Global Reinsurance May 2011

MAY 2011

BRAZIL BACKLASH Reinsurers revolt against the country’s new rules

RISING TENSIONS What the Libya situation means for (re)insurers

STAYING POWER David Cash outlines Endurance’s ambitions

G LOBAL RE I NSU RANCE.COM

Harsh lessons What the industry can learn from Japan’s tragedy

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Cover image: Press Association

Do cedants really need the reinsurance equivalent of Thomas Edison assuming their risk?

Leader

Just as all apartments built these days need to be ‘luxury’ – and indeed all large reinsurance brokers ‘trusted advisers’ – reinsurers feel the need to position themselves as innovative.

Google ‘innovative reinsurer’ and you’ll see what I mean.

Innovation is widely seen as something the reinsurance market should be doing, and some contend that it has been doing too little of it in recent years. Many will remember Guy Carpenter’s head of international operations Henry Keeling scolding reinsurers in Monte Carlo last year for giving excess capital back to shareholders when they could have spent it breaking new ground.

However, do cedants really need the reinsurance equivalent of Thomas Edison assuming their risk and ultimately paying their claims? As any inventor will tell you, being truly innovative is a risky business. In the quest to create the perfect product or widget, many attempts will fail.

For reinsurers, a misfi ring invention can mean paying out too many claims. While the client may benefit

in the short term from such a failure, it will affect the stability of their risk carrier.

Arguably, the last thing reinsurers need is the risk of backfi ring new products on top of the insurance and asset risks they already assume.

I think I understand what the industry is driving at with its persistent references to innovation.

Rather than inventing entirely new ways to cover risk, reinsurers are adept at matching coverage to clients’ individual needs and risk profi les. This type of innovation, perhaps better termed as tailoring, is part of the industry’s backbone. It is definitely attractive to cedants.

But despite urges from several sides for reinsurers to don white aprons and get into the lab, they should avoid getting too clever for their own good. In the uncertain times that the global (re)insurance industry faces, clients are likely to favour brawn over brains.

Ben Dyson Assistant editor Global Reinsurance GLOBAL REINSURANCE MAY 2011 1

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May David Cash, page 20

G LOBAL RE I NSU RANCE.COM

Lines & Risks, page 24

MultaQa Qatar, page 27

News

Cedants

1

Leader

22 Q&A

4

News digest

8

News analysis

Will Warren Buffett aid India investment?

10 News analysis

High levels of capital are keeping rates flat

12 News analysis

Brazil’s new rules could harm its progress

14 News agenda

How the Japan tragedy will change the industry

19 Up the ladder

24 On a knife edge

Civil unrest means reviewed risk pricing

Special Report 28 Talking heads

Industry leaders debate Middle East issues Can Qatar fulfi l your business wish list?

33 Motivations to merge

The balance of public v private liability

34 The big picture

Debating the conditions for M&A

The global influences affecting the GCC

Bill Keogh on his route to the top

20 Scaled for success 40 Diary

Lines & Risks

32 Wishful thinking

People & Opinion 18 Franklin Nutter

Markel’s Jeremy Brazil looks for value, not price

Endurance’s David Cash goes organic

Monty decides it’s time he lived the high life

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

Sales director Jonathan Trinder Tel +44 (0)20 7618 3423 Email jonathan.trinder@globalreinsurance.com

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

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

Group production editor Áine Kelly Email aine.kelly@globalreinsurance.com Deputy chief sub-editor Laura Sharp Email laura.sharp@globalreinsurance.com Art editor (group) Clayton Crabtree Email clayton.crabtree@globalreinsurance.com

Managing director Tim Whitehouse Group production manager Tricia McBride Senior production controller Gareth Kime Digital content manager Michael Sharp Head of events Debbie Kidman

Country Focus 37 Eye of the storm

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

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2 MAY 2011 GLOBAL REINSURANCE

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News Digest Air France crash: missing wreakage found two ye a

RBS MERGES COMPANIES TO SAVE FOR EU’S SOLVENCY II Royal Bank of Scotland Insurance is rolling the underwriting arms of Direct Line (DLI), Churchill (CIC) and the National Insurance and Guarantee Corporation (NIG) into UK Insurance Ltd (UKI) to save costs ahead of Solvency II, reported Insurance Times. The move will mean RBSI can cut out red tape and save administrative expenses, as it is now running one company with the capital and underwriting skill set instead of four, ahead of Solvency II’s implementation at the end of 2012.

A spokesman said: “We are proposing to transfer the insurance business of DLI, CIC and NIG into UKI using the business transfer process provided for by Part VII of the Financial Services and Markets Act 2000. Norton Rose LLP and PricewaterhouseCoopers are assisting RBS Insurance with this piece of work.” (goo.gl/tIK9s) LLOYD’S LAUNCH IN RUSSIA Chaucer Syndicates and RFIB have partnered with Moscowbased Nakhodka Re to launch Sea Line – the first Lloyd’s coverholder in Russia, reported Post. Chaucer and RFIB acted as sponsors to Lloyd’s for Sea Line, which received Lloyd’s coverholder approval on 31 March. Russian reinsurer Nakhodka Re owns Sea Line, which will underwrite cargo reinsurance risks in the CIS region. RFIB Holdings director John Metcalfe said: “We very much look forward to working with Chaucer and Sea Line and are proud that together we have achieved the milestone of launching the first Lloyd’s coverholder in Russia.”

A ABOUT GOO.GL: Type the goo.gl address into your web browser to access our recommended articles from globalreinsurance.com and its sister titles

Capital QUAKE DAMAGE TO BOND Investors in Munich Re’s Muteki catastrophe bond could face a complete loss of their investment as a result of the 11 March Japan earthquake, according to rating agency Moody’s, reported Global Reinsurance. Moody’s has downgraded the class A notes, first issued on 14 May 2008, to C(sf) from Ba2(sf). The bond scheme protects Munich Re against exposures it has assumed by providing earthquake reinsurance to Japanese agricultural mutual insurer Zenkyoren. Based on calculations performed on seismic data from earthquake data provider K-Net, Moody’s expects losses from the 11 March earthquake will breach the bonds’ trigger point and reach the exhaustion level, which will likely result in “complete loss of principal to class A noteholders”. (goo.gl/P0ROu)

M&A TAWA BUYS 51% IN US FIRM Run-off specialist Tawa said it will acquire a 51% stake in a new US holding firm, LGIC Holdings LLC, for $1, reported Global Reinsurance. Subject to regulatory approval, LGIC will acquire most of Walshire General Assurance Company, the sole shareholder of Lincoln General Insurance Company. The other investor in LGIC will be Kingsway Financial Services Inc, the former indirect owner of Walshire General Assurance Company.

Lincoln General, in run-off since 2009, reported statutory gross assets of $412m and net assets of $3.2m in late 2010. Previously Lincoln General wrote a broad book of commercial and personal lines insurance. After allowing for fair value adjustments, Tawa said it expects the transaction will have little impact on net assets. (goo.gl/KedmD)

BRIT GOES PRIVATE Lloyd’s insurer Brit has delisted its shares as it enters the fi nal stage of its acquisition by private equity consortium Achilles, reported Insurance Times. Brit’s listing has been cancelled and the shares are now no longer available for trading on the London Stock Exchange.

Achilles’ offer for Brit was declared wholly unconditional on 10 March, and closed on 26 March. The delisting brings an end to the Brit takeover story, which began last summer when the insurer rejected a £10-a-share offer from private equity fi rm Apollo in June. Apollo went on to form Achilles with fellow private equity fi rm CVC Capital Partners.

Brit eventually accepted an £11-a-share offer from the Achilles consortium in October last year, which comprised a $10.45-a-share base amount, a 30p-a-share capital distribution to shareholders and a 25p-ashare contingent amount payable if Brit’s year-end 2010 net tangible asset value exceeded £11 a share. Brit’s year-end net tangible assets came in at £11.21 a share, allowing it to earn the full amount. (goo.gl/UUrzN)

PHOTO: AP PHOTO/ROBERTO CANDIA

Insurers

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News Digest e ars on

PLANE WREAK SPOTTED The remaining wreckage of Air France flight 447 was finally located in April, almost two years after the June 2009 crash over the Atlantic ocean.

A search boat funded by Airbus and Air France aims to retrieve flight recorders from the crash. Investigators hope to recover the recorders to establish the cause of the crash.

The Airbus A330-200 went down on 1 June 2009, after it left Rio de Janeiro headed for Paris Charles de Gaulle airport, killing all 228 people on board.

Claims ZURICH’S ASIA-PACIFIC LOSS Five natural disasters in the AsiaPacific region in the first three months of 2011 are likely to cost Zurich Financial Services Group $500m, the firm said on 31 March, reported Geneva Lunch. The figure represents an amount net of reinsurance, before tax, and are estimates only. The firm cautions: “The full loss assessment, and therefore the ultimate cost, will take time to complete due to the extreme nature of the losses and the limited access to the damaged areas particularly in Japan but also in New Zealand.” The events are: the Brisbane floods, the Victoria storms and cyclone Yasi in Australia in January and February, the earthquake in Christchurch, New Zealand in late February and Japan’s earthquake and tsunami. The losses will be recorded in the first quarter results 2011, released 5 May.

AFTERSHOCKS ROCK JAPAN More than 830 aftershocks followed Japan’s 11 March earthquake, causing damage to at least 203,000 homes, Aon Benfield has estimated. According to the broker’s report, the World Bank has estimated insured losses between $14bn and $33bn, while Japan’s government has estimated total economic losses of between $198bn and $309bn, reported Global Reinsurance.

Tsunami waves from the Japan earthquake crossed the Pacific Ocean and caused a combined $88.4m in damage to coastal locations of Hawaii and California in the USA. Additional tsunami damage to more than 500 homes was recorded in Peru and Chile. (goo.gl/glJU6)

View from Insurance Times: Discount rate ‘The projected insured and economic losses from 2010-11 are staggering’ Franklin Nutter, RAA

>>> see People & Opinion, page 18 TRH CATASTROPHE UPDATE Transatlantic Holdings has updated its preliminary estimate of first-quarter catastrophe costs to include the earthquake in Japan, reported Post. TRH said it expects to incur total net disaster costs in the first quarter of 2011 of $355m, net of tax, based on its preliminary assessment of all catastrophe events in the quarter.

The total includes costs related to the Tohoku earthquake and tsunami off the coast of northeast Japan of $240m, net of tax, and contributes to a industry loss of $25bn-$30bn. It also includes a present estimate of events in Australia and the February earthquake in Christchurch, New Zealand of $115m, net of tax.

NOVAE TALLIES PACIFIC LOSS Lloyd’s insurer Novae expects its net loss from the 11 March Japanese earthquake and tsunami to total between $25m and $40m, reported Global Reinsurance. The estimate is based on an industry-wide insured loss of $20bn-$30bn.

Novae has also revealed that it expects a $10m hit from the flooding and cyclone Yasi in Australia, and a $25m-$30m bill from February’s earthquake in New Zealand. The new Zealand loss estimate is based on an industry-wide figure of $12bn.

The combined events put Novae’s losses from 2011 catastrophes at $60m-$80m. (goo.gl/tGc7z)

Lloyd’s global spread Total business by region:

Source: Lloyd’s UK

20%

US & Canada

Europe

16%

43%

Central Asia & Asia Pacific

10% Rest of the world

4% Other Americas

7%

Class breakdown by region: Reinsurance Property Casualty Marine Energy Motor Aviation All classes

USA & Canada

Other Americas

UK

30% 31% 20% 6% 10% 1% 2% 43%

75% 7% 8% 4% 4% 1% 1% 7%

29% 20% 22% 5% 2% 21% 1% 20%

Europe

38% 14% 18% 17% 7% 1% 5% 16%

Central Asia & Rest of Asia Pacific the world

46% 14% 28% 6% 3% 1% 2% 10%

62% 8% 12% 7% 3% 2% 6% 4%

Total

37% 22% 20% 7% 6% 5% 3% 100%

The day of reckoning draws close for insurers after the Association of Personal Injury Lawyers (APIL) launched a judicial review of lord chancellor Ken Clarke’s evasion on altering the discount rate.

The government will now almost certainly challenge APIL at the High Court and the result should be known in the summer.

If APIL wins, Clarke will be forced to decide. Even a 1% reduction in the rate from 2.5% to 1.5% could cost insurers millions, especially when lump sum payments are ballooning.

However, Clarke will be loath to trim the discount rate as that will be followed across all government departments and could mean higher bills for the NHS when it settles claims.

Stephensons head of litigation Andrew Welch says: “Judicial reviews tend not to be successful – put it this way, they are far from a guaranteed result.

APIL will have to prove that the chancellor has acted irrationally by not making a decision sooner.”

The discount rate is used to decide the amount taken from an injured person’s compensation to account for income from investing the damages. The rate was set in 2001, when yields on gilts were put at 2.5%, but APIL argues that yields have collapsed in the last three years to less than 1%.

Insurers argue investment returns should be viewed across 20 to 30 years, and it is unlikely that interest rates will stay low over such a long period.

“I would imagine if the judicial review is successful, the lord chancellor would consider both arguments carefully,” Welch says.

In theory, he adds, insurers could launch their own judicial review if the lord chancellor cuts the discount rate, but it will be hard to prove he had acted irrationally.

For more news and views from the general insurance industry, visit:

.co.uk

GLOBAL REINSURANCE MAY 2011 5

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News Digest Upgraded: Japan’s nuclear crisis raised to Chernob People

‘Companies have to reprioritise around the fact we are now in a soft market’ David Cash, Endurance

>>> see Profile, page 20

JAPAN DAMAGES HIT $300BN Following two large aftershocks in early April, Japan has now raised the severity of its nuclear crisis at the Fukushima Daiichi nuclear plant to a level 7 from 5, placing it on par with the Chernobyl nuclear disaster in 1986.

The Japanese government has also said the total damage bill for the 11 March earthquake, tsunami and resulting aftershocks could top ¥25 trillion ($300bn), making it the costliest natural disaster on record.

Lloyd’s insurers Omega and Novae estimated that the 11 March earthquake and tsunami in Japan will cost them $23.6m and $25m-$40m, respectively. >>> see News Agenda, page 14

BRIT APPOINTS GERHARDT Lloyd’s insurer Brit has appointed Hans-Peter Gerhardt as a nonexecutive director, reported Global Reinsurance. Gerhardt was the chief executive of Paris Re, a firm he created in 2006 to acquire the business and management team of AXA Re, the reinsurance arm of French insurance group AXA. Bermudabased reinsurer PartnerRe bought Paris Re in 2009 and Gerhardt stepped down from the helm of Paris Re in June 2010 after the merger was complete.

Gerhardt has held other senior management and underwriting roles, including vice-chairman of the board of executive directors of Cologne Re and chairman of Faraday. “I welcome Peter to the board and I know that his in-depth industry experience and underwriting perspective will be of great value,” said Brit chief executive Dane Douetil in a statement. (goo.gl/NNOhi)

JLT RE HIRES FORMER WILLIS CHIEFS IN CENTRAL EUROPE Broker JLT Re has hired two former Willis directors to strengthen its central and eastern European capabilities, reported Global Reinsurance.

Former Willis executive director Guy Hudson has been appointed partner, along with former Willis divisional director Russell Henwood, who has been appointed associate. JLT Re board member Bradley Maltese said: “Both these excellent practitioners have joined JLT Re’s non-marine treaty team, and while building on our European practice they will also broaden our international reinsurance offering as we continue to expand.” At Willis, Hudson was responsible for placing reinsurance programmes on behalf of central and eastern European insurers. Henwood worked in the reinsurance division. (goo.gl/yr4ff)

Reinsurers NEW ALTERRA SIDECAR TO START WRITING ON 1 MAY New Point IV, the new sidecar set up by Bermudan reinsurer Alterra, will start writing on 1 May, reported Global Reinsurance. Alterra Agency Ltd, an Alterra subsidiary, will be the underwriting manager for New Point IV and has entered an underwriting services agreement with the sidecar that will run for a year from 30 April 2011. Alterra said the agreement may be extended for another year, subject to conditions. (goo.gl/XJ6In)

PHOTO: AP PHOTO/HIRO KOMAE

XL RE GAINS MID-EAST CHIEF XL Re has appointed Dermot Dick, former chief executive of Qatari reinsurer Q-Re, as manager of its Middle East operations, reported Global Reinsurance.

Q-Re, the international reinsurance division of Qatar Insurance Company (QIC), is currently run by acting chief excecutive Ian Sangster following Dick’s departure. “The Middle East is experiencing tremendous infrastructure growth and continued expansion of its fi nancial services industry,” said XL Re Europe chief executive David Watson in a statement.

“Dermot has a proven track record of running a successful reinsurance operation in the region. We see this as an important future growth area for XL Re in the medium to long term, and one which is best served by a dedicated underwriting team.” Dick’s previous roles include executive vice-president, international underwriting at QIC and deputy syndicate underwriter at Syndicate 1243 at Lloyd’s. (goo.gl/0O0uc)

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News Digest obyl level

TAWA FORMS RUN-OFF Tawa has formed a reinsurance run-off firm to provide cover for Penn National Insurance, reported Post. The run-off specialist has set up the Bermuda-regulated firm QX Reinsurance to handle the lead paint exposures book of Penn National Insurance. The book contains covers for real estate properties around Baltimore between 1991 and 1997. The maximum reinsurance liability arising from the reinsurance contract of $100m (£61.9m) has been collateralised by a trust fund in QX Re that has been financed by the reinsurance premium received and an equity injection from Tawa in aggregate $90m. An increased bank facility of $27.5m has been obtained to part finance the equity injection.

Tawa plc has also provided a group guarantee to the trust fund, which is triggered in certain circumstances.

FIRMS FLOCK TO FLORIDA Florida has added another company to its growing list of reinsurers that are taking advantage of a state law that allows a firm to reduce its capital requirement, reported Insurance Journal. Arch Reinsurance Ltd, a Bermudabased reinsurer, received Florida Office of Insurance Regulation approval, after reporting it had capital and surplus of $4.26bn and the necessary ratings. Arch Re joins a list that includes the following: Alterra Bermuda Ltd, Montpelier Reinsurance Ltd, Tokio Millennium Re, subsidiary of Tokio Marine & Nichido Fire Insurance, Renaissance Reinsurance, Partner Reinsurance, Hiscox Insurance Company, Ace Tempest Reinsurance, XL Re, Hannover Re (Bermuda) and Hannover Re (Germany) and Allied World Assurance Co. YEAR’S LOSSES EXHAUST CATASTROPHE BUDGETS The losses suffered to date in 2011 have exhausted reinsurance companies’ annual catastrophe loss budgets, according to reinsurance broker Willis Re, reported Global Reinsurance. In a report on the 1 April Japanese catastrophe renewals, the broker said reinsurers are now trying to manage their underwriting results for the remainder of 2011 by applying rate rises where there has been loss activity and tightly controlling their capacity deployment. Willis Re said the industry has been hit globally by around $60bn of insured losses in the 13 months to March 2011, of which an estimated $35bn-$42bn has been passed to reinsurers.

While reinsurers have been able to absorb these losses as a result of their strong capital position and their financial strength remains unimpaired, the broker warned that reinsurers’ financial flexibility could be affected, resulting in less M&A and reduced share-buy backs and other excess capital management techniques. (goo.gl/l13cU) A ABOUT GOO.GL: Type the goo.gl address into your web browser to access our recommended articles from globalreinsurance.com and its sister titles

View from StrategicRISK Two years into the hard bite of the financial crisis, European companies and regulators are still scratching their heads over the tooth marks, and wondering how to cleanse the risk management factors – financial, corporate governance and global – that triggered the downward spiral.

How far does the progress made to remedy risk assessment inspire confidence that there will be no repeat?

Brussels is not the most edifying place to start. The EU’s internal market commissioner, Michel Barnier, is still considering the whole area of corporate governance in the financial services sector. A consultation paper, issued last June, has yet to result in anything concrete.

Meanwhile, the most solid risk assessments introduced by the EU – stress tests in the banking sector – have turned into an ongoing farce.

Two rounds of tests implemented last year were not stringent enough: just months after ‘passing’, Allied Irish Bank and Bank of Ireland suffered a liquidity crisis that brought on the EU-IMF bail-out of Ireland.

As the EU embarks on fresh stress tests, there is disagreement about whether these should investigate liquidity and sovereign debt exposure.

Earlier this year Barnier said there was an overall need to make the tests “more robust and credible”, but would not reveal whether the parameters and results should be made public.

Meanwhile, in the private sector Airmic chief executive John Hurrell says those dealing in operational risk are digesting the chief lessons emerging from the crisis.

But he adds that many companies tend to ring-fence the banking crisis, believing it to be “all about subprime” and irrelevant to their own risk exposure. As recent events affecting BP and Toyota have demonstrated, reputational risk spreads beyond the banks.

Moreover, Hurrell says the crisis has forced companies to overhaul new technology, intellectual property, product and supply chains – which all entail new risk. But he believes there has not been a proportional injection of risk management restructuring to accompany these. The holy grail for risk management – incorporating a strategy that will derive a competitive advantage from the downside risk – remains elusive.

It can only be attained by chief executives who deal directly with risk management, he says.

Ferma’s vice-president and group risk managing director at Pirelli in Milan, Jorge Daniel Luzzi, says there have been some improvements. “The voices of warning relating to risk are now being heard within companies, and committees for internal risk control are being set up,” he says.

But just as unity over stress tests eludes Europe’s leaders, unity within companies is proving one of the most challenging issues. Luzzi says that one of the main challenges is for groups to assess risk across the whole of their structures.

“Avoiding silos is very important. The danger remains that different subsidiaries will be assessing risk according to separate criteria, without equalising risk across the corporate structure,” Luzzi says.

Nor will regulation from Europe or individual countries do much to assist. According to Luzzi, rules “simply promote a period of conformity followed by playing tricks to get around the rules”.

Hurrell agrees that companies can still use the rules as little more than a box-ticking exercise. But this means they will have little impact unless backed by a genuine desire to integrate risk management.

But perhaps the greatest dangers for companies and regulators remain out of their control. At a recent UK corporate governance symposium, Anne Kvam, investment head of Norway’s $500bn sovereign wealth fund, had a query. She owns stakes in 1,100 Chinese companies and 400 in the UK, so why was she being asked to reform strategy for the UK, where corporate governance standards are already excellent, rather than China?

No true assessment of risk in the wake of the global crisis can avoid this question.

For more news and views from the risk management industry, visit:

.co.uk

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News Analysis India

A tempting proposition Warren Buffett’s recent venture in India has cemented many people’s view that the country is poised for major growth in insurance. But, with industry concerns and uncertainty in the way, Lauren Gow finds that the road ahead is not without obstacles

Wise move?

This year-on-year growth means that some market analysts see Buffett’s move as expertly timed. AM Best senior fi nancial analyst Philip Chung says: “After a period of intense competition, detariffi ng and the creation of the Indian Motor Third-Party Insurance Pool (IMTPIP), differences in premium growth rates between public sector insurers and private sector insurers are narrowing.”

The IMTPIP was set up by all general insurers in India in 2007 to collectively service commercial vehicle third-party insurance. The objective of the pool is to make available third-party cover to all commercial vehicle owners at reasonable rates and terms.

But Buffett’s decision to focus initially on motor insurance comes at a time when the IRDA is making swift amendments to its regulatory policies regarding the IMTPIP. Changes include increasing the amount of reserves held in the pool to ensure compensation claims are paid “expeditiously and without fail”.

In a statement issued in mid-March, a week after Buffett’s Bajaj

Allianz announcement, the IRDA said it has placed three-year restrictions on expenditure with regard to the issuance of company bonuses and incentives until the pool reserves have been increased.

“Such augmenting of reserves will strengthen insurance companies,” the statement said.

Willis Re’s regional director, Kieran Angelini-Hurll, says there is also a growing concern for losses reported through the IMTPIP. “Companies are keen to structure a solution to this issue, which has already had a significant adverse impact on their balance sheets and will lead to the need for more capital to meet solvency margins.

“This is also a deterrent to growth, as losses are shared as per the market share of the company and not the share of motor business sources to the pool. The private players will be closely monitoring developments on this portfolio, as they have close to 40% market share.”

According to Chung, one way of increasing interest in India’s motor insurance market could be through regulation easing. “Depending on the defi nition of ‘improving the market’, lifting the tariff on the IMTPIP, where the tariff rate is lower than the burn rate, could lead to a more profitable market.”

Long road ahead If India is really intent on becoming a global insurance player, drastic innovation is required. The government suggested increasing foreign direct investment (FDI) limits from the current 26% to 49% more than five years ago but, as yet, this hasn’t been implemented.

Angelini-Hurll says: “The matter is still under discussion, which is perhaps why this has become one of the more controversial economic reform measures in India. If the government’s proposal to increase the FDI limit to 49% does come through, our view is that it is coincidental to the visit of Warren Buffett.”

Chung is more cautious. “Raising the FDI limits will theoretically allow more funds into the country. This will force more innovation in the insurance sector. In the short term, though, higher FDI limits are expected to result in more persistent underwriting losses, which may not be too bad for consumers.”

“Service levels will improve,” Chung adds. “However, regulations will be very important to ensure that policyholders’ interests are protected in the event of an insurance failure.”

The Indian insurance market has a long road ahead. Angelini-Hurll believes that, at the present rate, the market is likely to double in the next five years because of the growing affluence of the Indian middle class and expansion of investment in infrastructure. But there is clearly a lot to be done to ensure the market reaches its potential.

Meanwhile, motor insurance will continue to drive growth in the Indian market, but it remains to be seen what influence Buffett will have on this emerging region. GR

ILLUSTRATION: BRETT RYDER

Where Warren Buffett goes, the market follows. So when it was announced in early March that the renowned American billionaire had begun selling insurance in the notoriously tough turf that is India, the market naturally tuned in with curiosity.

Interestingly, rather than buying into the market, Buffett has become a corporate agent for Bajaj Allianz General Insurance (BAGI). Berkshire India, which is a Berkshire Hathaway subsidiary, will sell and distribute general insurance products through its online distribution portal and a telemarketing channel on behalf of BAGI. The venture will initially focus solely on motor insurance.

At fi rst glance, making a play in an emerging market may not seem in Buffett’s usually cautious style. But on closer inspection, the decision to begin driving into this difficult market at a time when it is teetering on the brink of success may yet prove to be a profitable one. In turn, this could encourage other large players to the market, thereby creating the competitive culture insurers thrive in.

According to the latest data released by the Indian Regulatory and Development Authority (IRDA), the non-life insurance industry has shown positive growth, underwriting a total premium of R34,620 crore (one crore = 10 million), or $7.8bn, in 200910. That’s up 14.06% from the previous year’s figure of R30,352 crore.

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How can you keep on moving up with Solvency II?

Solvency II poses ambitious challenges for insurers in Europe and in other countries. However, these challenges can lead to new potential areas for your business – provided, that is, that you have our risk management experts on hand to advise you step by step. Acting as your partner, our Solvency Consulting Team offers comprehensive support in adjusting to the new regulations and across the whole spectrum, from optimising risk capital to providing tailor-made risk transfer solutions.

To ďŹ nd out how to shape up your enterprise risk management business, check out our website at www.munichre.com NOT IF, BUT HOW

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18/04/2011 09:46

News Analysis 1 April renewals

Acting local Following a staggering run of natural catastrophes, the industry has been awaiting the 1 April renewals with interest. While rates on a local level have seen some rises, Ben Dyson finds that high levels of reinsurance capital are suppressing a wider hardening

was seeking evidence of a widespread turn in the global reinsurance Rarely have the 1 April renewals, while important, been lavished with prices following the recent catastrophes, the 1 April renewals would such attention. This year, however, all eyes were on the outcome. have left it wanting. Aon Benfield reported that, in the USA, despite Most Japanese reinsurance policies renew on 1 April, and as the the release of Risk Management Solutions’ new windstorm model, date came less than a month after the devastating magnitude 9 property-catastrophe decreases were seen similar to the 5%-10% Tohoku earthquake in Japan, the market wanted to see how the event declines observed at 1 January. would affect the renewals process and, where new terms were agreed, “It is not clear whether there will be a decisive upswing or a how it affected pricing. continued diminishing of rates on line. But we have reached a Also, as several other important lines and territories renew business point where the sector is pausing for thought – we are at a point of on 1 April, the outcome gave observers and participants a fi rst look at reflection,” says Guy Carpenter global head of business intelligence how the market responded to the string of catastrophe losses that has David Flandro. He adds that the effects of the events so far in 2011 are been experienced so far in 2011. still fi ltering through into the If the market was expecting 1 April renewals picture. disruption and local rate Property rates “The situation remains hardening, it would not be Territory Pro rata risk Risk loss free Risk loss hit Catastrophe Catastrophe fl uid and the effect of the disappointed. According to commission % change % change loss free loss hit Japanese earthquake on the renewals report from % change % change the sector is still being reinsurance broker Aon International 0% to -3% 0% variable +5% to +50% +20% to +100% for natural cat determined,” Flandro says.

Benfield, the process in Japan India 0% 0% to +5% N/A 0% to +5% N/A “We continue to have data was interrupted, and mutual Korea 0% to -5% 0% to -2.5% 0% to +5% 0% to +7.5% 0% to +12.5% points coming in.” companies have typically Japan 0% 0% to +5% N/A N/A N/A Japan – earthquake 0% to -3% N/A N/A +20% to +50% variable been able to secure threeJapan – wind and flood N/A N/A N/A +4% to +10% N/A The capital position month renewal extensions on USA – nationwide 0% 0% 0% 0% to -5% 0% to +8% Part of the reason for 2010 terms. The broker added Source: Willis Re the relative lack of price that there had also been late movements globally is that the industry still has excess capital. Willis placements in India as a result of the Japanese earthquake.

Re estimates that natural catastrophes have resulted in insured losses Local hikes of $60bn over the past 12 months, with between $35bn and $42bn Not surprisingly, Japanese cedants saw their catastrophe rates rise ending up in the reinsurance market. But Aon Benfield estimates that where business was renewed. There was also rate hardening in Japan. there is around $470bn of capital involved in reinsurance.

According to Aon Benfield, Japanese typhoon rates increased by 5% Guy Carpenter has a smaller estimate of between $160bn and and 10%, and earthquake rates were up by between 25% and 50%. $175bn, although this is what the fi rm describes as ‘dedicated’ Other brokers’ renewal reports supported this view. Guy Carpenter reinsurance capital, and so excludes that held by insurers that also said Japanese earthquake rates increased by between 15% and 25% write reinsurance, or any capital waiting in the wings to be deployed depending on individual circumstances. According to Willis Re, in the right conditions.

Japan wind and flood rates increased by between 4% and 10%, while “From last autumn through to 1 January, we estimated that that earthquake rates increased by between 20% and 50%. figure [$160bn-$175bn] was about $20bn higher than was necessary, There were also rate increases in Australia and New Zealand on given risks assumed,” Flandro says. “Post-event, we believe that the back of both this year’s and last year’s losses. Guy Carpenter’s excess capital position has diminished somewhat, and that has report said it had detected rate increases, but said these were offset in implications for the sector.” part by the introduction of annual aggregate deductibles and higher There are indications that market sentiment is starting to change as retentions. The broker added that the forthcoming 1 June and 1 July a result of the losses. In April, Bermudian (re)insurer Alterra launched renewals would give a clearer picture of the impact of the last 12 the fi rst sidecar of the year, capitalised at $200m. months’ losses.

However, Flandro says that global changes in response to the Japan There has also been some indication of a hardening in retrocession, earthquake in particular are only evident at the fringes so far. “We of which some business renews on 1 April. Aon Benfield said retro are seeing pockets of capacity coming into the market, and some pricing at 1 January was down by between 5% and 7.5%. Since then, underwriters changing their behaviour at the fringes, but at the it said retro players had all responded differently to the uncertainty moment we are not seeing a sea change,” he says. surrounding the Japan earthquake losses, resulting in a price change “This is not a post-Katrina world where we had upwards of $60bn in range from flat to an increase of 20%. The broker said it expects a more insured losses without an excess capital position, where rates on-line uniform response from retro players as the loss becomes clearer. went up between 20% and 30% and we saw $30bn to $35bn of capital So some response to the recent events, then. But if the industry flood into the market. It is not even close.” GR 10 MAY 2011 GLOBAL REINSURANCE

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18/04/2011 09:47

News Analysis Brazil

On lock down New rules in Brazil have placed limits on transfers and cession to international (re)insurers and, despite some concessions by the regulators following industry lobbying, critics warn that these limitations may impede the growth of the market. Lauren Gow reports

Back and forth The revocation of 224 in favour of 232 wasn’t driven solely by market backlash, according to law fi rm Davies Arnold Cooper partner Hermes Marangos. “The government thought there wouldn’t be enough capacity. They tried to meet the industry halfway by allowing the industry to take some capital abroad, but also forcing reinsurers to think about keeping more capital in Brazil.

“Much like what happened in Argentina, the government is hoping that more (re)insurers will bring more capacity into the country.”

Clyde & Co partner Stirling Leech believes that Resolution 232 will impact heavily on subsidiaries and units that pass risks back to a foreign parent company, for example those writing Brazilian risks from the London market. He says: “It is also being criticised as prohibiting free trade and placing a restriction on business that previously didn’t exist.”

After making some concessions on Resolution 224, the Brazilian regulators have not backed down as far on Resolution 225, also effective from 31 March 2011. This resolution states that

insurance companies working in Brazil must cede at least 40% of each facultative or treaty contract to local reinsurers (it was originally set at 60%).

Leech says: “There has been a lot of discussion and debate about Resolution 225, which is fairly extreme in its nature. The largely international non-local reinsurers, of which there are many, don’t like it because it means they can only get 60% of the business.”

Mounting pressures One troubling grey area in Resolution 225 is that no plan has been made for circumstances where local reinsurers are unwilling or unable to write the 40% cession.

Marangos says this will place even more power in the hands of the state. “One assumes that if coverage is unable to be found, owing to lack of capacity or lack of willingness, (re)insurers will be forced to go back to the regulator,” he says.

Marangos is also concerned that some reinsurers will be punished twice by the resolutions. “Companies like Munich Re and ACE, which have paid a huge amount of money to register to become local reinsurers, are now fi nding that they also have to keep their international capital in Brazil. Arguably those reinsurers are being discriminated against even though the resolutions are in support of local reinsurers.”

Brazilian regulators may yet bow to mounting pressure to further relax the two resolutions. “If I was a betting man, I would say it is likely there will be further changes down the line,” Leech says. “There is defi nitely a wish and a trend among local Brazilian (re) insurance entities to try to keep it local, but they are facing a lot of backlash from the international community – both privately and publicly.”

Stifl ing new business opportunities through regulation might traditionally signal en masse market exodus. Marangos believes the cost of doing business under such regulation could prove prohibitive for some. “To use your international capital, you have to front the business via another reinsurer, which increases the complexity and the cost,” he says.

But, despite the difficulties they bring, Leech isn’t convinced that the resolutions will be enough to drive key players from the Brazilian market long term.

“They have already set up their stall there,” he says. “I think some might just pause momentarily to observe but most will stay, and keeping looking for new business.” GR

ILLUSTRATION: BRETT RYDER

Things are hotting up in Brazil. Following months of fierce industry lobbying, the Brazilian insurance regulator has agreed to relax new rules governing intra-group risk transfer and compulsory cession restrictions in the Brazilian reinsurance market.

But stirrings in the market suggest that the rules have not been relaxed enough, and create an unhelpful protectionist environment in one of the world’s fastest-growing markets.

The rules (known as Resolution 224 (later replaced by 232) and 225) were formulated to effectively stop a portion of premium earned by local reinsurers from leaving the country, as well as forcing local reinsurers that are a division of a multinational group to invest more capital in the country.

In December 2010, through Resolution 224, Brazilian regulator Susep (Superintendence of Private Insurance) had planned to prohibit liabilities arising from insurance, reinsurance and retrocession contracts carried out in Brazil to be ceded internationally.

But following strong criticism from the international reinsurance community, Resolution 224 was revoked and replaced with Resolution 232. Effective from 31 March 2011, intra-group transfers from (re)insurers holding a local licence to groups based abroad is now capped at 20% of premium corresponding to each contracted coverage. (Resolution 224 would have prohibited such transfers entirely.)

12 MAY 2011 GLOBAL REINSURANCE

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18/04/2011 09:25

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21/03/2011 15:56

News Agenda Losses, not events

Holistic thinking The severe damage caused to the Fukushima Daiichi power plant, where the earthquake knocked out the power to the fuel rod cooling system, could have been prevented by more careful thought, according to risk modeller RMS chief risk officer Robert Muir-Wood.

He argues that the power went out because the generators were placed at a low level on the site. Once they had gone down, workers could not get at them to resolve the problem. “There is clearly a set of critical issues that will need to be learned for the whole nuclear industry as to how they think through catastrophes holistically,” he says.

“There are a whole series of events that happened consequently, but the operators had probably thought about them separately and not happening as part of the same event.”

The unprecedented and unexpected size of the Tohoku earthquake has reinforced the message that (re)insurers should manage their books of business by taking into account potential loss amounts from a territory rather than single events.

According to AIR Worldwide managing director Milan Simic, (re)insurers managing their portfolios on the basis of events would have only assumed a maximum earthquake magnitude of 8.2, and so would have been caught out.

However, companies managing around an overall loss amount for Japan would have taken the loss in their stride. As big as the Tohoku earthquake was, Japan is capable of producing much higher losses from different tectonic sources.

An earthquake hitting Tokyo would be a worst-case event for global (re) insurers. But while Tokyo was affected by the shaking from the Tohoku quake emanating from the Japan Trench, the city would more likely be hit by events from the closer Nankai and Sugami troughs.

“If all of the participants are managing to a loss amount, then $20-$30bn from this event would not be impossible to contemplate from the loss point of view,” Simic says.

More to come?

A feast of data A positive outcome from the 11 March earthquake and tsunami is that it has given seismologists – and modellers and (re)insurers by extension – a chance to study what happens during such high-magnitude events and understand exposures better.

“There has not been very detailed evidence of what happens in earthquakes of that size before Chile and now Japan,” says RMS’s Muir-Wood. “The strength of ground-shaking at great distance from the earthquake and what kinds of damage this causes, especially to tall buildings, is something that has been speculated about. There is going to be much more information now.”

AIR Worldwide’s Simic agrees: “This will create a huge volume of important information that a number of scientific disciplines will be carefully studying for years to come.”

The severe aftershocks seen after the 11 March quake, in particular the 7.1 magnitude event on 7 April, has made some industry participants realise that aftershocks – rather than the initial earthquake – could at some point become the major event.

“It is an interesting question whether the impacts from an aftershock could be higher than the impacts in the same location of the original event,” says Muir-Wood at RMS. “We certainly get questions from our clients about that.”

The earthquake has also prompted questions about whether the Tohoku earthquake could trigger events in neighbouring seismic and tectonic systems, resulting in an event closer to Tokyo and thus be even more costly.

“One interesting question is whether this earthquake has affected the probability of earthquakes further south along the subduction zone close to the Chiba prefecture,” says AIR Worldwide’s Muir-Wood. “There is quite a lot of debate on that question.”

“There is now a lot of work being looked at in terms of what such a major rupture of this magnitude could do to the neighbouring faults, namely the Sagami and the Nankai trenches, which are much closer to Tokyo and can cause losses of much greater amounts,” adds Simic.

“Most senior scientists in the seismological community are looking to this problem now and are trying to find some conclusions as to the risk levels going forward.”

There are also questions about whether the series of heavy quakes seen recently are part of a trend.

“We now have an unprecedented situation where, if you take all the major earthquakes from 1900, the four largest events have happened in the last seven years,” Simic says.

14 MAY 2011 GLOBAL REINSURANCE

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News Agenda

Counting the cost of Japan’s catastrophe On 11 March, a massive earthquake and resulting tsunami struck Japan, causing massive destruction to life, property and infrastructure – even altering the lay of the land itself. Ben Dyson looks at the scientific implications of these events and the (re)insurance industry’s efforts to get to grips with them

Anyone in any doubt that the 11 March Japan earthquake was an extraordinary event should take a look at the physical changes it has wrought on the country it struck.

Leaving aside for a moment the devastating damage to property and lives, the magnitude 9 earthquake that rocked wide swathes of the country and triggered a deadly tsunami has left lasting marks on Japan’s topography.

According to RMS chief risk officer Robert Muir-Wood, the country is now between four and five metres closer to California than it was before. The outer north-east coast of Honshu, the largest of Japan’s four main islands, has sunk by one-and-a-half metres.

“Even around Fukushima, it has sunk by 60cm-70cm so the Fukushima Daiichi nuclear power plant is now about 60cm-70cm lower than it was before,” Muir-Wood says. Some of the flooding seen in photos of the event, he added, was because the areas are now below sea level.

The trouble with models Because the tsunami resulting from the Tohoku quake is estimated to have caused about one-third of the insured losses, there is likely to be a rise in demand for tsunami models.

AIR Worldwide, for example, currently lacks a tsunami model. It generated the tsunami portion of its insured loss estimate by using topographical information and wave height data, overlaid with AIR’s exposure database.

Muir-Wood says that while RMS does have tsunami models, they are not a standard feature of catastrophe models. “The reason why there hasn’t been a lot of momentum to make it a standard feature of models was partly because, in Japan, tsunami walls had been built to protect communities for the size of magnitudes which were anticipated then, and tsunami didn’t seem to be a very big source of loss in Japan.”

There are also challenges to making tsunami a part of mainstream cat modeling. Air Worldwide’s

Simic argues that it would need to be a global effort, because tsunami occur globally.

Furthermore, earthquakes are not the only cause of tsunami. Simic points out that a bulk of the European tsunami to date have been caused by submarine landslides. Another source is volcanic eruption. “If we were to do that, we would want to have a comprehensive set of tsunami-creating sources as possible.”

Devising accurate tsunami models could also be scuppered by a lack worldwide of information on bathymetry – the topography of the seabed.

GLOBAL REINSURANCE MAY 2011 15

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19/04/2011 14:56

News Agenda Muir-Wood says the quake’s displacement – the difference between the position of a reference point and a later position – was 30-40 metres. “This is absolutely enormous and pretty much unprecedented in terms of how much movement that was,” he says.

Expect the unexpected Not only was the earthquake big, but it also caught Japan completely off guard. Both local and international seismologists had only accounted for an earthquake of a maximum magnitude of 8.2 emanating from the relevant part of the Japan Trench, the subduction zone (an area where one tectonic plate can slip under another) between the Pacific and North America tectonic plates.

“It was a genuine unknown, where science was genuinely lacking in understanding the maximum earthquakes that this trench is capable of producing,” says risk modeller AIR Worldwide managing director Milan Simic. “We can say it was almost a failure.”

The problem was that the tsunami defences protecting the affected communities were built on the assumption that earthquake magnitudes would not exceed 8.2 on the relevant part of the Japan Trench, and thus any resulting waves would be smaller and more manageable.

“If it had been an 8.2 magnitude earthquake, it is likely that the tsunami would not have gone into these communities because the tsunami walls would have held,” Muir-Wood says.

The (re)insurance industry is still picking its way through the losses.

Firms have a far clearer picture a month on from the event than they did in the fi rst week, and most fi rms have now released tentative preliminary loss estimates.

Publicly available estimates to date, where Japanese earthquake numbers have been separated out from the rest of the 2011 losses, total roughly $8bn (see table). Some observers are expecting the total reinsurance bill to be higher – at about half of the total insured losses.

Industry-wide insured loss estimates range from $12bn to $30bn. Many (re)insurers are basing their preliminary loss estimates on an industry-wide insured loss of between $25bn and $30bn.

The losses will affect all types of insurance and thus reinsurance business. This runs the gamut from

Estimated Japan losses Insurer Bottom Platinum 87 Ace 200 Hardy 14.7 Omega 23.6 Hiscox 60 Amlin 80 Validus 139 Alterra 60 Novae 25 Montpelier 126 Transatlantic 240 XL 290 Flagstone 80 Munich Re 2,200 Swiss Re 1,200 Scor 257.9 Hannover Re 361.2 Everest 320 PartnerRe 500 Axa 144.5 Fuji Fire and Marine 508 QBE 125 Chartis 700 TOTAL $7.74bn

Top 87 250 19.5 23.6 150 150 139 100 40 126 240 290 130 2,200 1,200 257.9 361.2 320 500 144.5 508 125 700 $8.06bn

Figures in $m Source: company reports Note: Where no range has been given, the same figure has been used in both columns

‘Science was genuinely lacking in understanding the maximum earthquakes that the Japan Trench is capable of producing. We can almost say it was a failure’ Milan Simic, Air Worldwide

liability, to business interruption, to life – around 13,000 people had been killed by the events at the time of going to press, with a further 14,000 still missing.

Business interruption, and particularly contingent business interruption, is a significant grey area because it is unclear how much was written and to what extent companies will be able to claim under coverage that is there. But the bulk of the losses will be property-related. Of this, the lion’s share will be commercial and industrial property, as residential property is largely not reinsured in the private market.

“The principal international reinsured losses should come from the commercial and industrial earthquake market,” says Guy Carpenter’s global head of business intelligence David Flandro. “Even in that market, we know that earthquake reinsurance penetration is only around 14%-17%.

In the earthquake reinsurance market most of the treaties are capped by the event limits, although those limits are typically set at a very high level relative to exposures.”

However, as all reinsurers are at pains to point out, initial loss estimates are subject to change. The radiation from the stricken Fukushima Daiichi power plant is not significant from an insured loss perspective, because nuclear risks are typically excluded from private market reinsurance covers.

However, it is preventing loss adjusters’ access to the affected areas.

Concerns about appearing insensitive by sending in adjusters so soon after such a tragic event present another inhibiting factor.

Taking stock To add to all the loss and disruption so far, Japan continues to be rocked by aftershocks. On 4 April, reinsurance broker Aon Benfield issued a report saying that more than 830 aftershocks had been triggered by the original 11 March event, with 57 of these greater than magnitude 6. Shortly afterwards, on 7 April, a 7.1 magnitude aftershock hit on 7 April, killing three people.

It will be some time before the (re)insurance industry truly understands its losses from the Tohoku earthquake and tsunami. Structural damage caused by earthquake damage can be less visibly obvious than windstorm damage, for example. It can emerge several months later.

It took around 600 days after the 1994 earthquake in Northridge, California before insurers could get a definitive estimate from paid claims. A year on from the Chilean earthquake, and company loss assessments are still changing.

“We don’t expect to have anything like a defi nitive loss estimate for well over a year, although we should start to get some clarity in around 12 months,” Flandro says. “We will have an initial estimate based on reported insurance and reinsurance losses when fi rstquarter results are announced, but that will be subject to revision.”

Despite the time it will take to determine losses, the size and nature of the Tohoku earthquake has already resulted in many lessons and potential changes that the industry needs to take on board. GR

16 MAY 2011 GLOBAL REINSURANCE

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18/04/2011 09:47

People & Opinion For exclusive opinion and insight from Global Reinsurance and its sister publications, visit

globalreinsurance.com

ASIA-PAC CATS COULD COST INSURERS $500M Australia floods, Christchurch quake and Japan tsunami will hit insurers’ Q1 results strategicrisk.co.uk

LLOYD’S NAMES CAUGHT OUT

BY MOTOR BOOK DOWNTURN Names could stick with motor insurancetimes.co.uk

In my view Sharing the burden When natural disaster strikes, it can be an arduous process to rebuild the affected region, and the financial impact can be immense. Policymakers need to assess the role that (re)insurers can play, says Franklin Nutter, to ensure a sensible balance between public and private liability The past 15 months mark one of the most tragic periods of loss from natural events in human history. The loss of life alone is staggering: 222,000 in Haiti, 56,000 in the Russian heat wave, and more than 20,000 in the recent Japanese earthquake and tsunami.

While there is no measure to value the personal impact on the lives and families of those affected or the societies in which they lived, governments and private sector interests, including insurers, have of course sought to measure the economic impact of these and other natural events. The projected insured and economic losses from 2010-11 are staggering:

Projected economic losses 2010

Event

Economic loss

Insured loss

Reinsurance recovery

February

Chile earthquake

$30bn

$8bn$10bn

$8bn-$10bn

March

Europe wind/flood

$4bn$5bn

$4bn

$3bn

September

NZ earthquake

$10bn

$4bn$6bn

$3bn-$5bn

December

Australia floods

$4bn

$1bn$2bn

$1bn-$2bn

January

Australia floods

$10bn$20bn

$4bn$6bn

$3bn-$5bn

February

NZ earthquake

$8bn$12bn

$8bn$12bn

$6bn$10bbn

March

Japan earthquake

$100bn$300bn

$25bn$75bn

$15bn$25bn

2011

Notable about these losses is that they occurred in areas with relatively low population and economic densities; yet the values are significant. Certainly this will

affect the insurance industry’s assessment of risk and the psychology of potential loss in these and other areas at risk to natural perils that are difficult to predict and for which the industry has limited loss history. Over time, many lessons will be learned from the events of the past year; in particular, the value of hazard mitigation and other loss reduction measures.

Another lesson is already abundantly clear: the contribution of the global insurance and reinsurance markets to economic recovery will be evident in those cases where government policy encouraged reliance on the private insurance and reinsurance markets for protection against natural catastrophes.

The numbers are telling. In Chile and New Zealand, overall economic and property losses for homes and commercial structures will be spread broadly into the private sector, where the reinsurance markets will bear a large portion. In contrast, the Japanese government will bear most of the loss due to its policy of concentrating insured risk into government insurance and reinsurance programmes.

At a time when the governments of all of these countries are focused on human needs and public infrastructure, the influx of recoveries from global insurers will be an economic stimulus. It will be relatively greater in those situations where government policy shifted risk into private markets. Indeed it has been reported that the $6bn of reinsurance recoveries will push New Zealand into its first account surplus since 1973.

Governments around the world address natural events and insurance in a variety of ways. In the USA, for example, the Federal

government bears all flood insurance risk for homeowners, which in essence means US taxpayers subsidise the insured risk. This policy is under review because of the $18bn debt owed by the National Flood Insurance Program (NFIP) to the US Treasury from the losses of 2005 alone.

In California, as another example, the quasi-governmental California Earthquake Authority (CEA) aggregates insured risk and lays much of it off to global reinsurers.

The CEA benefits from this policy when an event occurs.

Policymakers should examine the balance between government policies that make coverage available to those who choose to live in areas at high risk from

18 MAY 2011 GLOBAL REINSURANCE

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18/04/2011 09:26

People & Opinion THE FIVE RISKIEST NUCLEAR POWER PLANTS Plants are being built in quake zones with a disregard for safety, a report claims strategicrisk.co.uk

natural catastrophes at affordable rates and sound risk management, and the reliance on the private reinsurance market as a risk-spreading shock absorber.

The reinsurance market has shown itself to be responsible, resilient and committed to

Japan’s government will bear most of the loss due to concentrating insured risk into state schemes providing coverage for natural catastrophes.

Government policymakers around the world should review their insurance programmes and policies to maximise the use of this extraordinary resource. GR Franklin Nutter is president of the Reinsurance Association of America

Weblog While April saw no major catastrophes, reinsurers took a collective intake of breath as claims from the fi rst quarter came flooding in.

Balance sheets all round took a beating in Q1, but it wasn’t all bad news. Topping out our most popular stories this month was Hannover Re, which reported record profits despite a spike in catastrophe claims.

Next up, it seems the industry is keen to learn just how much its balance sheets might be hit: in our second most popular story of the month, Jefferies analyst James Schuck’s estimates that the 11 March earthquake could cost $10bn. But RMS’s latest estimates suggest that this figure could more than triple to $34bn, making the earthquake and tsunami one of the costliest natural disasters on record.

The market also logged on to read Schuck’s estimate

that Munich Re’s Japan losses would be a “relatively moderate” $1bn.

Moody’s mulling over Flagstone Re’s rating came in fourth place, as the rating agency considered whether to downgrade the reinsurer.

This follows the series of natural disasters in the fi rst quarter, which the rating agency contends is likely to result in a material loss for Flagstone.

Lastly, after a quarter of bad news, some insult to add to all that injury: global broking fi rm Willis Re reported that losses suffered to date in 2011 mean that reinsurance companies have largely exhausted their annual catastrophe loss budgets.

Reinsurers should keep their fi ngers crossed for a quiet US hurricane season.

To contribute to the website, email Ben Dyson at ben.dyson@globalreinsurance.com

Online top five 1. HANNOVER RE POSTS RECORD PROFITS Net income hits €748.9m 2. JAPAN CLAIMS COULD BE $10BN Loss will affect local cat rates but will not turn market 3. MUNICH RE JAPAN LOSSES ‘RELATIVELY MODEST’ Stock upgraded to buy 4. MOODY’S MULLS FLAGSTONE DOWNGRADE Q1 catastrophes likely to result in ‘material losses’ 5. REINSURERS HAVE ‘EXHAUSTED THEIR 2011 CAT BUDGETS’ 2011 disasters so far could subdue M&A and buy-backs

Up the ladder How did you make it to where you are today?

I’ll start with luck; then the support of my wife and children, and then the kindness of many mentors throughout my career.

understood when interpreting analytical results.

Catastrophe risk models are essential tools, but don’t outsource your understanding of risk to a modeling firm – it’s a strategic asset.

Has the industry changed since you joined?

It’s more professional and more analytical today. But many of the things that attracted me to the business haven’t changed. Personal relationships still matter. Creativity is still valued.

What advice would you give to someone starting out in the risk modelling business?

Ask lots of open and probing questions, and listen carefully to the answers. Despite what we know about catastrophe risk, there is so much more that we don’t know. There’s a lot to learn.

What are the key challenges for you and the industry?

For me, it’s delivering the most robust models in a platform that exceeds our clients’ expectations.

For the industry, it is recognising that uncertainty is what this business is all about.

And what are the biggest opportunities?

Changing the way the industry, particularly the ‘c suite’, thinks about models. Given all the real-life uncertainties involved in the risks we’re analysing, those uncertainties need to be

What is the biggest mistake you’ve made?

Following advice I felt was wrong. I learned to trust my instincts and challenge questionable advice.

What do you do to relax?

Running, cycling, yoga and meditation. Being with my family. Putting together my ‘to do’ list.

I find it very relaxing when I’m organised.

Bill Keogh is president of risk modelling company EQECAT

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Profile

Scaled for success

As David Cash enters his second year as chief executive of Endurance, he tells Ben Dyson how industry conditions are the best they have been for some years and why he favours organic increases over consolidation

Q:

How has your fi rst year as chief executive of Endurance gone?

A:

In the fi rst year, I spent a lot of time meeting with investors helping them to understand our business, and a lot of time internally communicating direction. I think people are prepared to say we are now in a soft market, and that means companies have to reprioritise around that fact. We are very focused at the moment on trying to make sure we manage risk well and we don’t make underwriting mistakes; that we underwrite in our areas of competence rather than over-reaching to draw risk to us.

We are also spending a lot of time making sure the platform we operate from is fully built out, so that we are able to grow not just in the markets we are in now but also diversify or add products to the extent it is possible.

Q:

What geographical, product and strategic developments are under way?

A: There are a couple of the areas of our business that, to my mind, are undersized. This is in part because it is a tough market, and you try to avoid getting too big in that market. But when you are undersized you can have high expense ratios. It is important for each of those businesses to operate at scale.

The two areas where I am focused on careful growth are international reinsurance and middle-market United States commercial insurance. Those are areas where I am inclined to push a little bit harder, yet remain within the boundaries of safe pricing and underwriting.

Beyond that, we feel our model allows us to generate income more broadly than just through one product line, and it is important not to overweight yourself and fi nd yourself caught unprepared by an event.

Q:

How will you grow the international reinsurance segment?

A:

We write international reinsurance through our London, Zurich and Singapore offices. A key piece of the puzzle is that we are trying to write business locally, which is not really the traditional Bermuda catastrophe model.

Another is that our product offering right now is somewhat narrowly focused. We have more of a focus on property, marine and a little bit of casualty, and are not writing much of the other products such as personal accident and surety. For us to grow over

‘Where the risk is harder to judge and there is a greater emphasis on specialisation, you’ll see some modest fragmenting of that market’ time, we will have to broaden the range of products we offer.

We also strive to do a better job of cross-selling between our businesses.

In Bermuda we do business with a couple of hundred global insurance companies but we’re not yet doing business with a couple of hundred global insurance companies in London, Zurich and Singapore.

Q:

A common expansion tactic for Bermudan fi rms is buying a Lloyd’s operation, which Endurance has not yet done. Are you considering this?

A: We have looked fairly steadily for an international acquisition opportunity and in truth we have not seen one that

was a particular fit for us. We’re certainly open to Lloyd’s as a vehicle, but we see the merit in Zurich as well. It is difficult to service Germany from London, so a Lloyd’s platform doesn’t hold the same interest for me that it was perceived to hold for Bermuda companies generally in the past few years.

Q:

What challenges does the industry face in today’s environment?

A: I often contrast the situation now with the end of the 1990s, which was a very bad time. Casualty markets are soft, but not as soft as they were then.

There is probably more softening to come in the casualty markets. That is a source of stress for the market in general as that casualty cycle is the dominating cycle in our business. In particular, I don’t believe the excess and surplus lines casualty market will harden until 2015 or later.

If you go beyond the pricing challenge, the industry is in a pretty good spot. Balance sheets are much stronger than they were at the end of the 1990s and in 2005. The quality of management across our industry is also higher now than it was before. In some ways our industry, in learning from its mistakes, has forced itself to become more professional. The market is dominated by publicly traded insurers that are scrutinised and quite visible. That has resulted in improved management practices.

Also, I rarely see people trying to sell defective products today. The products offered are generally better constructed and there is a much higher degree of professionalism when it comes to managing and mitigating the risk on the front end.

Q:

How are you managing the casualty cycle?

A: We are trying to move ourselves towards smaller risks. As a reinsurer, one of the most significant treaties we have added over the past year has been in the non-standard auto line of business. Pricing in the non-standard auto space is relatively confi ned.

ILLUSTRATION: MICHAEL CRAMPTON

Endurance, formed on Bermuda in 2001 in the aftermath of September 11, has lived up to its name. It has survived the various industry challenges since its launch with its independence intact.

The (re)insurer has now entered a new era, with David Cash taking the reins from launch chief executive Ken LeStrange last March. Here, Cash outlines his strategy for Endurance and the challenges the company and the industry faces in the coming years.

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Profile As an insurer, we are also trying to build out smaller casualty risk binding facilities. It is a newer initiative. Where we are in the casualty space is that we are trying to grow towards smaller, less cyclical business, but it takes time to get there.

Q:

Historically the problems in casualty have come from asbestos.

Where are they coming from now?

A:

In the USA, I think the challenge will come from the excess and surplus lines marketplace, particularly excess casualty. The long tail in that product combined with uncertainty about the pricing creates the greatest conditions for volatility.

It also appears that the European liability environment is evolving relatively quickly. The challenges faced in UK motor lines with claims farming will probably start to be felt on the continent. You don’t have to change the legal environment dramatically in the eyes of the general public to create an opening that can allow casualty products to go through a challenging period.

In the USA, what has happened is that managing the liability of being in business has become so complicated that you have seen a gradual refi ning of the industry. You now have standalone specialists underwriting specific classes, so you end up with a more diverse culture of smaller insurance companies, while Europe is dominated more by large composites.

In an environment where the risk becomes harder to evaluate and there is a greater emphasis on specialisation, you’ll see some modest fragmenting of that market. A fragmented insurance market is probably, on balance, good for reinsurers, because smaller companies will value reinsurance more than they might have in the past.

Q:

The Bermuda market is often described as fragmented. Do you see consolidation there?

A: There is a collection of smaller insurers and reinsurers on Bermuda.

When you are small you tend to be very specialised in a market and if something goes wrong in that market you are disproportionately damaged by it. A lot of those companies have to fi nd a way to strengthen themselves. The

best way is to be a great underwriter, accumulate capital and at the right time use it to break into additional markets.

I think a lot of these companies will feel pressure to combine before the opportunity to break out occurs, so for that reason I think there will be some consolidation.

However, I don’t see consolidation as a silver bullet. When you take two companies that are struggling to get traction and you put them together without radical re-engineering, they

still struggle to generate the same return as some of the other companies.

In some ways, consolidation ensures the company survives, but that is not the same as thriving. My personal bias is towards trying to grow organically. GR FIND OUT MORE ONLINE: ENDURANCE REVEALS 2011 CAT LOSSES OF $55M To read this feature, and for more on Endurance, go to globalreinsurance. com or goo.gl/WwSVQ

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Cedants

Q&A with

Jeremy Brazil The chief executive of Markel finds that thinking in terms of set risk appetites has sustained the firm’s buying strategy post-financial crisis

Jeremy Brazil really is a farmer’s boy at heart. He completed an agricultural degree before his fi rst foray into the insurance industry as a graduate trainee with Willis Faber (now Willis).

Brazil was an obvious candidate to help develop crop insurance with the broker, though he laments the lack of take-up from the market. “The people who need it can’t afford it and the people who can afford it don’t need it.”

Undeterred, Brazil went on to work as a London market underwriter from 1989, before being made Markel’s director of reinsurance in August 2001.

Here, Brazil tells us why back-to-back meetings are a necessary evil in reinsurance buying.

Q:

PHOTO: YIANNIS KATSARIS

How would you describe the pricing situation in the reinsurance market – would you say we are in a soft market?

A:

At the moment, it is flat to soft across all lines. But if a class has been impacted by losses, prices have moved up to reflect that. In classes where prices are either flat or down, then reinsurance has tended to track that.

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Cedants Q:

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

A:

I am a great believer in the basic principles of reinsurance. It should be there to protect against the large risk loss or combinations of losses like catastrophes. I tend to look at it on that basis. We don’t arbitrage. We expect our underwriters to write profitable business so they carry meaningful retentions on their own business and we don’t want to pay too much away to reinsurers when it is profitable business.

Q:

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

A: In terms of structuring, we have a set risk appetite for catastrophe losses and non-catastrophe losses. If it is catastrophe losses, we’ll use the models such as RMS to get a sense and feel about what our exposure is. We also use our own internal models to do that and price our own reinsurance before it goes out to the market. We will have an idea about what to expect and what we are looking at. Once we get quotes, we have another look and see if what we have been quoted represents fair value.

Q:

How has the current pricing affected your buying strategy?

A: It hasn’t changed to any great extent. We tend to look for value, rather than price. But, having said that, we won’t pay silly prices for something that is not appropriate. If the price is not good value then we are happy to run all or part of it net. We have a core panel of reinsurers with whom we have a very longstanding, stable relationship, which is reflected in the pricing.

Q:

How has your buying strategy changed post-fi nancial crisis?

A: No, not really. We don’t have a large panel of reinsurers but they are the larger, more fi nancially strong companies. It hasn’t really changed it at all. One thing we do look at more closely now is risk appetite per reinsurer. One of the unintended consequences of going for high-quality reinsurers is that you end up doing a lot more with a lot fewer people. So we set a risk appetite per reinsurer and keep within it.

Q:

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

A: We’re keen to use our own internal modelling in order to test the reinsurance programme and that is all part of imbedding the model into our day-to-day business. It’s all about a greater understanding of risk appetite and its capital implications.

I think more and more insurers will be modelling their programmes in an attempt to try to optimise their reinsurance purchase and its capital implications. We already used our internal model when we looked at retentions across various classes to see what the impact is. Modelling can’t and shouldn’t make those decisions for you but they are another useful tool when analysing your portfolio to make informed decisions.

Q:

How much premium do you cede to reinsurers?

A: Typically it’s plus or minus 10%.

That has been pretty much standard for the past few years.

Q: How do you approach structuring your reinsurance programmes?

A: We have a set risk appetite for catastrophe and non-catastrophe losses for each class. Typically, there is an issue if we have ‘X’ loss last year and the program didn’t respond, then we’ll change the programme to be safe. But the law of nature is that the same loss won’t occur again so something else may now not be covered.

Q:

Describe your average day.

A: We don’t. We keep abreast of all the options out there – traditional, non-traditional, fi nite and alternative.

But really, Markel only use traditional methods because we want certainty and to make sure the reinsurance matches where it can and not run a basis risk.

A: I spend a fair bit of my time in meetings internally and externally.

They are unavoidable but must have a reason and purpose. A long time ago, I did attend a meeting to discuss whether we had too many meetings.

Since then we have fewer. I spend a lot of time discussing underwriting issues and strategy with our London and overseasbased underwriters. This is somewhat challenging when you have more than one time zone to contend with.

Q:

What do you most look for in reinsurers?

Q:

A: In no particular order: consistency in approach, commitment to class of business, long-term relationships, multi-class relationships, a high standard of service including front and back end. By this I mean that when we are placing business and there are amendments to be made, I would like to think we get a good hearing and things will be turned around very quickly.

And, in the event of a claim, that they respond very quickly.

A: My first underwriting manager, John Hodges, set me on my way. He gave me some good fi rst thoughts and provided me with guidance I have used in the rest of my career. He would say: “At the end of the day, insurance is half common sense and half luck so don’t over-complicate it.”

Q:

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

Q:

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

A: That’s a tough one. It’s really looking at the basic principles of why you buy reinsurance; looking at how value matches our plans. We tend to have a core reinsurance programme

Who do you most admire in the insurance industry and why?

Q:

What do you enjoy doing in your spare time?

A: I am a farmer’s boy at heart.

I still have a small farm, which is my escapism. It gets me out and about in the fresh air. GR FIND OUT MORE ONLINE: THE MARKEL MAKEOVER To read this article and for more on Markel, see globalreinsurance. com, or goo.gl/gyLIj

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Lines & Risks

Protesters stage a sit-in outside the headquarters of the Tunisian government to push the prime minister to resign, along with other ministers who held office during the regime of Ben Ali, while the army and po

On a knife edge As civil unrest escalates and political regimes across North Africa and the Middle East are shaken, Mark Leftly investigates the impact on the reinsurance market At the snappily named Insuring Export Credit and Political Risk annual conference held recently in Tower Bridge, London, one bright spark demonstrated that even the industry’s biggest brains had failed to forecast the North African crisis. Pointing to one of the most widely used sovereign risk maps, he showed that Libya and Italy had been considered to face the same likelihood of political violence and state intervention, such as changing the terms of contracts for foreign companies.

By the time of the conference in early March, this assessment had proved utterly flawed. The attempted revolution to overthrow the four-decade-long Gaddafi regime was well under way; president Mubarak’s 30-year rule of Egypt had ended three weeks earlier; while the United Arab Emirates was planning to send troops to quash protests in neighbouring Bahrain.

This is part of a contagion of political unrest that has also drawn in Algeria, Syria, Yemen and, most worryingly for the West given its oil interests, Saudi Arabia.

Insurers in the Gulf have reacted quickly to the prospects of claims on property damage and even contract cancellations. In March, Co-ordination Commission of Gulf Insurance and Reinsurance Companies secretary Fareed Lutfi was reported as saying that “the impact is immediately seen in rising premium levels”.

This will have knock-on effects for reinsurers as their primary cousins adjust their business models and the level of protection they need in this turbulent part of the world. This offers reinsurers a series of business opportunities, as well as a change of risk profi le to ensure that an oppressive dictatorship is never again considered

as politically stable as a western democracy like Italy.

The long view So far, the fi nancial impact on reinsurance has not been too great.

Munich Re’s client management executive for the Middle East and North Africa region, Andreas Pollmann, says that the company’s losses as a result of the crisis are in the “lower two digit number of millions of euros”. By contrast, the earthquake and tsunami in Japan is expected to cost the group around €1.5bn ($2.16bn).

Munich Re’s exposure is mainly in Libya and Egypt, but even the latter is limited given that it was, until recently, considered a standard regime.

Many companies simply didn’t think that they needed cover for political risk or violence in what was viewed as a safe country.

“Insurers have focused particularly on construction and infrastructure [cover],” Pollmann says. “When we look at the fundamentals of doing business in the region, we have to look at the basis of risk assessments and where

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Lines & Risks Revolt: how will the pieces fall?

cover is needed most. There will have to be a revision of where we are for the next 10-20 years.”

Although Pollmann hints that each country will have to be treated separately, given that they should still have “heterogeneous economies”, others are calling for a much more fundamental overhaul of reinsurance cover.

One senior broker source says that many underwriting models will not have factored in political unrest and losses spreading to several countries so quickly. Insurers fear that they might now have to cough up for regional rather than individual state unrest, which would naturally be much more costly.

“This raises questions for reinsurers,” he argues. “They may have to change their models and offer contagion cover on top. Insurers will be asking for another type of product, and reinsurers will have to come up with more capacity.”

The broker points out that many reinsurers do not provide cover for political risk. There is an opportunity for the industry here, but reinsurers will have to fi nd economic ways of providing larger-scale cover for political protest damage and the contractual impacts of regime change.

Charges of corruption Another broker source points out that damage from the political protests is

>

ILLUSTRATION: JAMIE SNEDDON

PHOTO: HAMIDEDDINE BOUALI/DEMOTIX/PA IMAGES

nd police set up road blocks

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likely to be minimal. “In Libya, both sides want the oil assets, so they aren’t going to destroy them,” he says. “Plus, a lot of the assets are in the south of the country and the problems are in the north.”

Account manager for political risk services at consultant Control Risks, Dr Joanna Gorska, agrees, adding that property damage and business intervention, such as workers struggling to get to work, has been minimal. Hence, there have been few claims for these problems so far, though she says that “the past couple of months have seen a spike in the volume of requests to assess risks in the region”.

She says these evaluations have found violence to be concentrated in urban areas. As the protests have been anti-government rather than against foreigners, western assets have only suffered accidental damage at worst.

Far more worrying is what happens to contracts once a new government is installed. “There will be instances of investigations into members of former regimes, especially on big contracts with foreign companies,” Dr Gorska explains. “We expect state intervention to increase, but that should mean renegotiation of contracts rather than expropriation or cancellation.”

This is likely to result in overseas fi rms seeing their shares in major joint ventures decrease, as new governments bow to populist demands for domestic companies to reap most of the rewards.

Dr Gorska thinks that many contracts won’t be completely lost, simply because the likes of Yemen and Libya are looking to foreign companies to invest in their infrastructure.

However, not everyone agrees.

Founding partner of fraud detection and risk assessment agency K2 Global Consulting Charles Carr warns that “a whole series of disputes come up” when a new government takes office.

Often, he says, the new regime claims that contract awards were based on corruption.

This then fi lters through to insurance and reinsurance. If a company sees its contract invalidated by a regime because of dodgy deals, an insurer could argue that its own cover is therefore void.

Acts of God Many companies working overseas will have taken out force majeure insurance, which provides cover for contract terminations outside of their control.

This includes ‘acts of God’, such as natural disasters, war and revolution.

Companies will obviously look to exercise this protection, provided it is a part of their political risk cover. However,

PHOTO: GIULIO PETROCCO/DEMOTIX/PA IMAGES

Lines & Risks

Protester takes part in the funeral of Abdullah Hamid al-Jaify, an anti-government activist killed in clashes with police in Yemen

‘When we look at doing business in the Middle East, we have to look at where cover is needed most’ Andreas Pollmann, Munich Re

experience shows that this could result in arguments between insurer and contractor, as they dispute whether it was in fact negligence that led to a loss of contract or change of its terms.

“This is the key question [for business] from the uprisings,” says Carr, who has previously witnessed similar disputes in Sierra Leone. “For example, they will have to determine whether or not the change in government was actually through a revolution in order to trigger the insurance policies.”

Insurer Hiscox has looked to minimise the prospects of cover by providing full political risk and violence cover, so terrorism, riots and temporary business shutdowns are all part of the policy. As the cover is rolled together it is more expensive, but getting payment should be painless.

“From our point of view, there has been increased demand since February, particularly from foreign companies working in North Africa,” says Hiscox chief underwriting officer Robert Childs.

He adds that a lot of this demand comes from a perception of risk, so foreign companies hear of the problems

in a specific country but still increase cover in relatively safe areas.

“Imagine sitting in your office in Durban: you see the riots over public sector spending cuts in Trafalgar Square and you would think that the UK is falling apart,” he says. “Foreign companies want to protect their foreign assets.”

This perception of risk also means that insurers will look to syndicate their cover among a number of parties so that they will not be hit hard by major political turmoil. Naturally, this will again mean that they turn to reinsurers for safety. This means that the price of cover will go up both for the original party and for the primary insurance market.

The biggest risk For major corporates, insurers and reinsurers, the big risk is Saudi Arabia.

Political risk intelligence consultant Exclusive Analysis forecasts a 45% chance of western expats and oil companies being affected by potential uprisings in the country.

“In Saudi Arabia, if royal succession doesn’t happen cleanly, and oil prices increase, this will have an impact worldwide due to rising energy bills,” explains Exclusive Analysis director of risk analytics Dr Rafael Gomes.

Companies that are energy intensive, such as plastics manufacturers, will fi nd their costs hike. Reinsurers, says Dr Gomes, are particularly at risk of claims here, as they tend to be global players. That means that they back the big insurers providing cover to multinationals, which could be most hurt by an oil price spike.

Dr Gomes adds: “Instability in Saudi would increase contagion risk not just for political violence but also commercial risks. The key message here is not that this is the most likely scenario, but that it requires concerted intelligence analysis.”

That said, the spread of political violence from Tunisia to Bahrain was not the most likely scenario, as the wag at the Tower Bridge conference so clearly pointed out. Reinsurers and the primary market alike will have to show a lot more caution in how they price risk in this region, as claims are likely to increase. The scarier the world becomes, the greater the need for their fi nancial cover. GR FIND OUT MORE ONLINE: INSURERS ‘CAN CONTEST LIBYA CLAIMS’ To read this article, and for more breaking news, go to our sister title insurancetimes.co.uk or goo.gl/NX5m1

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28:

Up for debate Industry leaders debate the challenges facing Qatar’s reinsurance sector

32: Wish fulfilment

Can a market be created to meet participants’ expectations?

SPECIAL REPORT: MULTAQA QATAR

MULTAQA QATAR ROUNDTABLE PRESENTED IN ASSOCIATION WITH:

33: In the mix

The prospects for mergers and acquisitions in the region

34: Spilling over

How events further afield are having an impact on the sector

Lines of inquiry GLOBAL REINSURANCE MAY 2011 27

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MultaQa Roundtable At the annual reinsurance gathering in Qatar last month, eight company bosses met for a frank conversation about the industry’s challenges. Ben Dyson reports

Talking heads

MultaQa 2011 presented an ideal opportunity to gather regional and global reinsurance executives to discuss the most pressing matters facing the industry. In a wide-ranging discussion, eight senior executives representing a broad cross-section of the market gave their views on how to tackle current market conditions, how underwriting should be improved and how they manage relationships with cedants.

Europe is very low.

The market correction in catastrophe business around the world – with the exception of Chile where it went up 50% after a major loss – is insufficient relative to the loss. We fi nd little if any opportunity for growth. But growth for us is not a target in itself.

GR: How and where can reinsurers see growth in a soft market? Is it all about mergers and acquisitions now?

MS: One has to live with the cycle. If premium is no longer adequate for you to expose your capital, you shouldn’t.

I know that is easy to say. A lot of organisations can’t do that – they have big staffs, big organisations with offices all around the globe.

It is difficult, but the industry requires underwriting discipline. In the current state of extreme overcapacity, this is not yet happening. I have been in the business for well over 30 years and I haven’t seen a situation like the one we have today. We had the financial market crisis, which in my view is equivalent to one-and-a-half or two Hurricane Katrinas, and nothing happened.

The insurance industry, at least from what I hear in Europe, is proud to say, “we didn’t cause the financial market crisis and we were not affected”. I have

Manfred Seitz: There is very little growth to fi nd in a market like this where you can look around the globe and virtually every territory and every class of business, with few exceptions, is unattractive from a pricing point of view.

While there have been some interruptions, rates have been falling for seven or eight years now. There was some impact of the fi nancial market crisis in directors’ and officers’ [D&O] liability, but only for fi nancial institutions. The rest of D&O is still on a slide, and rates are ridiculously low.

Industrial fi re business is rock bottom.

Liability business in the USA is very low.

GR: What is a sound business strategy in this environment?

difficulty believing that when I look at asset value corrections and low interest rate levels, which are impairing our business very significantly. Additionally, loss cost will increase in an expected inflammatory environment.

Salvatore Orlando: Growth in reinsurance is not something that you have to achieve every year. Managing

Participants Yassir Albaharna chief executive, Arig Charlie Cantlay chairman, Aon Benfield UK Juergen Gerhardt chief executive, Echo Re Michael Gertsch chief executive, Gulf Re Hans-Joachim Guenther chief underwriting officer, Europe and Asia, Endurance Peter Koerner chief operating officer, ACR ReTakaful Salvatore Orlando head of southern Europe, MENA, Africa and Latin America, PartnerRe Manfred Seitz managing director, Berkshire Hathaway Group Reinsurance Division International

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MultaQa Roundtable the cycle is much more important.

Reinsurers are much more dependent on loss ratios than cost ratios. You can survive with a higher cost ratio, but you cannot survive with high loss ratios several years in a row.

Hans-Joachim Guenther: I totally agree.

Managing the cycle is a science in many respects. You run models that allow you to determine comfortable ‘exit prices’ – the points at which you decide to withdraw from certain unprofitable lines of business.

Secondly, and even more importantly, you really need to understand the markets and your clients to create a sustainable business model.

Opportunistic buyers present more of a challenge in a soft market. Long-term relationships with clients are more

‘Over the past two years all the ratings agencies have had a negative outlook.

Are we doing something wrong?’

Yassir Albaharna, Arig

easily developed where you know you can mutually agree on the average price you need across the cycle. However, ensuring that the purchasing strategy of your client is not changing over time and becoming opportunistic is crucial.

Charlie Cantlay: I think it is incredibly difficult for a reinsurer to grow organically in today’s market. The smart underwriters are looking at new opportunities in product and geography, acquiring teams, or participating in mergers and acquisitions. Or they are simply giving their capital back and concentrating on the underwriting so they are positioned to survive and prosper when the market does change.

an insurance company where growth is not good.

If you shrink your portfolio, you get penalised by analysts who compare you to your peers and say, “you’re not going in the right direction”. Then your share price goes down. As an organisation, you have to weigh those implications and ask yourself how much cycle management you can really do if nobody else does it.

SO: Our industry always focuses discussions on rates. We also need to talk about exposure. I believe we are going to see some changes in the market over the next couple of years.

MS: It is worth looking at industry-wide and individual company results in more detail. In 2008/09, we had the fi nancial market crisis. In 2009, results for the industry were rather positive. Why? Because the business is so sound? No. It was more by chance, because there were no natural catastrophes whatsoever and asset value corrections, as well as low investment yields, had not yet fully materialised.

In 2010, it was a mixed picture.

Some Bermudian companies suffered impairment because their investment income declined due to their investment profi les, which are somewhat different from those of continental European reinsurers. Continental reinsurers, on the other hand, had comparatively good results – again not because the business was so sound, but because of fi nancial gains and increased values of existing bond portfolios with higher yields.

Is the industry’s business model okay, therefore? The answer can be found in analysts’ valuations of reinsurance companies. Why are most reinsurers trading at or below book value?

Yassir Albaharna: Over the past two years, rating agencies have maintained a negative outlook on the whole reinsurance business – without exception. So we are doing something wrong in their eyes?

GR: Do these outside observers fundamentally misunderstand the business, perhaps?

But the exposure is there and I think the really dangerous thing is when we start to get frequency of severity losses.

I believe that, in general, the quality of the business is improving because we are learning from our mistakes, but the exposure is still there.

MS: When you look at the past couple of years, we had losses outside the main catastrophe scenario zones – Chile, New Zealand, Australia. We did not have any catastrophes in the major exposure areas such as US hurricane, California earthquake, Tokyo earthquake or European storm. Now, with the Japanese earthquake, this is moving closer to the classic top exposure areas.

With all that has already happened in 2011, if some large event occurs in one of the classic exposure areas during the remaining three quarters of the year, you would have a real scenario – I think that would defi nitely turn the market.

CC: I totally agree with that. As we go into 2011, the market is more fragile than it has been for many years. If there is a storm or another quake, given that most people have got close to exhausting their catastrophe budgets already, the effect would be very significant.

HG: One of the underlying reasons for cycles being less volatile than in the past is that the influx of fresh capital is much easier and much more fluid than it was 20 years ago. This is a danger in itself, because it limits our ability to set economic terms that would allow us to earn an appropriate risk adjusted return.

Peter Koerner: When we look at losses, we always talk about return periods – whether an event is one-in-100 years or one-in-250 years. We assume we can get premiums for 250 years to pay for losses, but we cannot. More capital comes in that is happy to write the business at much lower rates.

SO: Good point. That means the product must be changed.

GR: Is anyone changing the product?

Michael Gertsch: The difficulty there is that you can’t be technically oriented and focus on cycle management if analysts, shareholders and rating agencies are still looking at growth as a measure of success. You can only execute cycle management if your shareholders agree and support that strategy and if the analysts understand there are certain periods in the life of

MG: We are operating in an industry that has a very short memory. When we talk about pricing, we like to talk about areas: this area has no losses. Well the area will have losses eventually. And that is what a lot of people don’t understand.

If you just have one or two good years as a reinsurance company, that doesn’t mean that the underlying business is sound. You might just be lucky.

CC: Underwriting is both art and science.

I think the science should inform; it should never be the basis of a decision.

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MultaQa Roundtable Unfortunately, too many people in the past 10 years have used the science as the basis for their underwriting. There is no substitute for 30 years of underwriting experience to overlay the science.

MS: It is relatively easy in today’s world to underwrite and price risk according to model results provided by various modelling companies. Models are a positive development and may be helpful for guidance. However, they cannot substitute time-tested risk assessment and pricing techniques developed in the (re)insurance industry over many decades and individual underwriting experience.

HG: Let’s not forget too that models also create a kind of artificial transparency between reinsurers and cedants. If we decided that a 50% load was appropriate to compensate for the uncertainties in a piece of business, competitors could differ in their assessment of the risk of uncertainties and charge a lower rate. In this way, cedants would have a good idea of the exit price of the existing market.

The belief in modelled numbers unfortunately led to the commoditisation of our business. The transparency of the pure risk price is something you will not fi nd in any other industry to this extent.

YA: The solution is in our hands. We are the ones who chose to underwrite this business. We are the ones whose shareholders have given us the capital to underwrite. If clients are not listening to us, I think we only have ourselves to blame when we choose to disregard business fundamentals. We have capital and we need to service it, but that comes at a price.

MG: There is a tendency to try to calculate everything. There are tools and systems available, but so many assumptions are going into them. That is when underwriting comes in.

When you talk about cycle management, it becomes increasingly important to underwrite, because if you went by pure pricing, you would not write any business any more. There is still business out there that can be written, but you have to underwrite – fi nd the reasons other than price why a risk is better than the normal model and so can be written.

A lot of companies are struggling with this these days and are calling for technical underwriting. It’s almost like people have forgotten what underwriting is. Taking assumptions and pricing is one part of it. The

modelling is one part of it. But then you sit down and you take a decision for certain other reasons and factors.

HG: The pure belief in modelled numbers was a step towards commoditising our business and that is not playing out well.

SO: One area of growth we have experienced over the past couple of years has been longevity business. There, we can find some interesting, decent business. Buyers are willing to pay a certain price because they can’t predict the future. I think it is a fair business environment. Buyers have a problem, you can give them capital or a product, and they will be prepared to pay.

Juergen Gerhardt: It is no use hopping from one treaty to the other, one year to the other. You should build up a long-lasting relationship with the client

‘It is not reasonable to expect people to carry on buying from the same partner if there is a loss’ Charlie Cantlay, Aon Benfield

and you can also ask the client for compensation if you have a loss in one year that would overcompensate what you had shelled out.

PK: It is very difficult to fi nd long-term treaties over three years or so, because companies don’t like to commit.

YA: We are happy to give buyers the terms and conditions that will ensure such a long-term relationship. But unfortunately there are no takers – continuity cannot be one-sided. So the treaties continue to be for 12 months and subject to an annual review.

loyalty, but I think we should get rid of the word ‘continuity’.

I think people are setting out their product, their coverage, their price on an annual basis. You have to make annual returns to your shareholders, and that is pretty much the way people buy. But there is an overlay of loyalty.

HG: I agree. Loyalty is often still out there, but it is not always translated into continuity. This is what good underwriters with in-depth knowledge of the marketplace are able to assess, because there are behaviours you can observe with clients.

I’m not saying you can trend it out, but you get a feeling for what kind of philosophies a client seeks in its reinsurance partners. That helps to build your book. The continuity that might have been in the market before I started my career is defi nitely gone.

CC: If you go back 20 years, the contact between client and market was minimal. Now it is intense and we absolutely encourage it because what you are trying to foster is a partnership approach, within certain parameters, between your carrier and client. In all my experience of the market, a partnership approach ultimately does better for a client than an adversarial approach between reinsurer and client.

SO: I think the market has changed completely. Twenty to 25 years ago, the continuity factor was driven by the fact that most of our clients were linked to a Swiss Re or a Munich Re. They were the lead reinsurers. Today some reinsurers like to continue to say, “I’m the leader”, but who is the lead? Lead doesn’t exist any more.

MG: The role of the broker has also changed. When you go back – when I started in this market 25 years ago – the broker was an intermediary. He was trying to create this path between the reinsurer, the insurer and the client. These days, the role of the broker has changed to getting the best deal for the client.

GR: Are clients fickle?

CC: People continue to use the word continuity. I think it is a much overrated phrase. It is not reasonable to expect people to carry on buying from the same partners time and time again if there is a loss. You hope that there is

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CC: I would add that the advisory role rather than just the transactional role has become critical to brokers.

Occasionally, we will say to a client, and it may not be in our best interest at all, “you are better off not buying anything”.

We don’t get paid for saying that. But if you are going to be a broker with a longterm future, you have to make decisions that might not be in your short-term interest to build up the longer-term value the client will put on your advice.

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MultaQa Roundtable PK: To get the best deal, we all agree that it is the cheapest but maybe there is a bit more to it. It can be expensive to change horses every year. What are all the costs of changing your leader, and how often can you do that?

SO: I don’t think a lot of people calculate the costs of change. They may have no idea what the implications around this are. The key decision-maker may not consider the additional cost burden they are adding when they decide to change a business partner.

This probably is more affordable in an emerging market because of cheap labour, but in mature markets those changes are extremely expensive and under-estimated.

GR: Where does the broker’s duty of care lie when a reinsurer undercuts the incumbent and they want to move?

CC: The broker’s duty is very clear: it is to give advice to the client about where the best coverage and the best price lies and to clearly explain to that client what the ramifications are, were they to change from that market to this market and explain every aspect of that.

Gone are the days, if they ever existed, where the broker would try to favour a particular market. If you start doing that, you might as well go and sell cars.

That is not the business we are in. We are in the business of giving what we believe is the best impartial advice to the client.

Sometimes that may involve saying: “you may want to think very strongly about moving from this market that is charging a higher price, because they have been with you for this period of time and they have stuck there, but it is your call”.

It is very rare these days that a broker gets the chance to put a market of their own choice onto a slip. Nearly all of our slips are dictated by the clients, or at least signed off in terms of who we are going to see. It is a much more controlled process than it used to be.

If we took an arbitrary decision not to offer a renewal, we’d be fi red instantly, and rightly so.

GR: How do clients make their decisions? Is it solely price?

CC: Some are entirely short-term price driven, and it would be foolish to suggest a lot of the clients we all deal with aren’t in that group. It is probably some of the medium to larger clients who value a relationship with a market that they have had for many years and want to keep it, so occasionally they will pay more. GR GLOBAL REINSURANCE MAY 2011 31

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MultaQa: Market development

Wishful thinking MultaQa 2011 opened with an invitation to firms to list their business wishes, but what prospects are there for creating a market in Qatar that can fulfil them?

In the opening address at the MultaQa Qatar 2011 event, His Excellency Yousef Hussain Kamal, minister of fi nance and economy for the state of Qatar, set the scene by urging fi rms wanting to do business in the state to send wish lists.

“We will study them,” he told delegates. “We hope to create a great atmosphere for you here in Qatar.”

His comments reflect the aims of the wider Gulf Cooperation Council (GCC) region, as it hopes to forge an attractive operating environment for local and international (re)insurers alike and become a hub for the business, much as Bermuda and London are today.

The challenge of creating a vibrant (re)insurance market in the GCC region was revisited in the fi nal panel session of the MultaQa Qatar event, chaired

by Bahraini (re)insurer Arig’s chief executive Yassir Albaharna.

Overcoming the obstacles One challenge the GCC region faces in creating a dynamic marketplace to rival other jurisdictions is that it lacks some of the drivers that stimulated development in other (re)insurance centres.

Bermuda’s enviable position, for example, was born out of necessity. The island started life as a captive centre.

It then became a primary casualty insurance centre as a shortage of coverage in the USA – driven by heavy asbestos and environmental liability losses – spurred the growth of carriers such as XL and Ace. Later, a shortage of US property-catastrophe capacity after Hurricane Andrew in 1992 led to fi rms such as PartnerRe, RenaissanceRe, and IPC Re (now part of Validus) taking off.

“At the moment I do not see a similarity of need in the GCC region for the reasons that developed the Bermuda market to what it is today,” (re)insurance broker RFIB Middle East director Mark Randall said during the debate.

While the region has low insurance penetration numbers compared with the rest of the globe, making it appear ripe for further expansion, the numbers may not tell the whole story. “There is low penetration because there are high GDPs and very few people, so the figures are distorted,” said Bahrain-based

Islamic reinsurer ACR ReTakaful chief operating officer Peter Koerner.

Furthermore, retention levels among local insurers are low, meaning that a great deal of risk gets passed outside the market to international reinsurers.

However, no on was in doubt that the GCC has many ingredients for a lively (re)insurance marketplace, despite some hurdles, Equally, some perceived drawbacks are starting to fall away.

Tackling the point about low retention levels, Aspen Re head of international property facultative business Heather Goodhew said: “External drivers could come from the reinsurance market itself, such as a hardening in capacity, pricing or commission levels, which

‘There is low insurance penetration because there are high GDPs and very few people’ Peter Koerner, ACR ReTakaful

would force companies to rethink the retention level,” she said.

Internal impetus for change, argued Goodhew, could come from fi rms improving risk management capabilities, although she added that this would need sophisticated pricing models and extra actuarial and underwriting staff. “There are signs of change,” she said. “We do see some companies restructuring what they do. I think it will be a slow path but the signs are potentially there.”

Economic factors could also play in the region’s favour. Commodities are said to be enjoying a ‘super-cycle’ – a period of extended growth. As a region rich in natural resources, such as oil and gas, the GCC could benefit from this, which will in turn spur more demand for insurance and reinsurance products.

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“Higher commodity prices will result in higher cargo values and so insurance will increase,” said ACR ReTakaful’s Koerner. “Trade will increase. Expanded travel capacities mean more planes will come, and that will be beneficial for aviation insurance.”

Building a strong future The many infrastructure projects under way in the Gulf region should also present international and local (re) insurers with ample opportunities.

Speaking earlier on the second day of the conference, Qatar Chamber of Commerce & Industry honorary treasurer Ali Bin Abdulatif Al Misnad outlined projects in Qatar alone, estimated to be worth $100bn. These include stadium development for the country’s hosting of the 2022 FIFA World Cup. “On the commercial side I can almost say that, without our own doing, there will be tremendous growth we can look forward to,” Koerner said.

A further positive for the region is the rise of fi nancial centres. Three jurisdictions in the GCC – Dubai, Qatar and Bahrain – have developed such centres to attract a broad range of fi rms.

While there is debate about whether the region needs three fi nancial centres, they are clearly welcome.

“They are an opportunity,” said Aspen Re’s Goodhew. “By being explicitly committed to developing insurance markets, they raise the profi le and interest. They are doing positive work.”

As the development of the fi nancial centres highlights, there is fragmentation in the region as individual countries carve their own path. However, there is talk about greater co-operation between the GCC members, which could one day turn into action and boost growth in the region’s (re)insurance market.

“Harmonisation or a common market throughout the GCC is a laudable dream and a goal that hopefully all regulators have in mind,” said law fi rm Clyde & Co partner Wayne Jones. He acknowledges that such an achievement may be a long time coming, particularly as regulators are minded to tackle challenges in their home markets before thinking about collaborating with others.

However, he adds: “Initiatives by organisations like the IAIS [International Association of Insurance Supervisors] and the buy-in of some local regulators into that are going to be absolutely key in moving that forward. If you sign up to the IAIS’s principles, you are all moving towards a similar goal.

It becomes that much easier to speak to each other and work things out.” GR

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MultaQa: M&A

Motivations to merge As insurance firms proliferate and regulation picks up pace, discussion at MultaQa turned to the prospects for mergers and acquisitions in the GCC region When it comes to insurance companies, the GCC region may have too much of a good thing.

Using his company’s home market of Bahrain as an example, (re)insurer Arig chief executive Yassir Albaharna said the country was home to 30 domestic direct insurance companies, plus a further 26 foreign fi rms – all chasing roughly BHD220m ($82.6m) of premium.

And that is just Bahrain. Saudi Arabia is home to 34 (re)insurance companies, and has placed a freeze on new entrants.

Therefore, there was much talk about potential mergers and acquisitions in the GCC region at MultaQa Qatar 2011. Speaking at the chief executive panel session on the fi rst day of the event, Munich Re’s client management executive for the Middle East and North Africa region, Andreas Pollmann suggested that the effects of regulations and standards elsewhere in the world would push GCC insurers to merge.

said several factors were suppressing mergers and acquisitions in the GCC region.

“At the moment there is very little pressure to sell on the companies that are in place,” he said. “The insurance industry is seen as a growth sector, so those who have entered the market and have licences are in the position of trying to exploit the growth to gain market share. In order for M&A activity to happen, there needs to be some pressure on companies to sell.”

‘The Saudi regulator is keen to see good companies survive and bad companies weeded out’ Wayne Jones, Clyde & Co

Thinking big “If regulators want companies in their markets that are able to build a sufficient risk pool, are big enough to attract talent to develop their underwriting standards and big enough to retain business and not just pass it on to reinsurers, they require consolidation in the market,” Pollmann said.

He added that regulators hoping to create such a situation would not increase capital requirements because there was an abundance of capital and willing investors.

Instead, he suggested, regulators could impose certain operational standards on companies, such as underwriting and reporting requirements, as well as monitoring risk retention levels.

“If the company does not achieve the necessary retention, the regulator is called to remove this company from business. This will obviously hurt some companies,” he commented.

However, there has been little activity to date. In a panel session on day two of MultaQa Qatar, law fi rm Clyde & Co partner Wayne Jones

Even where there are willing buyers and sellers, regional rules can get in the way. “With the exception of the new fi nancial centres, such as the Qatar Financial Centre and the Dubai International Financial Centre, it is very difficult to buy and sell companies,” Jones added.

As one example, Jones pointed to Saudi Arabia’s restrictions on new companies entering the market. However, he added: “I know the regulator is keen, though, to see good companies survive, bad companies weeded out and absorbed by other companies.”

A further restriction is the United Arab Emirates’ disallowance of composite insurance, meaning that insurers writing there must choose either life or non-life.

“I know a number of international companies would love to pick up a

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composite insurer’s life business and partner with them on that. But it is exceptionally difficult with the legal structure the way it is and the way the regulations operate at the moment,” Jones said.

In addition, the structure of many regional fi rms as public companies, which may trade rarely on the stock exchange and sometimes only once on the day of incorporation, could make acquisitions a challenge, he said. “It adds another layer of complication to how you go about buying a company or buying a book of business.”

Clamour for M&A That is not to say there has been a complete dearth of M&A activity in the GCC region. And while regulations can prove a barrier, some regulators can facilitate deals.

In February 2010, UK-based insurer RSA announced it was buying Oman’s third-largest insurer, Al Ahlia, from the Oman National Investment Corporation for £31m ($51m).

In October of the same year, Swiss insurer Zurich agreed to buy 99.98% of privately-owned Lebanese insurer Compagnie Libanaise D’Assurances.

A key attraction for Zurich was the company’s licences in the UAE, Kuwait and Oman, giving it a presence in the local markets outside its DIFC regional base.

Jones, whose fi rm Clyde & Co worked on both deals, said the RSA transaction in particular was helped by regulators.

“The Omani regulator was very accommodating on that transaction and I think that is a significant contribution to why it went ahead,” he said.

Despite the clamour for more M&A activity in the GCC region, some warned that it should not be seen as a panacea for the market’s difficulties.

“To me it seems M&A is somehow being marked as a solution to some problems here,” said Islamic reinsurer ACR ReTakaful chief operating officer Peter Koerner. “If that is the case, I think we are at too early a stage for it to be a solution.”

He added: “M&A for me is something that belongs to the most mature markets – Japan for instance, or Taiwan.

These are markets where there is probably nothing else left than to merge.

In the GCC, I would fi rst advocate for other measures.” GR GLOBAL REINSURANCE MAY 2011 33

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MultaQa: Global influence

The big picture With Japan reeling from natural disasters and political upheaval spreading throughout the Middle East, MultaQa 2011 looked beyond Qatar and the GCC region MultaQa Qatar undoubtedly has a strong GCC flavour pervading the prepared speeches and informal discussions. But it is very much an international conference, and delegates’ thoughts and comments wander frequently to issues outside the region.

This was true at the 2011 event, not least because a magnitude 9 earthquake and ensuing tsunami had struck Japan just three days before it opened its doors on 14 March. At the conference, as in the wider market, there was much speculation about what insured losses would be and how the event would affect reinsurance prices, terms and conditions.

A time for discipline In his speech on the fi rst day, Lloyd’s deputy chairman Graham White set the global agenda, urging the market to focus on underwriting discipline despite the Japanese tragedy. “There is no moral or fi nancial value in waiting for a market-turning event – we must always look to be better,” he said. “This is a moment of opportunity to get back to basics. If rates are low and investment income is hard to come by, then a clear spotlight focuses on underwriting.”

White pointed out that the property/ casualty (re)insurance market had made an underwriting profit just five times since 1975, adding: “An entire generation of underwriters has grown up working in an environment where it is not necessary to derive a profit from underwriting. Well – it is now.”

Although underwriting discipline is arguably the underwriters’ domain, White also noted that brokers have a role to play in maintaining sound practices.

He urged brokers to act responsibly by looking for stability when placing business rather than just the lowest price.

“In the insurance market, as in the supermarket, you get what you pay for,” he said. “Mutton never tastes quite as good as lamb. Insurance buyers want security. At Lloyd’s, we make it our aim to deliver that.”

In the first panel of the day, PartnerRe’s head of southern Europe, MENA, Africa and Latin America, Salvatore Orlando, echoed White’s calls for discipline. “It is

essential to apply cycle management to be a successful company,” he said.

He also contended that the industry should not expect constant growth.

“Everyone wants to do business. We are business people. But in reinsurance it is not necessary each and every year to, say, increase your portfolio by 10%,” he said.

Others suggested that the global (re)insurance industry was not totally lacking in growth prospects. While growth was stagnant in mature markets, Orlando pointed to emerging market powerhouses such as Brazil, Russia, India and China that would offer opportunities.

‘In the insurance market, as in the supermarket, you get what you pay for’ Graham White, Lloyd’s

While agreeing that the sector does not need constant growth, Echo Re chief executive Juergen Gerhardt expected to see medium to long-term prospects. “As exposures are expected to grow more rapidly than the overall GDP – because of technical progress, an increase in international value, and also because of concentration of values in areas prone to natural catastrophes – this should also help reinsurers to grow faster than GDP,” he said.

Others argued that reinsurers can also create their own openings through innovation. Berkshire Hathaway Reinsurance international division managing director Manfred Seitz said the reinsurance industry had been lacking innovation in recent years.

He said primary fi rms were driving the push into emerging markets and the development of new products for mature markets. “The reinsurance

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industry can play a supporting role and hope to help promote this.”

He added: “In recent times we haven’t done much, We have looked more at how we can move away from risk.”

Seitz contended that the Japan catastrophe could provide an ideal opening for reinsurers to get back into the innovation game. He recalled that the attacks on 11 September 2001 spurred the sector into action because of the unexpected accumulation of losses from different business lines in a single event.

“It will happen again now in Japan where we have the combination of earthquake and tsunami. That is an area where the reinsurance industry could and should innovate,” he said.

He referred to Munich Re’s proposed industry-wide initiative to offer greater liability limits to offshore oil rigs as a recent example of change. “There is plenty of potential, which I hope will prompt a return to innovative behaviour,” he said.

Global influences Throughout the conference there were also reminders that, while the GCC is often considered insulated from events in the rest of the world, it is nonetheless influenced because of heavy foreign interest and participation.

While there is no equivalent of Europe’s Solvency II capital adequacy regime planned for the GCC, it could still feel effects because of the interconnected nature of the international (re)insurance markets.

“Standards that are developed globally set the benchmark for the companies in the GCC region to live up to and build resilient operations that can in future attract business to the GCC markets,” said Munich Re client management executive for the Middle East and North Africa, Andreas Pollmann.

The conference also highlighted the influence the region can wield on the international (re)insurance markets. A further distraction was the civil unrest in some GCC member states and the wider Middle East and North Africa region.

Some delegates could not attend because of clashes between anti-government protesters and riot police in the Bahraini capital of Manama the previous day.

Some speakers noted that the unrest in the region was sparking interest in obtaining terrorism and political violence cover from the global market.

(Re)insurance broker RFIB Middle East director Mark Randall said most local writers exclude terrorism and political violence from their coverages, although a dedicated terrorism writer has been established in the Dubai International Financial Centre. GR

34 MAY 2011 GLOBAL REINSURANCE

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Country Focus Israel is a relative oasis of calm in a region being torn apart by civil war and natural disaster. Helen Yates reports on the state of the nation for the reinsurance sector COUNTRY FOCUS

ISRAEL

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Country Focus

Dual growth Speaking at last year’s Tel Aviv Re event, the chairman of the Israel Insurance Association and president of Harel Group, Gideon Hamburger, said the conference had taken off as a significant event in the global reinsurance calendar. “We are very proud that the Israeli insurance market is growing from year to year, and that it has not suffered from the worldwide economic turbulence,” he said.

The traffic is not just one-way.

While Israel’s local carriers have kept a comparatively low profi le, they are increasing their involvement in other markets. “The Israeli market has grown over the past 20 years,” says Aon Benfield Israel’s London-based head, Morris Mindel. “We have seen mergers and acquisitions – mainly of a domestic nature – but we’ve also seen Israeli companies investing outside Israel in central Europe, the USA and in London.”

London and Israel have continued to cement their risk-sharing relationship over the past decade. In 2001, Clal Insurance Holdings established a presence in the Lloyd’s market with its acquisition of Broadgate Syndicate 1301, which underwrites a portfolio of six main classes, including property, accident and health, and bloodstock.

In turn, Lloyd’s granted delegated underwriting approval to Israeli insurer Kesh International Underwriting Agency in December 2010. The new coverholder will continue to focus on niche lines of business – including directors’ and officers’

cover – some of which will be placed in the Lloyd’s market.

State of play As with many mature insurance markets, the top five players (Clal, Migdal Group, Harel, Phoenix and Menora Mivtachim) account for a large proportion of premiums: 61% of the non-life market in 2009, down from 63% a year earlier. Consolidation has helped to concentrate the market, with the introduction of a more stringent regulatory system driving further mergers and acquisitions.

Motor dominates the primary sector, accounting for around 52% of the non-life premium volume, followed by property at about 20%, with liability and health covers coming in third and fourth positions.

Aside from the compulsory covers – motor and workers’ compensation – non-admitted carriers are able to underwrite most lines of business. As a result, some of the larger risks are placed outside the local market in London and Europe.

The majority of primary placements are made via agents, with few Western-style brokers in operation.

The intense competition between agents and insurance carriers exerts downward pressure on rates.

“The higher-valued property business tends to be more driven by what’s available in the facultative reinsurance market,” Mindel says. “The mediumsized values tend to be more about domestic competition, and in 2010 there was more competition on the medium-sized commercial and industrial business.”

‘We are very proud that the Israeli insurance market has not suffered from the worldwide economic turbulance’ Gideon Hamburger, Harel Group

The local carriers are big purchasers of reinsurance capacity from the global market. “On the property side, domestic insurers have a significant exposure to natural hazards – mainly earthquakes – but there is an element of flood and hailstorm exposure,” Mindel says. “Cedants are astute in ensuring they have sufficient protection for

their balance sheets, and quite often they’re working with our analytics experts to ensure they’re buying the right structures and the right level of reinsurance.”

A large proportion of reinsurance is purchased direct from European reinsurers, such as Swiss Re, Partner Re and Hannover Re, although reinsurance brokers have been increasing their presence in the market.

“Historically, the insurance companies have bought proportional reinsurance, as it’s been a good method of insuring their portfolio – especially because of the earthquake exposure – and in the early days that was mainly done on a direct basis,” Mindel explains.

“In more recent years, Aon Benfield has played a much bigger role in supporting the cedants in the placement of their fi re treaties.”

Surviving unscathed The world’s richest man, Warren Buffett, put Israel on the global investment map when he paid $4bn for an 80% stake in metal-cutting tool company Iscar Metalworking Cos in 2006. He is full of praise for the country and its economy, saying: “If you’re going to the Middle East to look for oil, you can skip Israel.

PHOTO: QUIQUE KIERSZENBAUM/GETTY IMAGES

It may not have the slick marketing campaigns of some other Middle Eastern insurance centres, but Israel is slowly and surely growing in prominence on the global insurance stage.

In May, senior representatives from the global reinsurance industry will gather for the fourth annual Tel Aviv Reinsurance Conference. The event’s popularity is a good reflection of how Israel is perceived by the brokers and carriers.

Boasting a mature market and some of the Mediterranean’s biggest reinsurance buyers, the event is an important market for international players. With one of the highest premiums per capita in the world at $1,500, and a total turnover of $11bn in 2009, the market has been growing at a steady pace over the past decade.

Despite softening rates over the past few years – driven by low loss experience and intense competition – this well-regulated, mature market with its big reinsurance accounts continues to attract plenty of interest.

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Country Focus

COUNTRY FOCUS

Israel

The top five insurers – Clal, Migdal, Harel, Phoenix and Menora Mivtachim – account for 61% of the non-life market in 2009, down from 63% a year earlier. Consolidation has helped to concentrate the market, with the introduction of a more stringent regulatory system driving further mergers and acquisitions.

Population: 7.5 million GDP: $206.4bn (global ranking #49) FDI: $3.8bn

If you’re looking for brains, look no further. Israel has shown that it has a disproportionate amount of brains and energy.”

Israel’s well-documented security issues have had little impact on the economy or the flow of foreign investment into the country. The economy is thriving, having emerging relatively unscathed from the fi nancial crisis. It has become a world leader in technology, software development and biotech industries, backed by a thriving venture capital industry.

Israel’s diamond market also maintains a global reputation. The major industrial sectors include metal products, electronics, biomedics, processed foods, chemicals and transport equipment.

The country has shown no signs of being swept up in the wave of political unrest that has crashed through Arab nations, such as Bahrain, Egypt, Libya, Oman, Jordan, Saudi Arabia, Tunisia and Yemen. Mindel believes that Israel’s democratic parliament means it is highly unlikely to experience the type of unrest recently witnessed in neighbouring countries.

But the direction of pricing may be set to change for catastrophe-exposed

lines of business – in particular reinsurance. This is not necessarily a reflection of events at home, but potentially as a result of catastrophes in other parts of the world. “Following Japan, there is quite some focus on the catastrophe area – that’s both on the life and non-life areas of the business,” Mindel says.

“On the non-life side, there’s a focus on catastrophes, and companies are buying their programmes up to a [Risk Management Solutions] return period of 1 in 1,000 years. In view of Japan, they are also looking at whether this is sufficient or whether they should be considering additional purchases.”

Disaster watch Israel itself has not experienced any major hits or losses in recent years, despite its exposure to earthquake risk and other natural hazards. Its neighbours have been less lucky, with a magnitude 6.1 earthquake in Turkey causing 42 deaths and several building collapses in March 2010.

“There have been no significant earthquakes to speak of,” Mindel says.

“There have been some minor storm losses, but in general the natural peril losses and loss experience in Israel has been excellent – in fact better than Greece, Italy and Turkey.”

But the potential for a major quake is never far. On 1 April, a strong magnitude 6.2 temblor hit Crete, with shockwaves felt throughout Egypt, Israel and Malta.

According to catastrophe modeller RMS, while Israel is considered to have moderate seismicity, it is threatened by the Dead Sea Rift, which creates a series of faults running across the length of the country.

Major industrial sectors: metal, electronics, biotech, processed foods, chemicals and transport equipment Reinsurance premiums (2009): $ 11bn

RMS’s Israel earthquake model captures the Dead Sea Rift hazard and its faults, including the Jordan Valley Fault in the north, which generates magnitude 7 or larger quakes every 1,000 years. The last major event was in 1033, increasing the current probability that a major quake will occur soon.

This is a particular threat to Jerusalem, which is located less than 40km from the fault. Should a 7.5 magnitude quake occur here, it could cost more than $30bn in losses. As the country continues to develop its economy and infrastructure, its exposures to natural perils such as earthquakes will grow.

Turning to man-made perils, terrorism insurance remains tougher to place than other classes of business, according to Tal Nahari Amrami, managing director of Toren Insurance Agencies. Local insurers provide cover for property damage, with the government covering bodily injury and death, he explains in an article for Worldwide Risk Solutions.

“This cover for property is expensive and the insurance companies purchase reinsurance from European reinsurers,” Amrami explains. “The terror cover is excluded under directors’ and officers’ and bankers’ blanket bond policies.”

Terrorism risks and the potential for quake losses may be a key concern.

However, with its well-developed (re)insurance sector, and a solid economic infrastructure to support that, Israel is well equipped to handle any major events that lie ahead. GR

ISRAEL COUNTRY FOCUS IS PRESENTED IN ASSOCIATION WITH:

GLOBAL REINSURANCE MAY 2011 39

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Rewind

Monty From a shiny iPad 2 to a rump steak cooked medium rare, our man seeks the finer things in life

Lloyd’s goes to the next level

bloke Clive O’Connell. I just hope he’s careful.

I understand he injured himself in an (ahem) unfortunate place falling off his bike a while ago.

Clive, if you’re reading this – pack a cushion, mate.

So the iPad continues its unlikely march through the otherwise technophobic world of Lloyd’s, aided and abetted by the recent launch of the iPad 2 (which I naturally have my beady eye on). These marvels have even caught the attention of none other than top man Richard Ward himself. He was overheard joking at a conference the other day that with the latest model, which sports a pair of cameras, market participants could take pictures of themselves while doing business at the box. Nice. Still, you’d expect the man who kick-started electronic trading in his old workplace at the International Petroleum Exchange to keep abreast of the latest technological trends.

Big hit down under From cycling to rally driving … Many congrats to XL London Market aviation underwriter James Owen and his co-driver for completing the Targa Tasmania tarmac rally down under in early April. James, who was racing his 1968 Triumph TR5, came 58th in the Late Classic Handicap event, and 73rd in the Classic Outright. Not bad for a man whose aim was merely to make it across the finish line. As the sole European participants, James and co-driver became minor celebrities in Tasmania, apparently speaking on ABC Radio Hobart within 10 minutes of arriving. And they say insurance is boring.

No cred to Clinton rumour On the subject of top jobs at Lloyd’s, there was a rumour doing the rounds in the city that none other than former US president Bill Clinton was in the running to take over from Peter Levene when he slings his hook later this year. Being the inquisitive type, I took this one to the top (well, almost) to find out if there was anything in it.

I was rather disappointed to learn that this story has about as much credibility as some of the yarns I spin down the pub. Even so, hats off to whoever started that – it had me going.

Cushioning the blows Some may think it is early to start talking about Monte Carlo, but I’m already looking forward to it.

I do have a good excuse for bringing it up so soon, though. The Lloyd’s Cycling Club, complete with fetching blue outfits, will be cycling from Lloyd’s to Monte Carlo to arrive in time for this year’s RendezVous. The ride will raise money for charities Combat Stress and Fishing for Heroes by seeking industry sponsorship. Guy Carpenter and Swiss Re are already backing the team. One of the participants is Barlow Lyde & Gilbert lawyer and all-round good

Contingent complaints

I’m a bit tired of brokers always getting the stick when something goes wrong

As many of you will have noticed, contingent commissions have reared their ugly heads again. I remember what it was like last time around, and I can’t say I’m happy about it.

I’m a bit tired of brokers always getting the stick when something goes wrong. Okay, some brokers accept contingent commissions or whatever pseudonym they’re going under these days. But we can’t pay them to ourselves, you know.

Try as we might, we’ve not yet managed to tap directly into underwriters’ bank accounts.

Steak-out Like every red-blooded man, I love a good juicy steak cooked medium rare. So in a recent wander and natter round Leadenhall with Markel’s Jeremy Brazil, I was more than thrilled to find out he spends his weekends slaving away on his own cattle farm. With the weather warming up and barbeque season looming, I can ask Jeremy to send a few fresh steaks my way. The rump is best, mate, and maybe some sirloin will do too. GR

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