (re)insurer Validus muscled in with an offer of 1.5564 Validus shares and $8 in cash per Transatlantic share. Then National Indemnity, a part of Buffett’s Berkshire Hathaway run by renowned reinsurance underwriter Ajit Jain, topped them all – at least in terms of offer value.

It is still far from clear who will emerge the victor. There is little doubt that National Indemnity’s entry is strong. T he $52-a-share of fer values Transatlantic at $3.25bn. At the time of going to press, the Allied World offer valued Transatlantic at $2.96bn ($47.33 a share) and the Validus offer $3.03bn ($48.44 a share).

All offers are a discount to Transatlantic’s stated book value of $67.76 a share, as at 30 June 2011.

Aside from its higher value, one benefit of the National Indemnity offer is that, as cash, its value cannot change as a result of fluctuations in the stock market. Allied World’s offer was worth $3.05bn on 13 June (the first day of trading after the merger was announced), while Validus’s was worth $3.24bn on 13 July (the day after it made its offer).

Another benefit is that Transatlantic – yet to h it its st ride as a standalone reinsurer since controlling shareholder A IG sold its stake – cou ld be more comfortable in a larger group, particularly with the cachet of National Indemnity. General Re, another former standalone US reinsurer, has thrived since Buffett bought it in 1998.

Furthermore, unlike Validus, National Indemnity is in discussion with Transatlantic’s board. This could make its path to victory smoother than the adversarial route of Validus chief Ed Noonan, who objected to Transatlantic’s terms for discussion.

12 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_12 Transatlantic.indd 12

19/08/2011 15:19

GR_Ad_Page.indd 1

19/08/2011 16:13

News analysis Solvency II

Test of time As the timetable for Solvency II is stretched yet again – this time to 2014 – David Blackman looks at the hurdles encountered so far and the many still to be faced

T

here has been unparalleled turbulence in the eurozone economies chairman Gabriel Bernardino, in a recent interview with Global in recent months. But those hoping for a swift political solution Reinsurance’s sister title Insurance Times, was anxious to deny that to the sovereign debt crisis, which threatens the still fragile the new timetable was a delay. “You can’t start to enforce a system global recovery, will draw scant comfort from the EU’s agonisingly before implementing it,” he said. slow process for hammering out Solvency II. Fresh delays have hit what has already been a long drawn-out Putting systems in place process. Originally timetabled for introduction in 2010, the deadline But PricewaterhouseCoopers global Solvency II leader Paul Clarke for the directive’s implementation has been put back repeatedly. Last says insurers should not take their foot off the preparation pedal. year, EU internal market commissioner Michel Barnier set it at new “Despite the delay, insurers cannot afford to be complacent with their year’s day 2013. plans, as they will still be required to file Solvency II information over But by the beginning of this year, concerns were mounting that even the course of 2013 to prove their readiness. This means insurers will this new deadline was hopelessly optimistic. While insurers and need to have systems and processes in place by the end of next year.” regulators in some EU countries such as the UK have made good Lloyd’s finance director Luke Savage adds: “If insurers have 18 progress in ensuring they are Solvency months instead of six months, the work II-compliant by the end of 2012, other will stretch out. You won’t end up with member states have been less prepared.

Solvency II: The delays so far a better solution, but you will spend Regulators and insurers in some of the more money and take more time.”

June 2006: Consultation starts The European Commission begins smaller and southern European member European insurers in general are more consulting on the Solvency II proposals. states have found the European relaxed about the new deadline, June 2007: DELAY European Commission insurance chief Karel von Hulle is reported as saying that the original Solvency II deadline of Commission’s timetable challenging. And according to a survey by Aon Benfield.

January 2010 will be pushed back to 2012. for smaller and medium-sized insurers, A straw poll of European insurer July 2007: Draft framework published After years of talking, the which tend to make up a bigger chunk delegates at a conference held by the commission publishes the wording of the draft Solvency II directive. of the market in less mature economies, reinsurance broker in the wake of the November 2007: Results of QIS3 The third quantitative impact study shows that 98% of the 1,027 participating insurers have enough to complying with the new regime’s EU’s announcement revealed that 60% cover the minimum capital requirement. provisions is especially onerous. thought 2014 a better starting date for April-July 2008: Insurers submit to QIS4 The fourth study looks at the A hugely complicating factor is the the new capital regime. effect of Solvency II on the funds of individual insurers and groups.

Byzantine nature of the EU’s decisionAnd given the lack of clarity over the December 2009: Directive becomes law Solvency II becomes EU law making process. This has become even Level 2 measures – which spell out how following its publication in the Official Journal. more convoluted since the passage of Solvency II will be implemented – it is May 2010: DELAY The decision is made to push back the original 2012 deadline by a couple of months to align with year-end. the Lisbon Treaty, which gave the hard to see EU decision-makers had any March 2011: Results of QIS5 The latest study shows that most insurers’ European parliament a bigger voice in option but to postpone. capital levels exceed the directive’s solvency capital requirement. the production of directives such as Many of these measures are being June 2011: DELAY Several countries aren’t ready and French Solvency II. It means that, as well as thrashed out by working parties set up participants call for an extension. having to pass muster with member to examine the thorniest issues, such states through the Council of Ministers, as whether insurers should be allowed any EU legislation must also be approved by the European parliament. to hold capital in the currencies of the countries where they are insuring risks.

The overarching issue is that the existing implementation framework Legislative logjam requires insurers to adopt an “overly conservative approach” to the It may be a more democratic process, but the result is a legislative level of capital they should hold, according to a letter sent earlier this logjam in which Solvency II is caught up. The full implementation date year by leading insurance bodies to Barnier. now looks set to be pushed back a whole year to the beginning of Lloyd’s estimates its members would need to raise an additional 2014 under a new timetable to be agreed when the eurocrats return £25bn in order to comply with the existing standards. A number of from their summer breaks. working parties have been set up to iron out these issues.

But while member states will be required to formally transpose the All this means that the Level 2 rules won’t be finalised until well into directive into their national legislation by the earlier deadline, 2012 under the existing timetable. regulators and companies will not be obliged to comply with it.

Light was shed on one key issue last month, when Eiopa published Existing capital and solvency requirements will continue to apply its thoughts on equivalence. While the insurance regimes in Japan throughout 2013. and Switzerland meet the criteria for equivalence under the Solvency The intervening year will see the phasing in of the directive’s detailed II regime, it said, Bermuda still has work to do. provisions, and insurers will be required to provide their national This is a becoming an all-too familiar story: progress is being made regulators with an implementation plan. on Solvency II, but nowhere near fast enough. GR European Insurance and Occupational Pensions Authority (Eiopa)

14 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_14 SolvencyII.indd 14

19/08/2011 15:21

nortonrose.com

),1$1&,$/ ,167,787,216 Ę? (1(5*< Ę? ,1)5$6758&785( 0,1,1* $1' &2002',7,(6 Ę? 75$163257 Ę? 7(&+12/2*< $1' ,1129$7,21 Ę? 3+$50$&(87,&$/6 $1' /,)( 6&,(1&(6

Local knowledge â&#x20AC;&#x201C; global capability We have a long-established, award-winning global insurance and reinsurance practice.

Top tier, insurance non-contentious â&#x20AC;&#x153;The specialist non-contentious insurance group at Norton Rose maintains an outstanding reputation in the market Their negotiation skills are top-notch and they have their ďŹ nger on the pulse of all developments in the ďŹ eld.â&#x20AC;?

Chambers & Partners 2011 Top tier, insurance: corporate and regulatory Legal 500 2011 Insurance Team of the Year Legal Business Awards 2011 Best International Law Firm International Takaful Summit Award 2011

Our core strengths: Insurance and reinsurance disputes Reorganisation of insurance and reinsurance groups M&A Insurance-related capital markets products (insurance-linked securities) Exit strategies Insurance mediation and distribution Investments by insurance and reinsurance companies Our diverse range of work encompasses some of the most complex transactions and disputes and is high proďŹ le and innovative. Our blend of specialist skills and experience has resulted in a dynamic and industry focused team committed to the highest standards of client services.

Norton Rose Group is a leading international legal practice. We offer a full business law service to many of the worldâ&#x20AC;&#x2122;s pre-eminent ďŹ nancial institutions and corporations from ofďŹ ces in Europe, Asia PaciďŹ c, Canada, Africa and the Middle East.

Knowing how our clientsâ&#x20AC;&#x2122; businesses work and understanding what drives their industries is fundamental to us. Our lawyers share industry knowledge and sector expertise across borders, enabling us to support our clients anywhere in the world. We are strong in ďŹ nancial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and pharmaceuticals and life sciences.

Norton Rose Group comprises Norton Rose LLP, Norton Rose Australia, Norton Rose OR LLP, Norton Rose South Africa (incorporated as Deneys Reitz Inc.), and their respective afďŹ liates.

GR_Ad_Page.indd 1

NR11022

We have more than 2600 lawyers operating from ofďŹ ces in Abu Dhabi, Amsterdam, Athens, Bahrain, Bangkok, Beijing, Brisbane, Brussels, Calgary, Canberra, Cape Town, Casablanca, Dubai, Durban, Frankfurt, Hamburg, Hong Kong, Johannesburg, London, Melbourne, Milan, MontrĂŠal, Moscow, Munich, Ottawa, Paris, Perth, Piraeus, Prague, QuĂŠbec, Rome, Shanghai, Singapore, Sydney, Tokyo, Toronto and Warsaw; and from associate ofďŹ ces in Dar es Salaam, Ho Chi Minh City and Jakarta.

19/08/2011 14:48

News analysis Drought

High and dry As America remains in the clutches of one of the worst droughts in history, Lauren Gow looks at the relief available to (re)insurers and the farmers who are losing everything

Paying up

The USDA federal crop insurance programme has paid out $173m to farmers with reported losses in 13 states because of the drought so far this year. Drought has affected more than two million acres in those 14 states and drought-related loss payments represent 58% of all loss payments paid in 2011 to date.

The most adversely affected crop is cotton, although all crops including corn, soybeans, some wheat, rice and numerous vegetables are also affected. “More than 40% of the cotton crop in the four major cotton-growing states – Texas, Oklahoma, Georgia and Alabama – is currently rated as ‘very poor’ or ‘poor’ as a result of the drought,” Politsch adds.

More than 90% of New Mexico’s cotton is now rated poor-to-verypoor by the USDA, with Texas following closely behind at 86%. Overall national figures from the USDA show cotton farmers have abandoned about 30% of their cotton crops because of the drought.

Calculating the cost

The drought will impact two lines in the US (re)insurance industry: crop insurance and property and casualty. However, unlike other natural disasters such as windstorms, there is an innate difficulty in calculating exact losses from drought because losses occur on an individual basis, covering large distances for an indefinite time period.

Specialist broker BMS vicepresident Eric Hubicki says: “It is possible to calculate the crop losses in an area like Texas, where it has record levels of drought. But when it comes to property and casualty, it is more difficult. A tornado hitting a farm building, you know the loss bill pretty quickly. But when you bring in drought, it brings in an economic factor.

“Farmers might not have the margins that they are used to but, due to the drought, does that mean their equipment is not as well maintained? Things start to get neglected and that’s hard to put a figure on. Also, owing to the lack of moisture, there isn’t a windstorm risk. However, wildfires become an issue.”

Reinsurance specialist and vicepresident at BMS Jim Botsis agrees that it is too early to tell what impact the weather will have on crop production and the insurance industry.

However, he says the losses for insurers may be mitigated by recent scientific developments.

“The other thing to keep in mind here is genetically modified crops.

This is new technology that has been evolving over the past few years.

The crops are certainly a lot hardier and can sustain drought-like conditions,” says Botsis. “What farmers will go out and discover in terms of yield levels over the next few weeks will be different to what they would see 20 years ago without the technology that we currently have in place.”

There is a ray of hope on the horizon, according to Hubicki: “One area where a nationwide underwriter of insurance may be able to make up drought losses is when the northern states come through their cycle. It’s probably safe to say the margins that the insurers will report won’t be as large as in the past. But at this point, it might still be possible to make an underwriting profit.” GR

ILLUSTRATION: BRETT RYDER

D

isappointment stemming from tropical depression Don is palpable. There were high hopes that the lacklustre storm that hit Texas on 29 July would bring much-needed rain for the drought-stricken southern regions of the USA. But the storm dropped less than an inch of rain before blowing over, dashing the hopes of thousands of farmers and leaving (re)insurers trying to count the cost of yet more catastrophe pain.

The USA is in the midst of one of the worst drought periods in its history. According to the National Drought Mitigation Center (NDMC), over one-tenth of the United States fell into the ‘exceptional’ classification during July, peaking at 11.96% on 12 July. “That level of exceptional drought had never before been seen in the monitor’s 12year history,” said University of Nebraska–Lincoln assistant geoscientist, and climatologist at the NDMC, Brian Fuchs.

In Texas, the drought has now hit catastrophic levels. US Department of Agriculture (USDA) spokesman Kent Politsch said: “In Texas, between January and June of 2011, the state received the lowest amount of rainfall and had the highest temperatures on record. Record-keeping began 117 years ago. We obviously have a serious problem.”

By 1 July, USDA secretary Tom Vilsack had declared 14 states primary disaster areas due to drought. By midJuly, a further nine counties in Colorado and 16 counties in New Mexico were declared primary disaster areas, as well as 213 of the 254 counties in Texas.

“Declarations are important, because they allow farmers to apply for low-interest loans, file a claim on their crop insurance and seek additional assistance, such as from the SURE – Supplemental Revenue Assistance Payment – programme if they qualify,” says Politsch.

16 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_16 Drought.indd 16

19/08/2011 14:39

THIS IS WHERE EXTRAORDINARY THINKING GETS REAL There is a space between the moment ideas are born, and when they become a reality.

This is where we live, and where we bring our knowledge, insights, and advisory services to bear.

Creating industry-leading tools and analytics that help clients achieve a deep, granular understanding of their portfolio of risks and optimize their capital.

Never forgetting that our clientsâ&#x20AC;&#x2122; success comes ďŹ rst.

We are Guy Carpenter. guycarp.com

Guy Carpenter is one of the Marsh & McLennan Companies, together with Marsh, Mercer, and Oliver Wyman.

GR_Ad_Page.indd 1

10/08/2011 09:51

PHOTOS REX FEATURES PA

News Agenda

18 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_18-25 Agenda 911.indd 18

19/08/2011 16:56

News Agenda

‘In terms of industryreshaping events, 9/11 was probably the most transformational of the last decade’ Just as the absence of the Twin Towers has left an indelible mark on the Manhattan skyline, the influence of 9/11 can clearly be seen today in the (re)insurance industry’s relationships and practices.

Ten years on, Ben Dyson looks at an industry changed forever

PHOTOS: REX FEATURES, PA

I

t is difficult to find anyone who escaped the effects of the September 11 2001 terrorist attacks in New York City.

But, in terms of both business a nd persona l losses, t he insurance industry arguably bore the biggest brunt. Not only did it have to pay out $40bn – the second-biggest insured loss on record – but a huge number of the industry’s own executives lost their lives in the event.

Brokers Aon and Marsh had a large presence in the World Trade Center, and both lost hundreds of people. Most in the industry know someone who lost their life that day.

While the event was a sudden and d ramat ic shock for the industry, both financially and emot iona l l y, it a l so had a significant lasting effect. In fact, out of the tragedy of September 11 has come a series of key

c h a nge s t o t he i n s u r a nc e industry that can still be seen today. It resulted in something of a rebirth for the industry, both affirming its worth and bringing a bout a pu rge of t he poor practices it had slipped into during the soft market.

Looking at the event 10 years on, it is also a stark reminder that while it is still the most costly terrorist attack to date, the threat of future attacks is still very strong. And, despite the adva nces i n model l i ng, exposure management and risk management that have been made over the past 10 years, the i ndu st r y cou ld easi ly be surprised by another unforeseen event.

Know your exposures

In the immediate aftermath of the event, the fi rst surprise for the industry was the loss itself.

GLOBAL REINSURANCE SEPTEMBER 2011 19

GR_18-25 Agenda 911.indd 19

19/08/2011 16:56

News Agenda ‘Vivid memories’ Britt Newhouse, chairman, Guy Carpenter “I was in the South Tower in the 52nd floor when the second plane hit our building on the 76th floor. I have pretty ourabuilding on the vivid memories. There is not day goes by when I don’t think about how lucky I am. I walked down and out of the South Tower and the building came down about 10 minutes after I got out.

“We didn’t know the building was going to fall down at the time. In the South Tower, we had 20 minutes between when the first plane hit the North Tower and when the second plane hit us.

Because we had been in the building during the previous attack in 1993, we didn’t have to tell people to leave.

“The vast majority of the Guy Carpenter people got in the elevators and out of the building in that 20 minutes. Being the senior person in the office at the time, I shut the office down and sent everybody home. Most of the people Guy Carpenter lost were working in the North Tower because we had run out of space. A few people were killed on the streets by debris.

“While we were walking down the 55 flights of stairs to the ground level, the our building on the the building thing I remember most was that it got hotter and hotter because basically behaved like a toaster – the heat from the fire ran through the metal frame. We were more concerned about the fire than collapse.”

Almost everyone in the industry, from brokers to insurers to reinsurers, was surprised by the sheer number of lines that could be hit by a single event. Until this point, large marketchanging events had been natural catastrophes, which predominantly affected the property book.

“Nobody imagined or had really thought through the possibility that almost every line of insurance could be involved in a loss,” Guy Carpenter chairman Britt Newhouse says. “Life, workers’ comp, accident and health, property liability, professional liability, surety – there was virtually no line of business in the insurance world not involved in that loss and, as far as I know, that had never happened before.”

“Everything changed after September 11 and our market is certainly no exception,” Allied World Assurance chief operating officer David Bell adds. “From an underwriting perspective, 9/11 was in many ways a knock-out punch to the capital positions of certain carriers, and had a cascading effect over multiple lines of business.”

The complexity of the event is still being unravelled. For example, in its fi rst-half 2011 results, Lloyd’s (re)insurer Hiscox announced that it had received $9m after a successful subrogation action against the airlines whose planes hit the Twin Towers in 2001.

The 10 years since September 11 have hardly been quiet. The industry has been through several other transformational and teaching

experiences, among them the collapse of Enron and WorldCom in 2001 and 2002, respectively; the severe North Atlantic hurricane season of 2005; and the fi nancial crisis of 2008. And the terrorist attacks were not the biggest insured loss: the combined losses from Hurricanes Katrina, Rita and Wilma in 2005, expressed in 2010 amounts, are more than double the September 11 losses.

Yet the impact of the World Trade Center’s destruction had a far more marked impact on the global (re)insurance industry. One of the most noticeable effects was a sharp rise in rates in almost all lines of business.

“It was the most significant multiline rate-hardening trigger event the industry has ever seen,” reinsurance broker Aon Benfield’s chief strategy officer Bryon Ehrhart says.

The evidence of this sharp increase is still visible today. “The pricing cycle that occurred after the event is still contributing materially to reported profits today for many insurers and reinsurers through substantial favorable reserve development,” Ehrhart says.

Risks you hadn’t counted on

September 11 also changed the industry’s view of risk. “In terms of reshaping perceptions of risk and how insurers manage risk, 9/11 was probably the most transformational event of the last decade,” says New York-based Insurance Information Institute (III) president Robert Hartwig.

As a result of this new picture of risk, insurers had to re-evaluate their exposures and re-assess their view of risk aggregation in particular zones.

While, prior to September 11, risks in various business lines were not seen in isolation, the losses from the terrorist attacks highlighted more links than were previously visible. “It caused insurers to become aware of risks in their portfolio that they hadn’t imagined might exist before the events

‘It was the most significant multiline ratehardening trigger event the industry has ever seen’ Bryon Ehrhart, Aon Benfield

of 9/11,” Endurance Specialty Holdings chief executive David Cash says.

Furthermore, the attack forced the global (re)insurance industry to come to terms with a risk it had paid little attention to before: terrorism.

Some countries did have a concept of terrorism insurance before the World Trade Center destruction. One example was the UK, which has had a government-funded terrorism scheme, Pool Re, in place since 1993 as a result of a string of Northern Ireland-related terrorist attacks in the UK.

20 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_18-25 Agenda 911.indd 20

19/08/2011 17:08

News Agenda ‘With my own eyes’ Robert Hartwig, president, Insurance Information Institute “My office is three blocks from ground zero. I was here. I watched it with my own eyes. I was working at my desk and I heard a loud roar. Then I heard a muffled boom sound. I’m on the 24th floor and my window faces north. I didn’t know what it was. The woman in the office next to me came out and asked what it was. We went to a westfacing window and we saw on the top of the North Tower what was at that time, within two minutes of it happening, a small fire. We assumed that a small plane had accidentally flown into the tower. That didn’t surprise me because I have a pilot’s licence and I have flown up and down the Hudson river near the towers. Quite frankly, I was surprised that no one had ever crashed into them.

“With the second strike, we knew that it wasn’t an accident. I watched both towers fall with my own eyes and felt it and smelt the debris – our building was hit by debris. One of our employees suffered minor injuries and was cut by debris on the ground as she was coming to work when the tower was struck. We were lucky in that respect.

“It was surreal. You have watched it on television but to be less than a kilometre away, it is a different experience because not only was it visual, it was close up and then you felt it, you smelt it, you heard screams.”

But large parts of the global market, and the USA in particular, did not explicitly provide terrorism cover. It was covered under property policies simply by virtue of the fact that it was not explicitly excluded. The concept of terrorism underwriting was therefore virtually non-existent.

“At the time, 9/11 was the largest insured loss in global history and the irony was that not a penny had been charged in premium for this type of risk,” Hartwig says. “A large-scale terrorist attack of this kind had never been conceived of before and was not priced into property insurance or reinsurance programmes.”

The government steps in

After 11 September 2001, terrorism exclusions very quickly became standard in insurance and reinsurance policies; a situation that remains today.

Businesses now needed terrorism coverage more than ever, but were unable to get it, as many companies deemed it uninsurable because of their inability to measure the risk.

They had little historical data, and barely any way of predicting the likelihood of another attack.

Therefore, the US government had to step in, and the Terrorism Risk Insurance Act (TRIA) was born in 2002. The act was the USA’s answer to Pool Re, though it was initially intended to be temporary. It pays terrorism losses after the individual company or industry-wide losses reach a certain point, and up to a limit of $100bn. The act does not cover personal lines.

The knowledge that the US government would step in to pay losses above a certain point gave insurers the confidence to start offering terrorism cover to businesses. Its usefulness and popularity is such that its expiry date has continued to extend. After being renewed in 2005, TRIA was replaced in 2007 by the Terrorism Risk Insurance Program Reauthorization Act, which expires in 2014.

But at each step the Federal participation in terrorism risk has been reduced, leaving the industry to take an increasing share of the burden.

Although the US government-backed terrorism insurance programme is still intended to be temporary, with its 2014 expiry date, many in the industry hope it will become a permanent fi xture.

“Almost everybody in the insurance industry feels this legislation needs to be permanent,” Starr Indemnity & Liability Company and Starr Surplus Lines Insurance Company president and chief executive Charles Dangelo says. “There are scenarios that are potentially far too big for any one company, and arguably for the industry, to take on themselves when you think about what could happen in a very severe terrorism event.”

Terrorism finally covered

While September 11 prompted some companies to exclude terrorism risk, the heightened knowledge of its existence, coupled with a strong demand for cover, led several carriers to start offering cover independently of TRIA – so-called standalone

Biggest terrorist acts By insured property losses (as at 2010) 11 SEP ’01

USA

Hijacked aircraft crash into $23.14bn NYC World Trade Center

24 APR ’93

UK

Bomb explodes near London’s NatWest Tower

15 JUN ’96

UK

IRA car bombing in Manchester shopping mall

$917m

10 APR ’92

UK

Bomb explodes in financial district

$826m

26 FEB ’93

USA

Bomb explodes in garage of NYC World Trade Center

$770m

24 JUL ’01 Sri Lanka

Rebels destroy 14 aircraft

$491m

9 FEB ’96

IRA bomb explodes in Docklands, London

$319m

23 JUN ’85 Irish Sea

Bomb explodes on Air India Boeing 747

$199m

19 APR ’95

Government building bombed $179m in Oklahoma City

UK

USA

$1.117bn

DATA: SWISS RE

September 11 loss estimates Insured loss estimate $40.02bn (as at 2010) $1.2bn

$4.4bn

Life

Property (WTC)

$4.9bn Other liability

$7.4bn Property (other)

$4.3bn Aviation liability

$1.2bn Event cancellation

$600m Aviation hull

$2.2bn Workers’ compensation

$13.5bn Business interruption DATA: INSURANCE INFORMATION INSTITUTE

GLOBAL REINSURANCE SEPTEMBER 2011 21

GR_18-25 Agenda 911.indd 21

19/08/2011 17:08

News Agenda ‘Just one degree of separation’ David Cash, chief executive, Endurance Specialty Holdings “I was scheduled to fly from Bermuda to New York at lunchtime that day and my travel agent alerted me that the flights were all grounded. That’s when I, like others, watched the events unfold on TV and as I watched the Towers collapse, I was simply staggered by the images.

“Once air traffic opened up a few days later, I flew over New York and we passed over the World Trade Center site at night. You could see the floodlights and look down into the site, which made the reality of the situation even more striking.

“About a month later, I travelled to the site. There was a pile of scrap metal literally six-stories high – like a building in itself. Our industry is quite small and in that downtown New York area there were many, many insurance professionals who are not with us now. Many people in our industry can say that they have a one degree of separation relationship with what happened on that day. We all, myself including, know someone who was killed.

“At the moment I witnessed the events on TV, it was clear to me that things were going to be different both politically and in our industry. All of us saw it.

It was visually stark. When I look back, while it was clear to me and to many others that it was a turning point, it was hard for any of us to imagine the full impact of what would unfold for our industry.”

terrorism cover. While this type of cover was not new, some contend that the events of 9/11 were a catalyst for growth of this market.

“There was a very small standalone terrorism market prior to 9/11, to deal with troubles in places like Sri Lanka with the Tamil Tigers, the Colombian FARC and the IRA in Northern Ireland,” Liberty Syndicates terrorism, fi ne arts and specie underwriter Mike Burle says. “The unprecedented attack of 9/11 really did kick-start what we see today is a very mature standalone terrorism and political violence market.”

Class of 2001

It was not only terrorism cover that was tough to fi nd in the aftermath of September 11. Because of the event’s far-reaching effects on the insurance market, prices jumped in all lines of business, and companies reduced or withdrew coverage. The effect of 9/11 was exacerbated by the fact that the industry was emerging from the throes of a long soft market, and was heavily weakened by years of underpricing and underwriting losses, particularly in US casualty.

Private equity companies saw an opportunity to invest in the industry, and a raft of new companies was formed to pick up the slack.

In all, around 10 new companies were formed, and were dubbed the class of 2001. Many of the number still survive and thrive; notable examples being Endurance, Allied World Assurance and Montpelier Re,

which have made the transition from start-ups to core members of the global (re)insurance establishment.

These companies quickly deployed the capital their backers supplied to help plug the coverage and capacity holes that 11 September punched into the market. “The class of 2001 played a very meaningful role in the capital market’s ability to help Main Street rebuild itself quickly,” Allied World’s Bell says.

The formation of the class of 2001 also cemented Bermuda as a

‘9/11 kick-started what we see today is a very mature stand-alone terrorism and political violence market’ Mike Burle, Liberty Syndicates

worldwide reinsurance hub. Bermuda was already fairly well established, with ACE and XL setting up there in the mid-1980s to plug gaps in the US casualty market, and a string of property-catastrophe underwriters – notable survivors being PartnerRe and RenaissanceRe – establishing themselves in Hurricane Andrew’s wake in 1993. But the arrival of the

class of 2001 took the island to the next level.

“The capacity crunch was focused primarily on catastrophe and large corporate risk products where traditionally risk has been syndicated,” Endurance’s Cash says.

“Syndication happens most efficiently in global insurance marketplaces and there were only two places where capacity could have formed to respond at that period of time. One was London, the other was Bermuda.”

He adds: “Before that time, Bermuda wasn’t a marketplace in the same sense that it is today. But Bermuda was able to emerge as one of the two major marketplaces in the world primarily because of the demand for large syndicated risk after 2001.”

Contract certainty nailed down

As important as underwriting and fi lling coverage gaps was, the payment of claims was vital. One of the most memorable claims – and indeed claims disputes – from September 11 was that for the property of the Twin Towers themselves.

The leaseholder of the World Trade Center site, Silverstein Properties, argued that the destruction of the Center’s twin towers by two passenger jets constituted two events and so they could expect a payout of $7bn from insurers. Insurers, on the other hand, insisted it was only one, and Silverstein was only entitled to half that amount.

The dispute ran for five years, with the verdict that the wording in some

22 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_18-25 Agenda 911.indd 22

19/08/2011 16:56

News Agenda ‘Like it was yesterday’ Gregory Serio, managing director, Park Strategies and former New York State insurance superintendent “I remember everything about that day like it was yesterday. I remember the blueness of the sky, the blackness of the smoke. I remember worrying about where my employees were and I remember sleeping on my sister’s floor that night. And I remember going into the site.

“At the time, I was also the volunteer fire chief in Albany.

When I was the deputy superintendent, I worked on creating an urban search-and-rescue team for New York, located in Albany. That team was the first team with a significant cache of equipment at Ground Zero that afternoon.

“Unusually for an insurance regulator, I managed to get a glimpse of the horrific extent of this event by actually working on the site that night – and the next night and the night after. I was working there until I simply couldn’t do two jobs working 20 hours a day.

“It helped me immeasurably to understand both the size of the disaster by standing in the midst of ruins and to understand the human toll. It’s almost impossible not to have an appreciation for the human toll watching them take out fire fighters, police officers and civilians who were trapped and died in the wreckage, as well as understanding more the macro implications of it. It provided an insight I would never have had if I was merely the insurance commissioner.”

policies required payment only for a He adds: “Those dollars that fi rst single event, but the wording in flowed after 9/11 were not government others put insurers on the hook for a or banking dollars, they were two-event payout. insurance dollars, flowing very Part of the reason for the length of quickly into the marketplace to the dispute was the fact that wordings stabilise both the geographic area of had not actually been fi nalised when New York City, and Lower Manhattan, the Towers fell. This sparked a global as well as sending out a message that effort to achieve contract certainty there was this significant safety net.”

– to have fi nalised wording in place The events also allowed the industry either on the date of coverage to build new bridges and strengthen inception or within a set timeframe existing ties. One of the many difficult thereafter. situations in the aftermath of the This dispute and the issue of attacks was that collateral for non-US contract certainty also had a strong reinsurers had to be swiftly bearing on how insurance and replenished so they could TAKE reinsurance coverage was continue providing coverage for COVER secured for the redevelopment US insurers. One such reinsurer of the World Trade Center site FIND OUT was Lloyd’s.

MORE ONLINE (see ‘A leap of faith’, overleaf).

Under the collateral rules, goo.gl/H8uE4 Lloyd’s and other non-US reinsurers would have had to (Re)building bridges But the Silverstein dispute was pre-pay its entire reinsurance a rarity, and the industry gross loss of any reinsurance earned plaudits for paying claims recovery into trust within 45 days. promptly. So much so, in fact, that Instead, the New York insurance many believe faith in insurance was department gave the market restored. additional time to recapitalise its “In the immediate aftermath, collateral accounts, which it there was a sudden and newfound successfully did. appreciation for insurance and the As a result of the greater interaction, critical pillar it represents in the Lloyd’s lost a lot of its mysticism, and economy,” recalls public policy thus gained greater trust of US consultancy Park Strategies managing regulators. “The relationship with director Gregory Serio, who was New Lloyd’s changed dramatically. Until York State’s insurance superintendent 2001 it was an arms-length regulatory at the time of the attacks. “Prior to relationship, borne out of a crisis itself that, there was almost no recognition – reconstruction and renewal,” Serio of insurance as a critical element of says, referring to the reserve plan, either the monetary system or the completed in 1996, that saved Lloyd’s broader economy.” from the brink of collapse. “9/11

allowed people to see how Lloyd’s had changed, how this new entity that had emerged from reconstruction and renewal was able to operate in the event of a global disaster. It was the first big test for that new marketplace.

But I think what it also did was to break down a lot of those barriers that develop in an adversarial relationship.”

On 28 July this year, Lloyd’s had its 100% collateral requirement in New York reduced to 20%. “I don’t think any of that would have happened if the fundamental relationship between Lloyd’s and the American regulatory community hadn’t changed after 9/11,” Serio says. “This is a direct

‘Those dollars that first flowed after 9/11 were not government or banking dollars, they were insurance dollars’ Gregory Serio, Park Strategies

byproduct of how Lloyd’s addressed the 9/11 situation.”

In addition, the work on TRIA and other federal matters helped bring the insurance industry and the US government closer together. “You had a whole new set of relationships GLOBAL REINSURANCE SEPTEMBER 2011 23

GR_18-25 Agenda 911.indd 23

19/08/2011 16:56

News Agenda ‘We had to function’ Charles Dangelo, president and chief executive, Starr Indemnity & Liability Company and Starr Surplus Lines Insurance Company “The attack struck very close to home. At the time, my office was in downtown New York on the East River. I was having a staff meeting when the first plane hit. A number of people were looking at World Trade Center 1 out of the window of our office building and saw the plane hit World Trade Center 2. We told everybody to go home and watch the news.

We told them to come into work the next day if the office was open or if not to go to an alternative site if they were able to do so. We knew, being an insurance company, that we had a lot of work ahead of us and we had to function. We needed to be there for our policyholders.

“We had an alternative site in New Jersey where I was up and running by 8am the next day. We were contacting brokers and our accounts, saying: ‘Let us know if we can be of assistance, let us know what we can do,’ but at that point, nobody really knew. They were still assessing whether they had people in the building.

“Because of the presence of Marsh, Aon and others in the building, all of us had friends and associates we knew were there. As news came in, we heard that some did make it out. We heard that others did not. In our business, we see serious events that create significant property damage and loss of life; but it really struck home when these were people we worked with day in, day out who didn’t survive.”

being used for the fi rst time,” Serio says. “That helped to set the stage for what has become a regular and institutionalised relationship between the Feds and the National Association of Insurance Commissioners.”

An industry rejuvenated

Just as the public began to see insurance in a better light, the industry also gained an opportunity to re-evaluate itself. The industry in general had slipped into bad habits during the soft markets, with sloppy

‘One thing that 9/11 and other catastrophic events remind insurers of is that they don’t know everything’ Britt Newhouse, Guy Carpenter

underwriting and excessive competition taking their toll. Some executives report that there was a disillusionment with the industry, but this lifted when 9/11 banished the bad practices from the market.

Some say the industry is now more professional in many respects.

“Most reinsurance brokers are now emphasising a technical approach compared to the more aggressive approach to risk placement that was

employed in the late 1990s,” Endurance’s Cash says.

“This change in perspective has made them more successful in selling to their clients, but it has also made them more successful in working with reinsurers.”

In many ways, the industry is a far better place as a result of the changes wrought by the terrible events of 11 September 2001. It certainly has a greater appreciation of both terrorism risk and how to manage large accumulations of risk. But the threat of terrorism has not gone away. There is a sense that the death of Osama Bin Laden could spark retribution from his followers, for example.

“One thing that 9/11 and other catastrophic events remind insurers of is that they don’t know everything.

No matter how good your models are or how you underwrite and engineer against things, stuff happens. You have to put something into your thinking and the management of your business to deal with that,” Guy Carpenter’s Newhouse says.

“The industry has got much better at being able to understand what the exposure is if something happens in a particular place at a particular time.

But it is still very difficult, if not impossible, to predict where and when it is most likely to happen.”

Though it has clearly learned many lessons over the past 10 years, there is still plenty of scope for the industry to be caught off-guard by a future event. GR

J

ust as the insurance industry underwent a rejuvenation after the September 11 terrorist attacks, so too has the site that the atrocities laid to waste.

The site’s leaseholder, Silverstein Properties, has used the insurance claims money it recouped from the loss of the World Trade Center’s iconic Twin Towers to rebuild the area. One of the buildings, WTC 7, is already complete, and the company plans to develop three more: WTC 2,3 and 4.

The rebuilding would not have been possible without insurance money. But it would also not have got off the ground without still further support from the industry in the form of a comprehensive insurance and reinsurance programme.

And, as Silverstein’s vice-president of risk management, Shari Natovitz, explains, putting together such a programme was no mean feat.

The fi rst challenge was the sheer amount and breadth of the coverage required. “The project needed to be protected, which meant engaging the entire global insurance community,” Natovitz says.

“We were looking at a $6bn build and in order to get capacity for that we needed insurance from all over the world because we are also looking at carriers to produce significant limits for the protection of our workers under workers’ compensation, as well as the protection of the public passing by this project every single day.

“All told, when you start adding those dollars up, just for my projects alone you have a total property/ casualty capacity approaching the $10bn mark.”

Moving on from the past

The next problem was attracting the insurers and reinsurers to take the risk. The highly publicised, sometimes fractious legal dispute between Silverstein and its insurers in the years that followed the terrorist attacks did not serve as a great starting point. And given what they had learned from the events of September 11, companies were reluctant to take large chunks of exposure in Manhattan, especially on the very site that had yielded them heavy losses last time.

Natovitz admits that, while most carriers were eventually willing to assist, there was some initial scepticism. “Many of them were reluctant to reach out to us, perhaps in part because of the litigation but

24 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_18-25 Agenda 911.indd 24

19/08/2011 16:56

News Agenda

A leap of faith: the WTC rebuild It was no mean feat to convince insurers and reinsurers to come on board with the rebuild of the 9/11 site, but leaseholder Silverstein knew it would be worth the fight

Getting it right

also because we were an unknown quantity in terms of building a mega-project at that point,” she says.

“There was also reluctance on the part of any carriers to want to step into the World Trade Center site because they were concerned about their own aggregations.”

She adds that a handful of carriers refused to do business with Silverstein at all. “There were some carriers that stepped away from us as a result of the litigation,” Natovitz says. “We have spent the last five years trying to suggest to them that doing business together would be a good way for them to get to know us and also recoup some of the losses in premium dollars that they felt they paid out. We have had limited success with that, but it is only about four or five carriers.”

Bringing insurers on board

Silverstein got around the problem of reluctant insurers by setting up meetings between senior insurance executives and Silverstein’s project and design managers, as well as the fi rm’s president of World Trade Center properties, Janno Lieber.

“Through the litigious era of 2001 to 2006, the underwriters knew us by the headlines in the newspapers and what was happening in the courts,” Natovitz says. “They didn’t really know who we were. Nor did they know what our capabilities were in terms of being able to develop and manage a construction project of this magnitude. The fi rst step in us being able to meet the insurance demands that were put on us was to re-introduce ourselves to all the major markets.”

It paid off. The company’s insurance programme, covering a wide range of risks, is placed with 45 carriers though its broker, Willis.

The programme also includes a

on this insurance programme,” she said.

Insurers were also attracted by the safety measures built into the new existing and planned properties. These include a bunkerlike construction of the central lift shaft and stairwells, wider-thanrequired stairwells to ease escape for occupiers and access for fi rst responders in the event of a disaster, and dedicated communications networks to circumvent the problem immediately after 9/11 where cell phones and land lines failed, rendering communication between emergency teams almost impossible.

CLAIMS: captive insurer, the Greenwich LAYING NEW Street Insurance Company, which FOUNDATIONS provides terrorism cover.

While she stresses that all carriers FIND OUT MORE ONLINE had an important role to play in the goo.gl/QaikP programme, Natovitz mentions that particularly significant parts were played by Chartis and its subsidiary Lexington, ACE, XL, Munich Re and a range of Lloyd’s syndicates.

“Ultimately, we met with markets from London, Lloyd’s, Bermuda, the USA and Europe. All of those markets are participating

A big feature of Silverstein’s post9/11 disputes with its insurers was the lack of clarity in the policy wordings, and the fact that fi nal wordings were not in place for the entirety of the coverage. This had a big influence on how negotiations were conducted with insurers when putting the new WTC programme together.

Natovitz says Silverstein and Willis were at pains to ensure consistent wording across the programme and a complete understanding on all sides of the meanings of the wordings. “I’m very pleased to say that the entire industry learned from that softness of wording associated with 9/11. We went into the initial submissions to the market with the single strong objective, when we approach coverage, of having absolute contract certainty.”

After ensuring consistency and comprehension, Natovitz said Silverstein then went one step further. “We added a designated adjuster to the property programme so we would have somebody who understood the coverage and the intent representing the programme.

We also added a forensic accountant to the project as well, so all those issues would be upfront.”

Natovitz praised the individual brokers in Willis for helping the fi rm to achieve contract certainty.

She also credited the carriers for their support.

“This has truly become a project that sought and received the support of the entire insurance and reinsurance community,” she said. “Without them it would be a challenge to be able to rebuild, so we look at them as our partners and we look forward to continuing to work with them because they have been an extraordinary help to us.” GR GLOBAL REINSURANCE SEPTEMBER 2011 25

GR_18-25 Agenda 911.indd 25

19/08/2011 16:56

Bravely exploring uncharted territory in the world of specialty insurance and reinsurance.

GR_Ad_Page.indd 2

10/08/2011 09:53

Insurance coverage is underwritten by member companies of Allied World. Coverage is subject to underwriting. Member companies may not be licensed in your state or jurisdiction. To find out if coverage is available, please contact your insurance broker.

INSUR A NCE | REINSUR A NCE | S Y NDIC ATE 2232

A world without a road map is a world full of opportunity.

At Allied World, we aren’t afraid to journey off the beaten path to find new markets or explore new opportunities.

Our skill at navigating uncharted terrain enables us to work closely with clients to find innovative ways to balance risk with reward. When it comes to specialty insurance and reinsurance solutions, sometimes the road less taken is the one well worth traveling.

Specialty solutions. Worldwide.

GR_Ad_Page.indd 3

awac.com

10/08/2011 09:53

‘‘ Profile

We have had disappointments along the way, but we achieved most of what we set out to

‘‘

M

ike Wilkins is seven minutes late. In this rare interview, the press-shy chief executive of Australia’s largest general insurer, Insurance Australia Group (IAG), makes no bones about his time and patience being limited. With typical Australian swagger, he begins the interview saying: “I need to be somewhere in 23 minutes.”

Time is indeed of the essence for Wilkins. When he took hold of the reins at IAG in June 2008, he gave himself one year to turn the business around. Within five weeks of taking over as chief executive, Wilkins wielded his axe, slashing 600 local jobs as part of his so-called ‘efficiency programme’, which aimed to save A$130m (US$134.6m).

But more controversially, the Australian insurer decided to retain the calamitous UK business – a decision he is still vehemently justifying.

Now, after three years in the job, with a wildly fluctuating share price and a ratio of seven profit downgrades to one upgrade, it would be safe to say Wilkins’ mission has not been successful.

But Wilkins is like a bulldog with a bone when it comes to overseeing IAG. He wholeheartedly embraces the motto: ‘There is no ‘i’ in team’ and swiftly bats away every question asked directly of himself. He

answers instead with “we” or “us”, seemingly in an effort to share responsibility for both the successes and failures of the insurer.

Former IAG UK chief executive Neil Utley, who worked with Wilkins for three years, describes him as a “typical insurance guy”.

“Sometimes that can make someone less interesting but that is not the case with Mike,” Utley says. “At first, he comes across as reserved, which makes him seem very serious. But he’s got a great sense of humour and is a warm person.” When relayed this character verdict, Wilkins laughs self-consciously and promptly moves the focus away from himself and back to business.

Far from being demoralised by continuously disappointing results, Wilkins is adamant that IAG is making progress. “I am pleased with what we have been able to achieve as we have sought to reposition the business,” he says. But when pushed, he falters slightly: “Yes, we have had some disappointments along the way.

But, generally speaking, I think we have achieved most of what we set out to achieve.”

Without skipping a beat, Wilkins swings the conversation back to positive territory. “Certainly in this part of the

ILLUSTRATION: RICHARD PHIPPS

IAG’s Mike Wilkins pulls no punches when talking about his company’s unstable past, which just makes him more resolute about the future, finds Lauren Gow

28 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_28-30 Profile.indd 28

19/08/2011 12:46

ProямБle

GLOBAL REINSURANCE SEPTEMBER 2011 29

GR_28-30 Profile.indd 29

19/08/2011 15:37

Profile world, we have laid a very solid platform for the next stage of our development. What we are looking to do now is just a logical extension from the platform that we have laid.” Smiling briefly, he adds: “And I am quite excited about the future.”

That future was announced by Wilkins at an investor briefing in Sydney on 14 June and includes plans for organic growth and acquisitions in the Asia-Pacific region.

IAG’s Asian growth initiative is not remarkable in itself as the insurance giant has had placements in the region for more than a decade. But Wilkins’ decision to go full throttle into the region is a marker of his determination to produce hardier economic results at a faster rate.

“The Asian economies are the fastest growing economies in the world and we certainly believe that is going to continue for the next decade or more,” Wilkins says excitedly. “With the combination of the geographic and time zone location, together with technical expertise and the growth of those emerging markets, Asia seems like a sensible place for an organisation like IAG to go.”

On 15 August, IAG announced it had agreed to acquire a 20% strategic interest in the motor-heavy Chinese general insurer, Bohai Property Insurance, for a price of RMB687.5m (approximately A$100m, or US$103.5m).

THE MAN

Age: 54 Hometown: Canowindra, New South Wales First employer: Yarwood Vane (now Deloitte) Interests: Rugby, golf and most sports In his own words: ‘I am quite excited about the future’

THE COMPANY

Ranking: Australia’s largest general insurer GWP: A$7.78bn (US$8.05bn) Employees: 13,500 Market view: Feared and revered, the IAG umbrella of companies has some of the oldest and most successful GI brands in its stable, but falters in the homestretch of results.

A healthy appetite

When questioned about his rationale for Asian growth impetus over other emerging markets like Latin America, Wilkins answers with his tongue firmly planted in his cheek. “The time zone difference is better,” he says bluntly, before laughing to himself.

But Wilkins’ plans for the region are surprisingly undefined. “We are open-minded as to whether we start greenfields operations in those areas or whether we go into joint venture or buy into existing players. Likewise in Australia and New Zealand.”

One example of Wilkins’ acquisition appetite was the purchase of West Australian health insurer HBF in June, which added about A$100m to IAG’s overall Australian premium pool. Wilkins agrees almost too eagerly that this is the company’s future footprint. “It will be that type of thing that we are looking at. We are very open to those opportunities.”

Wilkins moves on to speak frankly about the scope of the Australian (re)insurance market. “I think Australia is a relatively small economy and reinsurance is a global business. If you look at the major players, they are global in their scale.

Several years ago, there was an attempt to create a reinsurance market in Australia but I just think the available domestic business wouldn’t support a serious reinsurance market.”

For now, he says, IAG is satisfied with the reinsurance opportunities available in the region.

“We think that Australia and New Zealand continue to be attractive diversification opportunities for reinsurers because they can then defray some of their Northern Hemisphere risks into the Southern Hemisphere. It’s unfortunate that in the last couple of years there have been a series of events in this part of the world that have affected reinsurers. But

IAG ENTERS CHINESE MOTOR MARKET

FIND OUT MORE ONLINE

goo.gl/eOezF

go back a few years and the reverse was true.

That’s what a diversification strategy is all about.”

Away from home shores, Wilkins has his eye firmly on the horizon following an eventful three years in office. In June 2010, IAG announced plans to drastically revamp its UK Lloyd’s business Equity Red Star, shedding 175 of its broker partners in the UK and withdrawing almost entirely from its aggregated motor business after suffering considerable losses from bodily injury claims. In April 2011, a further 185 job cuts were announced in what was shrewdly described as “a widespread consultation”.

So when Wilkins stood before investors at the 14 June briefing and said: “We aim to return the UK business to profitability by 2012,” gasps could be heard from the audience in Sydney’s Westin Hotel. Famous for his slash-and-burn mentality, many market makers were expecting Wilkins to abandon the heavily flawed Equity Red Star business in favour of focusing solely on home soil.

Rumours continued to circulate in August about the imminent sale of its UK business, which IAG continues to deny.

Making the right moves

Interestingly, when asked about IAG’s UK plans, Wilkins bristles slightly. “We think we have taken all the actions that are necessary. We dropped a lot of business, we re-priced our portfolio and we strengthened a number of our internal disciplines. What we have said is that we expect to make a loss in the UK in the second half of our financial year.”

And there is one point Wilkins will not budge on – analysts need to keep their ladles out of the pot. “While I respect analysts, they don’t always appreciate how long it takes for price increases and other remedial actions to work their way through a portfolio.”

Wilkins’ defensiveness of the troubled UK arm is akin to a parent with a rebellious teenager – not surprising considering the state of the business that was left to him when former chief executive Michael Hawker quit in May 2008. Hawker, who hired Wilkins as chief operating officer in late 2007, resigned after reportedly losing the confidence of shareholders following the rejection of a final merger offer from potential suitor and fellow Australian insurer QBE Insurance.

Since then, Wilkins has battled to revive IAG’s fortunes using his own unique management style.

While some would expect the parent of an unruly teen to restrain and control, Wilkins, by his own admission, prefers to keep things at arm’s length.

“I believe you need to have decision-making as close to the end user as possible. I try to give as much authority and autonomy as I can to the leaders of the individual businesses within an agreed set of parameters.”

Wilkins pauses momentarily before adding: “I think it’s about creating the right environment for our people to succeed and to monitor the progress we are making against that.”

And on that note, Wilkins says “thank you” and ends the interview. Exactly 23 minutes are up and he has somewhere else to be. GR

30 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_28-30 Profile.indd 30

19/08/2011 12:46

ULTIMATE RISK SOLUTIONS YOUR KEYS TO GOOD DECISION MAKING

BREAKTHROUGH DYNAMIC FINANCIAL ANALYSIS (DFA) SOFTWARE THAT OUTPERFORMS ANY OTHER ON THE MARKET TODAY RISK EXPLORER™ • Solvency II compliant • Low startup and licensing fees • Point & click operation • Scaleable • Instant customer support • Easy to integrate with internal systems • Excellent references URS REAL WORLD™ • Global economic model essential for multi-national company decisions • Consistent economic scenarios for any future time horizon • Simulates economic scenarios in multiple world regions • Simulates effects of supply/demand shocks in economic zones • Simulates economic variables including GDP growth rate /inflation /wage growth / unemployment • Simulates investment as % of GDP/ interest rate yield curve /stock market indexes.

GR_Ad_Page.indd 1

THE RIGHT TOOL FOR THE RIGHT JOB. Over the past ten years, Ultimate Risk Solutions has been helping risk professionals stay ahead of the technology curve when it comes to making better business decisions. As an independent company with no ties to big brokerage or consulting firms, we’re focused on only one thing and that is providing the absolute best software solutions for our clients.

Risk Explorer ™ and Risk Explorer Express Edition ™ provide companies of any size the analytical power of the most sophisticated DFA models.

URS RealWorld™ is a global economic model that simulates macroeconomic variables that impact market value of company assets and, for multinationals, contribute to currency exchange risk.

Visit our website or contact us at info@ultirisk.com for detailed product information or to schedule a no-obligation demonstration.

URS Ultimate Risk Solutions, LLC

The Right Technology. The Right Answers. www.ultirisk.com • info@ultirisk.com

24/06/2011 10:15

Claims

Swept AWAY

Queensland has suffered its worst floods in living memory, but it’s not the first time the area has been devastated. As Lauren Gow finds, many of the consequences of the disaster could have been avoided, but where does responsibility lie?

Defining the terms

One area that requires full disclosure is the term ‘flood’, of which a definition has never

equally vulnerable in the recent floods by the lack of clarity.

Condamine “It is vital that we don’t use other Condamine River – 14.25m (46.8 ft) compound terms like ‘flash flood’ or ‘storm flooding’, as those terms confuse the picture,” Rockhampton says Sullivan. “The insurance industry has Fitzroy River – 9.2m (30ft) agreed to a common definition and is now Gayndah just waiting on the government to make a Burnett River – 18.25m (59.9ft) decision and roll that out as solution.”

Suncorp’s executive manager of personal Ipswich Gympie Bremer River insurance Stephen Jeffery agrees with this Mary River 19.4m (64ft) 8.5m (28ft) view. “The ICA and all insurers are in support Lockyer Valley Lockyer Creek - 18.9m (62ft) of that move, as it will help consumers understand what a flood is and what it is not.

In the current environment, insurers have Brisbane different interpretations of how their policies Brisbane River – 4.46m (14.6ft) respond to various conditions. But everyone Toowoomba being treated on the same basis would Gowrie Creek certainly help the claims process.”

8m (26ft) Encouragingly, submissions to the inquiry so far have all highlighted the need for been officially agreed upon by government government, consumers and the insurance and insurers. In 2008, the Insurance Council industry to work in unison to mitigate flood of Australia (ICA) put forward a proposal for risk. Each has an interlinked role to play, a common definition of inland flooding, but which Sullivan says is one of the core it was denied authorisation from the principles of the inquiry. “Insurance doesn’t consumer watchdog Australian Competition cause houses to flood. A failure by all to and Consumer Commission (ACCC) on the mitigate and plan properly and do basis that the proposal may actually create something about the flood issue in the first more confusion, rather than provide clarity place causes flood damage.” for consumers.

While a second round of hearings at the ICA general manager of risk and disaster Commission of Inquiry is due to begin on planning Karl Sullivan says the government 29 September, for the moment, there needs to define the term urgently, as appears to a universal calm ahead of the policyholders and insurers have been left next storm season in December.

Worst affected areas

PHOTOS: DAVE HUNT/AAP

“W

e’re nearly drowning. Hurry up!”

Thirteen-year-old Jordan Rice screams down the phone as he begs triple-0 emergency operators for help.

Seconds later, he and his mother Donna are swept to their deaths, while 10-year-old Blake Rice clings to the roof of the family’s Mercedes as it is swept down the main street of Toowoomba in the worst floods in living memory in Queensland.

The senseless deaths of Donna and Jordan Rice, alongside 35 others, as well as more than A$2.55bn (£1.62bn) in insured losses as a result of the floods in late December 2010 and January 2011, has sparked one of the largest independent government inquiries in Australian history.

The results of the Queensland Floods Commission of Inquiry, which began on 17 January 2011, are not due to be handed down until 24 February 2012. But insurers, consumers and local, state and federal governments are already learning lessons that could prevent the same magnitude of losses recurring in future.

There is a single word that continues to be raised from all three perspectives: disclosure. The need for full disclosure on all fronts appears to be the single most important technique in the prevention of future losses.

32 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_32-33 Claims.indd 32

19/08/2011 15:43

Claims

GOVERNMENT A change of mindset

35

ported in deaths re ods recent flo

CONSUMERS

PHOTOS: DAVE HUNT/AAP

Knowledge saves lives

Lack of awareness regarding flood risk became a matter of life and death for residents in Queensland, with many registering official complaints with the ICA and government following the floods.

Sullivan says: “A lot of people were not in the position to make an informed decision about whether they required flood insurance because they simply did not know they were at risk.”

Jeffery says the inquiry has drawn out a vital lesson that the insurance industry must understand from a consumer perspective – policyholders need their policies detailed in plain English.

“There has been a lot of focus around disclosure regimes and how transparent it is for people to understand the product and whether they are covered,” he says.

“There are measures proposed through government that we support, such as a summary of facts statement on the front of the product that highlights what key areas they are covered for and not covered for.

“There is a need for consumers to understand the products fully so they can make an informed decision of what they want.”

Chief executive of Australia’s largest general insurer IAG, Mike Wilkins, agrees.

But he also argues that the debate needs to be wider than just understanding insurance cover when discussing floods and policyholders.

“One of the issues with floods is that people were allowed to build in high-risk areas, sometimes being unaware of that,” Wilkins says. “The debate that we think needs to arise should include what governments and consumers can do together to help mitigate further flood damage.”

According to ICA reports, insurers largely support the need for government-led mitigation as it will assist in alleviating the burden facing the industry in times of catastrophe.

“The ICA is urging the government to have a fundamental rethink. Fix mitigation, fix land use planning, fix flood mapping and fix building codes,” Sullivan says.

“Make sure people who are living in flood risk zones are informed. Once all of that is fixed, insurers will be in a position to insure correctly and properly.”

The last large-scale flood event in Queensland was in Brisbane in 1974, with more than 7,000 homes and businesses destroyed and 14 fatalities. Amazingly, building codes in the intervening years between then and now have not prevented residential and commercial buildings being built in known high-risk areas.

Jeffery says he is flabbergasted at the lack of government planning. “When we talk about mitigation, clearly dams and levees are a factor, but the most important thing is ensuring people do not build in those areas. The minister for environment in 1974 said: ‘Flood plains are for floods, not houses.’ I think we have forgotten this in the intervening time.”

In its submission to the government inquiry, Suncorp has requested the government increase focus on planning and building codes, particularly in terms of how high homes are built and what floor height is necessary in certain areas.

A$2.55

bn

total in Dec 20 sured losses 10-Jan 2011

INSURERS

At what cost?

For insurers, the biggest lesson to come out of the Queensland flood inquiry is the pricing of risk, which comes back to the availability of accurate data.

For five years, the ICA has battled local governments to make all flood maps available to insurers. All local councils in Australia, barring some in Queensland, have made their flood maps available for use in the centralised ICA National Flood Information Database.

But insurers are fighting an uphill battle in forcing Queensland local governments to disclose flood maps. “The reason they resist handing over the maps is some don’t believe that insurers should be given that data because they might price the product accordingly,” says Sullivan.

“Other councils believe they might have liability issues from property owners who suddenly discover they are on flood-prone land, and others are concerned that they would be held accountable by insurers for errors or mistakes in the flood mapping.”

Sullivan argues that while there is some validity to these concerns, the excuses are largely baseless as the ICA indemnifies local councils for any liability for flood maps once they have been handed over.

While Suncorp provides flood cover in Queensland, Wilkins says without floodrelated data, IAG is unable to follow suit.

“In Queensland, with the data that was available to us, we just feel we cannot quantify the risks appropriately for us to be able to offer flood cover.” s s e in Jeffery says insurers can only s u db homes an bane floods work within the boundaries they 74 Bris have been given. “We need everyone lost in 19 else to come to the party around risk management. We can provide products to rebuild people’s homes, but the best case is for the house to not be flooded in the first place.” GR

7,000

GLOBAL REINSURANCE SEPTEMBER 2011 33

GR_32-33 Claims.indd 33

19/08/2011 15:44

Cedants With some reinsurers playing it ‘fast and loose’, XL Insurance’s global head of ceded reinsurance explains why he prefers a more traditional approach

&A Q Rob WITH

Andrews

‘Pricing grabs most of the headlines

because it’s the one element to which we can all relate’

PHOTO: YIANNIS KATSARIS

Rob Andrews started his insurance career in claims at US insurance heavyweight Liberty Mutual. He later switched to underwriting to broaden his horizons.

Before long, Andrews’ talents were noticed by the ceded reinsurance department. As is often the case, one thing led to another, and today he manages the global ceded reinsurance department for XL Insurance, the global primary insurance division of the Bermuda-based XL Group.

As might be expected with a company that writes a full range of business lines in 20 countries, the job of buying reinsurance is diverse.

Andrews’ division operates out of offices in the USA, the UK, Switzerland and India to support XL Insurance’s underwriting around the world. It should come as no surprise, therefore, that Andrews has never experienced what many would describe as an ‘average’ day.

34 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_34-35 Cedants QA.indd 34

19/08/2011 14:07

Cedants Here, he explains to Global Reinsurance why XL chose traditional reinsurance over catastrophe bonds and describes the disruptive influence of “fast and loose” reinsurers.

Q. How would you describe the current pricing situation in the reinsurance market?

A.

We are in a soft market but it’s slightly different from others we’ve historically witnessed. To my mind, we’re embedded in a soft market when we see stepped erosion in pricing, limits management and terms. In this cycle, reinsurance rates have been steadily declining across the market for the past five years, and I have seen some loosening of limits, but contract terms have remained largely stable.

Notable exceptions over this period have been in marine immediately following Deepwater Horizon and, more recently, when property rates began rising in May in response to the plethora of worldwide losses in 2010 and early 2011.

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

A.

Central to our buying philosophy is maintaining a balance between our capital strength, risk management and business objectives. In practical terms, that means fully understanding our exposures so we can construct programmes that protect our capital, dampen volatility and support our business heads’ ability to compete successfully in their market segments.

‘Alignment is more elusive than you’d think.

Fundamentally, reinsurance is a trade of underwriting risk for credit risk.

Ensuring success means we need to be fully transparent’

A.

Pricing grabs most of the headlines because it’s the one element to which we can all relate. As a buyer, low prices certainly beat the alternative, but they’ve not caused us to depart meaningfully from our normal buying practices.

As ever, we balance market pricing with our capital strength to achieve the best landing spot in terms of retentions and limits. What I have observed is how it has encouraged the market to develop new products and /or bring previously unattractively-priced products back to the table for discussion. This is a positive trend that I hope continues.

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

A.

Dialogue, diligence, the right tools, determination and a commitment to the company’s objectives. And, depending on the market cycle, a fair amount of stamina and good humour doesn’t hurt either.

Building articulate reinsurance solutions requires a team of highly skilled reinsurance professionals who work closely with the business units, risk management, actuarial, finance and others to understand the risk being assumed and to find the best approaches and structures.

While there are still details to be finalised by the regulators, my initial impression is that Solvency II should be broadly similar to what we experienced after the financial crisis.

From an operational standpoint, we have well-documented processes and procedures, and we routinely audit our key financial controls. Procedurally, our ceded underwriting team employs catastrophe, risk and capital models to help them assess our exposures, which fits nicely with our focus on protecting capital and executing on XL’s enterprise risk management strategies.

While we purchase treaties on a global basis, we are always mindful that they equally must meet the regulatory needs of our various legal entities. I expect that Solvency II may require some minor adjustments to ensure we continue to hit the mark.

Q. How has the current pricing affected your buying strategy?

Q: How much premium do you cede to reinsurers?

Q.

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

A.

A.

For 2011 we’re estimating a treaty spend of around $600m.

Q.

To what extent do you make use of alternative reinsurance structures, such as catastrophe bonds?

A.

We evaluate all alternatives when developing reinsurance solutions. In fact, we considered a cat bond this year, but ultimately determined that a more traditional reinsurance approach provided us with a better balance of coverage, basis risk and pricing.

Q. What do you most look for in reinsurers?

A.

XL HUNTS NEW P&C HEAD FIND OUT MORE ONLINE

goo.gl/5CnJf

Alignment. That sounds simple enough and you’ll see it mentioned in various marketing literature, but it is actually more elusive than you would think.

Fundamentally, reinsurance is a trade of underwriting risk for credit risk. Ensuring success means we need to be fully transparent about the exposures we wish to cede and reinsurers must convince us they’ll fully execute on the promise they make even if that doesn’t occur until years later.

Reinsurers that are truly aligned are in sync with, and support, what the company is trying to accomplish and are therefore consistent in their capacity, services, pricing and terms.

Nothing frustrates the process more than when we observe reinsurers playing fast and loose with their support or taking arbitrary positions on contract terms such that it causes non-concurrency in coverage or increases processing costs.

Q: How is the success (or otherwise) of your reinsurance purchasing measured?

A.

The truest measure is the one you would prefer never to test: did the covers perform as you expected after a loss? XL Insurance is a specialty commercial underwriter, so many of the products we sell are long-tailed. Consequently, our primary measuring stick is assessing whether the covers model such that they achieve our objectives.

As you would imagine, we don’t rely on a single metric or model, but rather employ a blended approach to account for intricacies.

Based on the losses that have emerged to date, we are comfortable that we are on target. GR GLOBAL REINSURANCE SEPTEMBER 2011 35

GR_34-35 Cedants QA.indd 35

19/08/2011 14:07

11 TH -13 TH M A RC H 2 012 R I T Z CA RLTO N, D O H A HOSTED BY

ORGANISED BY

Promoting thought leadership in (re)insurance BUSINESS PROGRAMME Incorporating a world-class international business programme, Multaqa Qatar 2012 brings together the leading minds in international insurance and reinsurance to examine the challenges and opportunities facing the industry.

NETWORKING PROGRAMME Meet with your peers and make new business partnerships through a series of networking and leisure events specifically designed to facilitate business networking.

THE SIXTH ANNUAL MULTAQA QATAR CONFERENCE Hosted by the Qatar Financial Centre Authority and organised by Global Reinsurance, Multaqa Qatar is the Middle Eastâ&#x20AC;&#x2122;s leading insurance and reinsurance event.

APPLY FOR YOUR INVITATION Now in its sixth year, Multaqa Qatar promotes thought leadership in (re)insurance, providing an important platform for local, regional and

Attendance to Multaqa Qatar 2012 is by

international decision-makers to come together and shape the direction of the

invitation only.

industry.

To register your interest in attending visit

Combining a world-class business programme, structured networking, leisure

www.globalreinsurance/qatar

activities and a truly international audience, Multaqa Qatar is the perfect place

or call Debbie Kidman on

to do business.

00 44 (0) 20 7618 3094

For the latest speaker updates visit:

QatarVI_GR_19Aug.indd 1

www.globalreinsurance.com/qatar

19/08/2011 14:25

Country Focus COUNTRY FOCUS

INDIA

A tough proposition Insurance in India is booming. But many obstacles, not least the continued dominance of state-owned behemoth GIC, make the reinsurance market a nerve-wracking prospect for foreign entrants. Mark Leftly reports GLOBAL REINSURANCE SEPTEMBER 2011 37

GR_37-39 Country.indd 37

19/08/2011 12:49

Country Focus

I

The wait for change

Prior to the 1999 act, GIC was an amalgamation of 107 general insurers that were nationalised 27 years earlier. Upon privatisation, GIC was charged with developing the reinsurance market.

A domestic insurer can go to the liaison office of a Munich Re or an ACR, where their local representatives

‘Really, it is the unions within India’s reinsurance sector that feel threatened by foreign ownership’ Maurice Williams, Willis Re

will act as a conduit to underwriting offices in nearby countries.

The long-awaited Insurance Laws (Amendment) Bill 2008 would change this, meaning that foreign rivals could formally set up in India. Lloyd’s of London would also be recognised as a branch of a foreign reinsurer.

“This system will eventually change,” broker RFIB’s divisional director for India, Kishor Gohil, says. “GIC has given its blessing, as they feel that a wider choice of reinsurer will be of benefit to the market.”

GIC can hardly protest at foreign competition, given that the group has expanded overseas to the extent that, by last year, 43% of premiums came from outside India, with presences as far afield as Brazil and Russia. In 2008, GIC also indicated its willingness to work with potential new entrants to the market by signing a tie-up to develop life reinsurance with Hannover Re. But Gohil warns that the law may still not come into force for a few years yet, despite hopes that the bill might finally be passed by the end of 2011.

“India is not very quick at this kind of

thing. If anything, it is very slow,” he says.

Willis Re’s managing director of Asia, Middle East, Turkey & Africa, Maurice Williams, agrees, adding: “Really it is the unions within the reinsurance sector that feel threatened by foreign ownership.”

Not enough freedom

When the law is passed, it will also change the level of ownership that foreign insurers can have of an Indian venture, from 26% to 49%. The balance has to be owned by a domestic insurer.

So, even if reinsurers are granted a foothold in the market, they will still own less than half of their venture.

Worse still, this business would have a distinct credit rating to that of the parent company.

“None of the reinsurers would be happy with their name on a separately rated entity,” Williams argues. “They would have to put a lot of capital into it to get the same rating [as the group].”

Also, reinsurers would only be permitted to invest in government bonds. While it is true that the bonds pay out reasonably well at 7%-9%, reinsurance companies like to invest in a wide range of financial products to spread their risk.

For an insurer, a population of 1.2 billion in what is still an underdeveloped market, despite being the 10th biggest for the industry globally, plus that near doubling of permitted ownership, is an exciting prospect.

But for a reinsurer looking to maximise its balance sheet, it might as well keep its capital and write business through its intermediaries in the liaison

PHOTOS: GETTY IMAGES

ndia has proven remarkably resilient during the economic downturn. While virtually every western nation has counted the pennies hoping to find even the barest hint of economic growth, the International Monetary Fund found that India had increased gross domestic product by an average of 8.3% in 2005-10.

This has helped the insurance sector to continue its powerful rise since the liberalisation of the market under the Insurance Regulatory & Development Authority Act in 1999, when the government monopoly was smashed and brokers were permitted to operate. General insurance is growing around 20% year-on-year, boosted by a growing middle class and a youth that is more aware of the benefits of such policies than previous generations.

No less than Warren Buffett has noted the opportunities in the Indian market, his Berkshire Hathaway empire agreeing to become a corporate agent of Bajaj Allianz General Insurance Company earlier this year.

The growing strength of the primary market has piqued the interest of foreign reinsurers. The likes of Swiss Re, Munich Re, Hannover Re, SCOR and private equity-owned Asia Capital Reinsurance Group (ACR) have opened representative offices in the country in recent years.

This is despite the presence of government-owned General Insurance Corporation of India (GIC), its market dominance demonstrated by the fact that it had net earned premium of Rs8,076 crore ($1.79bn) in 2010. To put the figure in context, that is more than one-fifth of SCOR’s global net earned premium last year.

This is not in fact an open market for foreign reinsurers. They are not allowed to set up branches in India: their teams on the ground effectively act as intermediaries to help primary players access reinsurance in other territories.

And even a raft of proposed regulatory changes is unlikely to prove attractive enough to entice reinsurers to set up shop in India any time soon.

38 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_37-39 Country.indd 38

19/08/2011 12:49

Country Focus

COUNTRY FOCUS

India

Reforms of India’s non-life insurance market has produced substantial progress in all lines since the turn of the century. The market received another boost in 2007 with the detariffication of key classes of business. India’s motor insurance has 46% of total market share. Property insurance and health sectors have 18% each.

Population: 1.21 billion GDP: $4.060 trillion GWP: $6.4bn

offices. Even if a reinsurer looked at using India as a regional hub, particularly as a way into the Middle East and North Africa, Williams says that the opportunities might not be enough to offset these problems.

State barriers

GIC, with its in-built monopoly, remains a huge obstacle. Head of the analytics team at the Asia Pacific division of rating agency AM Best, MoungMo Lee, points out that GIC has made efforts to act more like a private sector group, saying: “Recently, reinsurers tried to introduce some discipline to steer the market into the right direction – that of commission, capacity.”

For example, GIC has reduced ceding commission – the amount paid to primary insurers in compensation for placing business with the reinsurer – to as little as 3%-5%.

Regulators have also tried to create a more market-driven insurance market, which in theory should entice reinsurers. For example, the fixed tariffs for the lines that made up the bulk of general insurers’ business, including fire and workers’ compensation, were removed in 2007 and prices allowed to float according to demand.

But this has been undermined by the third-party motor insurance pool, which was introduced that same year.

Even though more than 80% of motor business was with four state-run insurers, private groups had to sign up to this pool.

Rather than losses being split among those that provided motor cover, they were divided proportionately to that business’s share of the overall

Major exports: petroleum products, precious stones, machinery, iron and steel, chemicals, vehicles, apparel

captured in the past. You need to verify the data, but people have usually entered it manually.”

The GIC has long relationships with insurers, so will have been able to ask questions and update its records. The quality of the data will be far better than that which reinsurers possess when they first establish an office in India, which could lead to decisions that look safe on paper actually leading to losses.

insurance market. Private companies were effectively subsidising massive losses made by state-run entities in a sector to which they had actually limited their exposure. “With the creation of the third-party motor pool, the private sector slowed their growth,” Lee says.

The GIC administers the pool.

Couple that with the feeling that the GIC’s more disciplined terms are still not as market-conditioned as major reinsurers would like, there remains nervousness over the way the industry is run in India.

Blind to concerns?

The 10% rule

What compounds these concerns is that private and public insurers are obliged to place at least 10% of their business with GIC. In fairness, this has reduced from 20% and is common to some other emerging markets.

Senior director in the Asia Pacific insurance team at Fitch Ratings Jeffrey Liew says: “As the country opens up, eventually that figure will become zero.

Primary insurers will have the option to go with other reinsurers.”

Even if that happens, Liew’s colleague Terrence Wong points out that any reinsurer that does decide to set up in India faces having far less accurate data than GIC. Much of the data on policyholders will be out-of-date, particularly in the vast rural areas.

“The Indian market is in line with some of the developing markets – it is difficult to verify the data properly,” Wong explains.

“Some reinsurance companies have tried to use IT as a tool to improve data quality. But it is about what has been

1 APRIL RENEWALS: ACTING LOCAL FIND OUT MORE ONLINE

goo.gl/sNg1U

Open to competition though it might be, GIC does not seem to understand the fears of its potential rivals. In an interview this summer, GIC chairman Yogesh Lohiya argued that his organisation was losing out.

“The market is open,” Lohiya was quoted as saying. “Every other country specifies some guarantee or some restrictions.”

Because foreign reinsurers can set up liaison offices, they are indeed not subject to the same regulation as GIC, and they also do not have to pay a portion of their premium, as is the case in other countries, like Malaysia. Foreign reinsurers, then, have their own advantages over GIC, and there are aspects that make the market more attractive than others in Asia.

Lohiya is, of course, going to defend GIC and indeed makes some valid points. His logic might well still be compelling when that bill is finally passed – it may be better to just have a few intermediaries on the ground rather than to go through the potentially risky business of establishing operations in India. GR GLOBAL REINSURANCE SEPTEMBER 2011 39

GR_37-39 Country.indd 39

19/08/2011 12:49

Rewind

Monty

Champers, money, gossip, tactless remarks … Some things never change. Or do they?

Season’s greetings

Speak your mind

Ah, Monte Carlo, the longed-for September Rendez-Vous. I can almost hear the sounds of champagne corks popping, old chaps chatting, underwriters talking up rates, brokers talking ’em down. Even more than the fi rst sip of fizz at the Guy Carp bash, I love the rumours that do the rounds. Ajit Jain spotted hobnobbing with Mike McGavick? There’ll be a merger in the works.

Grahame Chilton shooting the breeze with Dominic Burke? Watch this space. This year, though, I reckon the most frenzied speculation will centre on M&A in Lloyd’s – and quite right too. It’s only a matter of time before more deals are done in Lime Street, many of them cut in the Café de Paris.

One thing’s for sure – Matthew Fosh won’t be buying his own drinks.

Loose lips sink … insurers. Rumour has it that US insurer Allstate unceremoniously sacked Joseph Lacher, president of its home and motor insurance arm Northbrook, after an unfortunate case of loose lips. After months of in-fighting between Lacher and Allstate chairman Tom Wilson, Lacher let his true feelings about Wilson be known, describing him as a “f**king a**hole” to a group of Allstate brokers in a bar at the RitzCarlton, Florida. With just two words, Lacher lost his $3.2m job and ended a 20-month career at Allstate. Let’s raise a glass to the one man in our industry who has done what some of us only dream of.

Gardening leave

Alterra firma

Talking of Monte, I wonder whether my old friend John Berger will put in an appearance? It’s not like John to miss a gathering of the great and the good, and this could be the perfect opportunity to make his next move.

Because whatever the talk of a ‘merger of equals’, it seems Berger stayed at Alterra for only as long as was strictly necessary after the sale of Harbor Point.

And now? To oceans new …

Mine’s a ginger ale

That insurance tradition of long, boozy lunches has just been broken, and I for one am not happy.

I recently met with a member of a London market insurance broker that has banned its staff from drinking during office hours. The gent told me, while ruefully sipping European mineral water, that apparently the banning of all drinking was seen as a better alternative to setting limits. At least there’ll be a lot of cheap dates in these tough economic times.

The insurance tradition of long, boozy lunches has just been broken

To those not stationed there, working life on Bermuda must seem cushy. But it’s not all sitting about in shorts in a tropical paradise making lots of money; there are hurricanes too. The guys there were reminded of this when tropical storm Gert nearly hit the island in mid-August.

But some were pretty stoic about it. One Bermuda-based reinsurance exec told me: “I’d sooner clean up my back garden than my balance sheet.”

Beats living in Florida, I guess, where you might end up having to do both.

Taxing times

As regular readers know, I’ve been a bit worried about Warren Buffett losing his touch. After seeing his article in The New York Times about the super-rich paying more tax, I’m convinced he’s gone soft. I thought the idea of being rich was that no one could tell you what to do, especially the tax man. Perhaps I should rethink my career. Not so long ago you could buy t-shirts declaring “greed is good” from the Berkshire website. These are now conspicuously absent. Ah, the good old days … GR

40 SEPTEMBER 2011 GLOBAL REINSURANCE

GR_40 Monty.indd 40

19/08/2011 14:08

ENLIGHTENED SOLUTIONS FOR EXTREME RISKS

Willis Re harnesses the power of its 182 years of reinsurance knowledge and its cuttingedge analytics, to provide clients with a sophisticated understanding of their risks and intelligent and practical solutions to manage their risk outcomes.

Willis Re The Willis Building 51 Lime Street London, EC3M 7DQ United Kingdom Tel: +44 (0)20 3124 6000 Fax: +44 (0)20 3124 8223

Willis Re Inc. One World Financial Center 200 Liberty Street 3rd Floor New York, NY 10281 United States Tel: +1 (212)915 7600

www.willisre.com

GR_Ad_Page.indd 1

10/08/2011 10:05

Your forecast: Clear and Stable

In the world of risk management, it takes clear vision to build effective solutions to complex challenges. Alterra is a market-leading, global enterprise ready to offer you a wide range of reliable specialty insurance and reinsurance products. Superior financial strength. Excellent ratings.

Disciplined underwriting. It’s clear to us. Let’s make it clear for you. // www.alterracap.com

Better talent. Better results.

Specialty Insurance & Reinsurance

GR_Ad_Page.indd 1

Ratings: A.M. Best: A / S&P: A- / Fitch: A / Moody’s: A3

19/08/2011 14:38