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Pulling the levers As their stranglehold on the industry grows, we go behind the scenes at the rating agencies

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PartnerRe’s new boss isn’t feeling the pressure

Strategy talk from Swiss Re and Munich Re

23/08/2010 17:37

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Cover photography: Name

Ratings are based on what reinsurers tell the agency, so small wonder it sometimes goes wrong


“Reinsurers need the rating agencies – otherwise they can’t do business,” muses one expert. “That’s why they’re not prepared to criticise them too publicly. I would say this illustrates the point that these guys have got too much power, and they’re not regulated or checked by anybody.” Well, this month, we’ve taken an in-depth look at the rating agencies’ record, their relationship with the reinsurance industry, and that allpowerful hold they have on who does business with whom. Many chief executives are swift to criticise the agencies in private, arguing that they have too much control and not enough independence, and that they often lack the basic skills needed to understand a reinsurer’s business model.

is an honesty game – the ratings are based on what reinsurers tell the agency, so small wonder it sometimes goes wrong. But in the absence of a viable alternative, brokers and cedants need some way of judging their reinsurers’ fi nancial stability – this system may be far from perfect, but what’s the alternative? With a bit of luck, Solvency II and other improved forms of regulation will help; it will sift out the weaker companies from the system, meaning there could be less reliance on the agencies’ views. In the meantime, though, they continue to hold sway – and while chief executives may mutter in corners, don’t expect to hear them speak out any time soon.

In public, with the ever-present spectre of a fatal downgrade, it’s a different story. No one can deny that the agencies were embarrassed by the events of the fi nancial crisis – and their credibility has been in question ever since. Coming up with a rating

Ellen Bennett Editor-in-chief Global Reinsurance GLOBAL REINSURANCE SEPTEMBER 2010 1

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23/08/2010 17:44

September Munich Re and Swiss Re talk, page 22

Costas Miranthis is caution itself, page 26


Turbulent times for marine, page 36





28 ‘Don’t treat us like just another cedant’


News digest

Find out what reinsurance buyers will be shopping for at Monte Carlo

10 News analysis First-half results; Neal Bill battle; IASB changes 16 News agenda Exposing the truth about the rating agencies

People & Opinion 20 Karen Clark

Cooper Gay’s Toby Esser is always relaxed

22 On the inside

Stakes are high for Swiss Re and Munich Re

56 Diary

New PartnerRe boss Costas Miranthis is staying calm

Monty gets the resort wear out for the Rendez-Vous

Editor-in-chief Ellen Bennett Tel +44 (0)20 7618 3494 Email

Publisher William Sanders Tel +44 (0)20 7618 3452 Email

Assistant editor Ben Dyson Tel +44 (0)20 7618 3480 Email

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Managing director Tim Whitehouse

Art editor (group) Clayton Crabtree Tel +44 (0)20 7618 3087 Email

36 The shipping forecast

Marine faces a perfect storm

Special Report

Choosing RDS over PML to monitor cats

21 Up the ladder

26 Profile

Lines & Risks

41 Ground breaking What are the key issues shaking up the earthquake sector in 2010?

Regional Focus 53 Game on Brazil is bouncing back well from the financial crisis

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GLOBAL REINSURANCE MAGAZINE is published ten 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 © Copyright Newsquest Specialist Media Ltd. All rights reserved. No part of this publication may be used, reproduced, stored in an information retrieval system or transmitted in any manner whatsoever without the express written permission of Newsquest Specialist Media Ltd. This publication has been prepared wholly upon information supplied by the contributors and whilst the publishers trust that its content will be of interest to readers, its accuracy cannot be guaranteed. The publishers are unable to accept, and hereby expressly disclaim,

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


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23/08/2010 17:30

Les Rendez-Vous de Septembre Visit us @ 4, Boulevard des Moulins 13–15 September, Monte Carlo

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

When does a broken link mean a broken chain? Sometimes the best laid plans are never enough, and this is especially the case in a world where the margins are wafer thin. Globalization and rising demand have placed enormous pressure on the transport sector. As margins are squeezed, cargo values are increasing whilst transit times are decreasing in hyper-efficient supply chains — representing a challenge for transport insurers to think bigger and think beyond. Thus it pays to know a reinsurer that truly grasps every conceivable risk — whether before, after or during shipping. To find out how to keep business delivering whatever the weather, check out our website at NOT IF, BUT HOW

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17/08/2010 12:57

News Digest

Q2 LOSSES BRING DOWN AIG’S FIRST HALF AIG’s fi rst-quarter 2010 profit of $1.5bn has been wiped out by a second-quarter loss of $2.7bn, resulting in a fi rst-half loss of $799m, reported Global Reinsurance. But this is an improvement on the $2.5bn loss the company made in the fi rst half of 2009. The second-quarter result was largely driven by a $3.4bn loss from discontinued operations, comprising American Life Insurance Company (ALICO) and Nan Shan Life Insurance Company. The result was also hit by $564m in net capital losses and a non-qualifying derivative hedging loss of $102m. Excluding these items, AIG’s would have made a profit of $1.3bn. ( HARDY H1 PROFITS DOWN Hardy Underwriting made an after-tax profit of £1.97m ($3.1m) in H1 of 2010, 70% down on the £6.54m it made in the fi rst half last year, reported Insurance Times. The drop came despite a 4% increase in GWP to £155.9m and a £1.2m tax credit for the half, compared with a tax expense of £1.2m in the H1 2009. ( A ABOUT TINYURL: Type the tinyurl address into your web browser to access our recommended articles from and its sister titles

LIFE AND HEALTH BOOSTED SWISS RE PROFITS IN H1 Swiss Re made a profit of $970m in the fi rst half of 2010, compared with a loss of $212m in the same period last year, reported Global Reinsurance. Earned premium for H1 fell 14.3% to $9.65bn from $11.26bn. Investment income fell 8.9% to $2.84bn. Its performance was driven by its asset management and life and health divisions. The asset management unit’s operating income rose 49.3% to $2.17bn, while life and health grew 64% to $387m. ( BERKSHIRE SEES H1 EARNINGS RISE Berkshire Hathaway said Q1 net underwriting earnings rose from $66m last year to $462m, and H1 earnings rose from $268m last year to $688m, reported Insurance Times. All four insurance businesses made profits, but General Re saw profit fall due to catastrophe costs. (

‘There were plenty of times when I knew I blew the rating’ A former rating analyst

>>> see News Agenda, page 16

MUNICH RE ON TARGET Munich Re made a €1.19bn ($1.53bn) net profit for H1 2010, meaning it is on track to hit the $2bn profit target it has set itself for the full year, reported Global Reinsurance. The group said the target “remained ambitious” following large cat losses in the first half of the year but, given normal loss experience and continued investment results, it is was still achievable. The first-half profit was €60m or 6.5% up on last year’s H1 profit of €1.13bn. ( OMEGA VOWS TO MAKE FULL-YEAR PROFIT Omega says it expects to show a pre-tax loss of $35m in H1 but it would make an underwriting profit for the full year, reported Global Reinsurance. Omega says it has cut market share in lines where rates are falling. Although GWP is up 30% at $244m, only 19% of the premium has been earned by 30 June. Omega expects this to be 65% by year end. (

VALIDUS COMBINED RATIO FOR H1 JUMPS TO 105.3% Bermuda-based reinsurer Validus made a net profit of $61.4m in the fi rst half of 2010, 74% down on the $232.4m it made in the fi rst half of 2009, reported Global Reinsurance. Validus’s H1 combined ratio rose to 105.3% from 73.5%, despite an 8.5 percentage point benefit to the loss ratio from prior-year reserve releases. ( HANNOVER RE HIT BY LOSSES Hannover Re said its H1 results were hit by major losses, forcing its combined ratio to 99.5% (from 97.1%). H1 net premium income rose by 7.9% and it described its net income of €310.6m ($398.7m), though 28% down on the same period last year, as “satisfactory”, reported Insurance Times. Chief executive Ulrich Wallin said: “We generated net income after taxes in excess of €300m. This offers a good platform for achieving our 2010 profit target of around €600m.” (


XL SUPERSIZES PROFITS XL Capital made a net profit attributable to ordinary shareholders of $319.8m in the fi rst half of 2010, 23.8% up on the $258.3m it made in the same period last year, reported Global Reinsurance. Q2 profit surged 140% to $191.8m from $79.9m. Non-life gross written premium increased 1.4% to $3.43bn, while life GWP fell 28% to $205.7m. (

Deepwater Horizon: oil spill claims



MARSH PARENT TURNS 2009 LOSS INTO $484M PROFIT Marsh & McLennan Companies, the parent of insurance broker Marsh and reinsurance broker Guy Carpenter, made a $484m profit in H1 2010, compared with a $17m loss in the same period in 2009, reported Global Reinsurance. Total group revenues for the half were up 6.6% to $5.24bn. H1 operating income for the risk and insurance services division increased 11.6% to $605m from $542m. ( GR-MarshTurnaround)


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23/08/2010 17:22

News Digest ms hit results

THE AFTERMATH Clean-up worker attempts to rescue a pelican in Lousiana, USA, following the Deepwater Horizon oil spill. Underwriting losses from the disaster have affected the first-half results of (re)insurers including Markel, Catlin and Hannover Re

MARKEL COR RISES TO 112% Markel International, the Londonbased division of US insurance group Markel Corporation, reported a combined ratio of 112% for the first half of 2010, up 18 points on the 94% for the same period last year, reported Insurance Times. The main cause for the increase was $32.7m, or 12 points, of underwriting loss related to the Chilean earthquakes and the Deepwater Horizon oil rig explosion. ( ALEA LOSS ‘DISAPPOINTING’ Run-off reinsurer Alea made a net loss of $50.1m in the fi rst half of 2010, compared with a loss of $44.7m in the same period last year, reported Global Reinsurance. The company cited a fi nancial impairment of $50.6m as the main reason for the loss. “Our fi nancial performance for the fi rst half of the year is disappointing, given the group’s considerable progress in continuing its run-off strategy,” said Alea chief Jeff Rosenthal. (

CATLIN PROFIT BEFORE TAX DOWN 64% ON 2009 London-listed (re)insurer Catlin Group made a profit before tax of $79m in the first half of 2010, down 64% on the $218m profit it made in the same period last year, reported Global Reinsurance. The company attributed the decline to catastrophe losses, which included the Chilean earthquakes and the Deepwater Horizon oil rig disaster, lower investment returns and $49m in foreign exchange losses – although only $8m of this was realised in the first half. ( ALTERRA MAKES $139M Alterra Capital, the (re)insurer formed on 12 May from the merger of Max Re and Harbor Point, made a profit of $139.8m in the fi rst half of 2010, compared with $88.3m in the same period last year, reported Global Reinsurance. Harbor Point is included in the results from the merger’s completion date in May, so comparative 2009 figures only represent Max Re’s results. In Q2 of 2010, it made a net profit of $103.4m, compared with $43.8m in Q2 2009. (GR-AlterraH1) NOVAE SWINGS INTO PROFIT Lloyd’s insurer Novae made a profit of £10.8m ($16.7m) in the first half of 2010, compared with a loss of £10.5m in the same period last year, reported Insurance Times. The first-half combined ratio improved to 100.8% from 110.5%. Operating profit before foreign exchange movement on non-monetary items was £18.2m for the first half of 2010, compared with a loss of £5.1m in H1 of 2009. (

View from Insurance Times: RSA/Aviva ‘I now realise just how flawed the PML concept is for cat risk management’ Karen Clark, Karen Clark & Company

>>> see People & Opinion, page 20 CAT LOSSES FORCE PARTNERRE PROFIT DROP Bermuda-based reinsurer PartnerRe made a net profit of $270.6m in the fi rst half of 2010, down 56% on the $625.8m it made in the same period last year, reported Global Reinsurance. The company’s combined ratio jumped to 103.8% from 85.3%. Income for the second quarter alone showed a similar pattern, with net profit falling almost 60% to $190.9m from $474.3m. However, the underwriting result remained positive in the second quarter, with the combined ratio increasing to just 89.8% from 83.5%, indicating that PartnerRe bore the brunt of its catastrophe losses in the fi rst quarter. (

Catastrophe bonds The total value of catastrophe bonds completed in the second quarter of 2010

Eight catastrophe bond transactions were completed in the second quarter of 2009, making it the second most active Q2 on record, according to reinsurance broker Guy Carpenter’s quarterly cat bond update. But it reported that the total outstanding catastrophe bond risk capital fell by $105m to $11.82bn in Q2, as maturities outstripped the new issuance. The broker also found that investor appetite for assuming US wind risk hit a limit in Q2 as an issuance surge caused some investors to run up against exposure limitations.

Q2 2010 cat bond issuance

Source: Guy Carpenter, company statements



Date: deal name (cost)

1 April: State Farm’s Merna Re II ($350m)

19 May: Munich Re’s EOS Wind ($80m)

27 April: Assurant’s Ibis Re Series 2010-11 ($150m)

21 May: Nationwide’s Caelus Re II ($185m)

One of the compelling reasons for merging RSA with Aviva’s GI business is that the similarity between the two businesses would generate cost savings. RSA itself suggested that it could make £300m ($469m) in cost-savings by fusing the two companies. But the overlap could be a blessing as well as a curse. It could take a lot of work to whittle away the duplicate parts of both firms to arrive at a coherent whole. Collins Stewart analyst Ben Cohen pointed out that both firms largely write the same lines in the same markets and through the same distribution channels, which would require some pruning. “For example, you would have to decide what to do with the direct operations and potentially get rid of one of those,” he said. Just as coping with the firms’ similarities will be tough, so too will tackling the differences. Cohen suggests the combination may be particularly challenging from a people perspective. “There are probably slightly different cultures in the two organisations, and they have been big rivals for a long time,” he said. While there are strategically compelling reasons for merging RSA and Aviva GI, analysts feel the deal is unlikely. Cohen suggests a revised bid of £5.5bn would be reasonable, but it is unclear whether this would be enough to change Aviva’s mind. Stockbroker Oriel Securities analyst Thomas Dorner said: “The message coming from Aviva management is that they do not want to sell, and it is not at all clear that increasing the offer slightly would result in Aviva being more willing to sell on the basis that they want to continue to pursue the composite model.” For more news and views from the general insurance industry, visit:

6 May: North Carolina JUA/IUA’s Johnston Re ($305m) 25 May: Allianz’s Blue Fin Series 3 ($150m) 12 May: Chartis’s Lodestone Re ($425m)

26 May: USAA’s Residential Re 2010 ($405m)


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News Digest Pakistan floods: 20 million people affected People UNDERWRITER LEWIS LEAVES RENAISSANCERE Jamie Lewis has resigned from RenaissanceRe after the Bermudian reinsurer replaced him as active underwriter on its Lloyd’s Syndicate 1458, reported Insurance Insider. Lewis, an experienced Lloyd’s underwriter who had been with the company since 2003, was named active underwriter of the Syndicate as RenaissanceRe launched its Lime Street operation in time to begin writing business on 1 June 2009.

>>> see Profile, page 26 BUSINESS AS USUAL AT BRIT AS NEW UK BOSS HIRED Brit Insurance Holdings has continued to bolster its senior management while takeover talks progress with US private equity fi rm Apollo, reported Insurance Insider. The insurer announced on 18 August that it was hiring Ray Cox as its new UK chief executive. Cox’s appointment is a reminder that Brit’s day-to-day operations are still going on despite Apollo’s due diligence exercise and the takeover ruckus that has dominated the past two months. A ABOUT TINYURL: Type the tinyurl address into your web browser to access our recommended articles from and its Find our more online sister titles

CARROLL JOINS CHAUCER Chaucer Holdings has appointed Tim Carroll as a non-executive director of Chaucer Syndicates, its managing agency and main operating company, reported Reinsurance. KLAUS MILLER TAKES ON HANNOVER LIFE RE Klaus Miller will join German reinsurance group Hannover Re’s executive board on 1 September, assuming responsibility for the northern and central Europe business of life and health unit Hannover Life Re, reported Global Reinsurance. His responsibilities will also encompass longevity solutions and several unitwide functions, such as central actuarial functions. Wolf Becke will remain chief executive of Hannover Life Re, and will be responsible for the division’s US, Asia-Pacific and emerging markets businesses. (

Claims STANFORD CASE HAS COST D&O INSURERS $15M SO FAR The London market directors’ and officers’ (D&O) insurers for fraud-hit Stanford Financial Group (SFG) have so far paid out $15m in criminal and civil litigation defence costs, court documents reveal. The figure – taken as of 30 July – covers the cost of defending Allen Stanford, who is accused of masterminding a $7bn Ponzi scheme with help from former SFG chief fi nancial officer Laura Pendergest-Holt and accounting executives Gilbert Lopez and Mark Kuhrt, reported Insurance Insider.

ASIA FLOODS WILL COST HUNDREDS OF MILLIONS The flooding and landslides in Pakistan in July will produce economic losses in the hundreds of millions of dollars, according to Aon Benfield’s monthly cat recap report for July, reported Global Reinsurance. The events, triggered by monsoons, caused more than 1,500 deaths and destroyed at least 250,000 homes. China has also suffered from severe rainfall and the flooding of the Yangtze River, affecting more than 650,000 homes and producing economic losses of $12.5bn in July alone. (


Costas Miranthis, PartnerRe

HANNOVER RE UPS ESTIMATE Hannover Re has more than doubled its estimated hit from the Deepwater Horizon oil rig disaster, increasing its loss reserves to €98m ($125m) in Q2 from an earlier €40m prediction, reported Insurance Insider.


‘Being cautious is part of who we are’

FOREIGN AID NEEDED Survivors negotiate a flooded road in central Pakistan. The floods have affected 20 million people and about one-fifth of Pakistan’s territory. Aid groups and the United Nations say foreign donors have not been quick or generous enough


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Unlock the Mysteries of Risk Guy Carpenter’s risk and capital management tools unite our deep understanding of risk with our industry-leading analytical capabilities. Our increasing range of proprietary platforms — which include MetaRisk®, i-aXs® and CasCatTM, the industry’s first casualty catastrophe model — enable our brokers to deliver knowledge, so you can make better informed decisions that achieve desired results.

For superior analytics and advice, contact your Guy Carpenter broker or visit us at Guy Carpenter…your key to better decision making.

Perspective. Analytics. Understanding. GR_Ad_Page_ID.indd 1

17/08/2010 14:37

News Digest

Capital markets ILS RETURNS GOING STRONG The trend of strong returns for the insurance-linked securities market since the fi nancial crisis has continued in the fi rst half of 2010 and could beat last year in terms of issuance, according to a Swiss Re ILS market update, reported Reactions. IPAC BUYS $50M STAKE IN BERMUDAN ILS FUND Ipac Asset Management, an Australian investment management firm, has bought a $50m stake in a Bermuda insurance-linked securities fund managed by Nephila Capital, according to the alternative risk transfer internet portal,

Brokers GUY CARPENTER HIRES INTO GLOBAL SPECIALTIES Reinsurance broker Guy Carpenter has hired Erik Manning to its global specialties division, which comprises marine, energy, aviation, retrocession and Bermuda business, reported Global Reinsurance. Manning will join on 27 September, reporting to global specialties chairman Kevin Fisher. (


Reinsurers TAWA BUYS ISLAND CAPITAL Run-off investor Tawa will acquire 94.3% of the issued shares of Bermuda-based insurer Island Capital and its wholly owned UK subsidiary, Island Capital (Europe), for an initial consideration of $7.4m, reported Global Reinsurance. ( ENDURANCE LAUNCHES SHARE BUY-BACK SCHEME Bermuda-based (re)insurer Endurance’s board of directors has authorised a share repurchase programme that will enable the company to buy back up to seven million shares between now and 9 November 2011, reported Global Reinsurance. The programme allows the company to buy the shares in the open market or through privately Find our more online negotiated transactions. (tinyurl. com/GR-EnduranceBuyback)

FLORIDA INSURANCE LAWS ‘FAILED’, SAY HOMEOWNERS Florida voters believe changes to the insurance laws over the past four years that promised to improve conditions for consumers have failed, with 86% of homeowners believing their homeowners’ insurance situation has either stayed the same or worsened, according to a public poll, reported Reactions.

‘No major client said they would stop doing business with us’ Stefan Lippe, Swiss Re

>>> see People&Opinion, page 22

The Dodd-Frank Wall Street Reform and Consumer Protection Act – the statutory response from the US federal government to the 2008-09 financial crisis – is the most sweeping overhaul of the US financial system since the 1930s. The new law, much of which is still to be written by various federal agencies, basically has three goals: reduction of systemic risk between financial participants; reduction of structural leverage of the financial markets; and increased transparency to allow appropriate pricing of risk and, when appropriate, governmental intervention. Dodd-Frank also attempts to remove the implicit guarantee from the federal government of losses from large financial institutions that are ‘too big to fail’. The act fails, however, to address what many consider two potential causes of the financial crisis. One is the government regulation of pricing of short-term funding by the Federal Reserve. Many people believe that the artificially low pricing of short-term debt was one of the core causes of the overleveraging of the real estate market. It also ignores the role of the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). The promotion of widespread home ownership among many US citizens who would have been unable to purchase a home without federal assistance led to nationwide foreclosures once their limited equity in their homes eroded following falling home prices. Dodd-Frank puts in place several new entities and a statutory liquidation process to deal with systemically risky institutions. A new Financial Stability Oversight Council has been created to monitor systemic financial risks. The Council will have significant authority to identify potential systemic threats and to direct the regulatory agencies to take action to address those risks. The Federal Reserve is given new authority to impose increased regulations on bank holding companies and various other non-bank financial institutions, including heightened capital and liquidity requirements and other requirements such as a self-designed resolution plan. A new process is established for US federal authorities to place bank holding companies and significant non-banks into a receivership structure similar to the one currently in place for banks under the Federal Deposit Insurance Act. This is intended to give US federal authorities the power to act quickly to respond to potential liquidity or other crises of confidence involving non-depository institutions. One of the most highly contentious provisions of Dodd-Frank is the ‘Volcker Rule’, which prohibits banks and their affiliates from engaging in proprietary trading, subject to exceptions for certain types of assets and certain categories of transactions. Banks and their affiliates will now face strict limits on investments in and sponsoring of hedge funds and private equity funds. Sponsorship and investment in such funds will be subject to certain conditions and with ultimate investment limited to 3% of any single fund and an aggregate investment in all funds not to exceed 3% of the entity’s tier-1 capital. Dodd-Frank also attempts to remove the assumed federal guarantee of derivatives trading by requiring banks that receive assistance from the US government, including equity infusions and debt purchases, to remove risk swap activities to affiliates that do not have access to existing federal guarantees. Finally, Dodd-Frank establishes a new regulatory framework for the over-the-counter derivatives markets. It now requires clearing and exchange trading for derivatives contracts that are eligible for clearing and accepted by newly established derivatives clearing houses. Enhanced transparency should promote the proper identification and pricing of risk. Increased capital and margin requirements, if implemented carefully, may be able to deleverage the US financial markets while not overly burdening a capital-deprived US economy. The new legislation may provide the necessary groundwork for the establishment of a more transparent, robust and reliable US financial system. Matthew Kerfoot is a counsel in Dechert’s financial services practice in New York For more news and views from the risk management industry, visit:


View from StrategicRISK


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News Analysis First-half results

A mixed bag Europe’s biggest reinsurers experienced both highs and lows in their recently announced first-half year results. Some saw profit fall, others posted a rise but, as Ben Dyson reports, they are all facing a second half of either further catastrophe losses or softening rates

The results in the fi rst half of 2010 of Europe’s four biggest listed “If we see the same loss situation in the second half as we have in reinsurers – Swiss Re, Munich Re, Hannover Re and SCOR – were the fi rst, it would be pretty difficult to achieve a comparable result to all marked by the welter of catastrophe losses that characterised the fi rst half in the second half,” Noack said. “If the combined ratio the period. But there are fundamental differences between the is more than 100% in the second half, it would be very difficult for performances of the various companies. Munich Re to achieve the full-year net profit target of €2bn.” In addition, they face the prospect of either further catastrophe Another differential between the reinsurers is top-line growth. losses or softening rates in the second half of this year, which could Swiss Re was the only company to post a reduction in gross written affect future results. premium. It is continuing to pare back its book as it recovers from The reinsurers all posted increases in their combined ratios as a the losses and capital erosion it suffered in 2008. The fi rm was result of natural catastrophes. Swiss Re came off worst, with a 16.1 downgraded to A+ from AA- by rating agency Standard & Poor’s (S&P) percentage point jump in combined ratio. in early 2009 after revealing that realised investment losses on its Hannover Re performed the best of the bunch. Its combined credit default swap portfolio had severely eroded its shareholders’ ratio only increased by 2.4 equity for the full year of 2008. percentage points, and it was “I would say the company the only one of the four to post is doing anything it can to Europe’s four biggest reinsurers’ H1 2010 results a combined ratio below 100% – require less capital in a bid Munich Re Swiss Re* Hannover Re SCOR though only just – at 99.5%. to achieve an upgrade from GWP One particular area of S&P to double-A in 2011,” difference was the net profit. Noack says. “Capital recovery H1 2010 €22.61bn €11.45bn €5.68bn €3.26bn Both Hannover Re and SCOR’s is very much in focus, which H1 2009 €20.69bn €11.92bn €5.25bn €3.25bn net profit fell, by 28.4% and distinguishes Swiss Re from 15.2%, respectively. Munich Hannover Re.” Change +9.3% -3.9% +8.2% +0.1% Re’s profit increased 5.3% Net profit Softening market to €1.19bn ($1.5m), on the If there are no further other hand, while Swiss Re H1 2010 €1.19bn €795.4m €310.6m €156m catastrophe losses in 2010, a transformed a $212m loss in H1 2009 €1.13bn (€173.8m) €433.5m €184m common problem facing all the same period in 2009 into a reinsurers will be softening $970m profit this year. Change +5.3% n/a -28.4% -15.2% rates on the non-life sides of Swiss Re is a special Non-life combined ratio their business. case here: it made realised “I am hearing from investment losses of $2.3bn H1 2010 106.4% 105.9% 99.5% 102.8% Hannover Re, Munich Re in the fi rst half of 2009, but H1 2009 97.9% 89.8% 97.1% 97.5% and Swiss Re that the rate gains of $363m in the fi rst half situation was flat in the 1 April of 2010. Change (points) +8.5 +16.1 +2.4 +5.3 and 1 July renewals, but my *Converted from US dollars at the 30 June 2010 exchange rate: $1=€0.82 Profits = investments interpretation is that the tone has turned slightly negative,” According to investment Noack says. “Every company bank WestLB analyst Thomas mentioned that the claims in the fi rst half are not enough to keep Noack, bottom-line profitability in the fi rst half was the market hard, and if nothing severe happens in the second half, I investment-driven. “It very much depends on asset allocation,” personally would expect the premium rates to decrease at the next he explains, “because, from a purely technical point of view, the renewal season on 1 January.” reinsurers had poor combined ratios, especially in the fi rst quarter. While softening rates would not hit results in 2010, 2011 and “Munich Re’s result stood out because its fi rst-half profit was 2012 could be affected. However, Noack says that, rather than boosted by investment returns. It realised capital gains on its bond resulting in losses, softening is more likely to prompt reinsurers to portfolio in particular.” cut their top line. As a result of the gains, Munich Re appears to be on track to hit its “If there is no big loss in the second half, it could make profitability €2bn profit target for the full year of 2010. However, Munich Re chief more challenging,” Noack says. “But the bigger companies, especially fi nancial officer Jörg Schneider warned when presenting the results Munich Re, are willing to walk away from business if they feel the that the realised gains may not be sustainable in the second half of premium is not risk-adequate.” GR the year. Any losses, therefore, could ruin the reinsurer’s chance of > See ‘On the inside’, page 22, for more on Munich Re and Swiss Re hitting its target for the year. 10 SEPTEMBER 2010 GLOBAL REINSURANCE

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20/08/2010 17:21

News Analysis The Neal Bill

Rumble of the jumbos Industry resistance to Bill HR 3424 – otherwise known as the Neal Bill – has been heating up, with voices of dissent now coming from Europe. In July, the German ambassador to the USA, Klaus Scharioth, joined the European insurance and reinsurance federation, the CEA, in expressing concerns surrounding the proposals to change the US tax treatment of reinsurance between affi liated entities. Both argued that the bill, introduced in the US House of Representatives on 30 July 2009, would be in violation of US obligations to avoid protectionism if it is passed. “It goes without saying that the German government recognises the US government’s right to combat tax avoidance and evasion,” wrote Scharioth. “But it is our view that the proposed legislation goes well beyond this objective and, as a result, will be in confl ict with provisions of the German-US tax treaty.” The US Committee on Ways and Means’ select revenue measures subcommittee chairman Richard E Neal introduced the bill to put an end to the ‘Bermuda loophole’. This is the migration of premiums from US (re)insurers to their offshore affi liates in order to “avoid tax, and gain a competitive advantage over American companies”, said Neal. Groups representing European reinsurance companies are concerned that the US effort to target so-called tax havens will result in the unfair levy with an additional tax charge. “EU reinsurers face an average tax burden of 25%, so the argument that the existing tax deduction could create incentives to reinsure more than would otherwise occur between unrelated entities does not hold true,” said CEA president Tommy Persson. “The proposals would also lead to taxation in both the USA and the reinsurer’s country of origin, thereby violating US double tax treaties.” This will ultimately harm the US consumer, warn opponents of the bill, as it will lead to a contraction of insurance capacity with prices going up by as much as $10bn-$12bn a year, according to the Risk and Insurance Management Society. Since the proposals are only applicable to foreign and not US reinsurers, the CEA also suggests that they could contravene the US G-20 commitment to avoid protectionism and its World Trade Organization commitments under the General Agreement on Trade in Services. “We strongly urge US legislators to recognise the detrimental effects on US consumers and the US insurance market, and to abandon the proposals,” Persson concluded. Foreign reinsurance companies argue that they provide an important economic role by underwriting US peak catastrophe risks. A number of companies, including Swiss Re, Munich Re, Allianz, XL,

Argo, Arch and Zurich, have voiced their opposition to the bill. Foreign-controlled insurers and reinsurers, with almost 500 US-based subsidiaries, provide 15% of the direct insurance – and more than half of the reinsurance – accepted in the USA, the CEA points out. In 2008 they also paid nearly twice as much in claims settlements to US cedants as they received from them in premiums. Total US premium ceded to non-US reinsurers was $58.2bn, while net recoverable amounted to $121.2bn, according to data from the Reinsurance Association of America. The Bermuda reinsurance market, which has been beleaguered since President Obama came to power, is also keen to stress its risk transfer role. Bermuda’s reinsurance sector paid out $17bn in property claims in 2005, representing 25% of total damages after the USA was battered by hurricanes Katrina, Rita and Wilma, according to Analysis of the US Economic Impact of Bermuda based Insurers and Reinsurers, a report from the Association of Bermuda Insurers and Reinsurers. “Bermuda insurers and reinsurers lead the market for coverage from hurricanes and earthquakes,” said the report. “These innovative providers account for as much as 40% of the US market. This study has found that as many as four out of 10 homes and businesses rely on Bermuda fi rms for their insurance protection, a major economic contribution that may be overlooked, as reinsurers stand behind the primary insurers.” To date, more than 100 independent groups have written letters expressing concerns about the bill. On 14 July, the select revenue measures subcommittee held a hearing on the taxation of reinsurance between affi liated entities, at which the Florida insurance consumer advocate, Sean M Shaw, registered his opposition to HR 3424. “My job is to advocate for Florida insurance consumers,” he said. “There is a proverb that says, ‘When elephants fight, the grass gets trampled.’ This issue has been presented as a battle between some US insurance companies, on one side, and the international reinsurers, on the other side. “Frankly, I don’t care about the elephants, on either side,” he said. “I’m concerned about American consumers. Consumers can expect to pay an additional $11bn to $13bn every year because of this tax increase. That would be a bad idea even in the best of times. And it is a terrible idea now. Especially in hard times, international insurers and reinsurers are indispensable for high-risk states such as Florida and for a heavily populated, highly industrialised, and increasingly vulnerable, nation such as the United States.” GR


The elephantine battle between US insurance companies wanting to close the ‘Bermuda loophole’ and reinsurers fearing an unfair tax could drastically affect the American consumer, writes Helen Yates. One Florida advocate says he is determined the public won’t be crushed


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23/08/2010 10:08

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02/08/2010 12:48

News Analysis Insurance accounting

Start planning now The IASB’s proposed new accounting standards aim for improved consistency and transparency. However, we should expect more volatility in insurers’ results, and the market will need time to adjust to the changes to income statements. Helen Yates reports

After six years and several missed deadlines, new standards for any initial profit (see box). However, those writing only short-duration insurance contracts were proposed in July by the International contracts are able to sidestep the building-block approach. Accounting Standards Board (IASB). They are expected to have a Nagari says: “What the IASB has done is to adopt a short-cut significant effect on insurers and reinsurers. The new International approach for these short-duration contracts, which is a version of Financial Reporting Standards (IFRS) 4 will replace a confusion the current method that is used in a number of general insurance of GAAPs (generally accepted accounting principles) on all new accounting policies.” contracts. Insurers and reinsurers are encouraged to start planning for the The latest draft of the standards requires all entities that issue introduction of the new standards and to prepare management, contracts that contain insurance risk to use a model of the present shareholders and others for the new style of income statement. value of expected cash flows; such flows are to be measured from For European companies, the standards are expected to be more the issuer’s perspective rather than a market price to determine in line with requirements under Solvency II. “Solvency II within insurance liabilities, although any market variables should be the EU is based on a valuation model for insurance liabilities that consistent with market prices. is very similar to the one The IASB maintains its preferred by the IASB, and the defi nition of an insurance Solvency II regulations require a The IASB’s new building-block approach contract as “a contract under reconciliation between the IFRS In its weekly credit outlook, rating agency Moody’s lists the key which one party accepts and the Solvency II valuations significant insurance risk from to be published every year,” points of the proposed IASB accounting standards’ building-block another party by agreeing to Nagari says. approach as: compensate the policyholder The aim of the standards is if a specified uncertain future to make the fi nancial reporting 1. Probability-weighted average of future cash flows. event adversely affects the of insurance contracts more The cash flow estimate is to be ‘unbiased’, meaning that there is policyholder”. consistent and transparent. to be no provision for adverse deviation or conservative bias to While the defi nition is “Previously, insurers have been the estimate. unchanged, one refi nement – a permitted to use very different 2. Time value of money. Instead of reporting discounted future requirement that all cash flows methods to report insurance cash flows under the fi rst building block, the IASB elected to used to test for a transfer of contracts, based on a variety make the discount to reflect the time value of money a separate risk are discounted to reflect of national practices,” Nagari building block. their present value – could explains. “This has reduced 3. Risk adjustment. A separate risk adjustment or risk margin is negate the effectiveness of the comparability of insurers’ to be included in the determination of an insurance liability to fi nite reinsurance contracts. fi nancial reports, penalising reflect the uncertainty about the amount and timing of future Deloitte’s global IFRS insurance them when they accessed cash flows. leader Francesco Nagari says capital markets with a higher 4. Residual margin. An additional margin eliminates any gain at this could affect some fi nite cost of capital than most other inception of a contract. reinsurance contracts and industries.” means they could no longer According to be classified as reinsurance. PricewaterhouseCoopers, He says: “They would be out of the accounting standard and instead the proposals are likely to result in more volatility in the income would have to be accounted for as loans.” statement and may also put more pressure on data and modelling Reinsurance contracts are subject to the same rules as general systems. insurance contracts, but there are implications for reinsurance “Industry reaction will be divided,” says PwC partner Gail Tucker. buyers – the only type of policyholder within the scope of the new “They will create increased volatility in insurers’ reported results, standards. They will have to measure the asset they assume by as market movements will now affect reported profit. There will buying reinsurance with reference to their own liabilities. also be significant changes to the presentation of the income “That is going to be the only instance where the buyer of these statement, which stakeholders will need to take time to understand. insurance contracts will make use of this model,” Nagari says. The developments will also cast their net wider than the insurance For insurance contracts with a duration of more than one year, industry, affecting all companies that issue contracts with insurance the new measurement model is based on four building blocks: risk, such as fi nancial guarantee contracts.” probability-weighted future cash flows; a separate discount to reflect There will be a four-month comment period on the draft, which the present value of future cash flows (in other words, reflect the time ends on 30 November. The fi nal standard is due for publication in value of money); a risk adjustment; and a residual margin to eliminate mid-2011. GR 14 SEPTEMBER 2010 GLOBAL REINSURANCE

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Our growth in underwriting cat bonds is equally impressive. In a world where the volatility of the markets is surpassed only by Mother Nature herself, is it any wonder that Swiss Re is increasingly the partner of choice in underwriting cat bonds? In this business there is simply no substitute for experience, expertise and depth of resources. As a result, no one transfers more insurance-linked risks to the capital markets than Swiss Re; since the inception of the sector, Swiss Re has underwritten over USD 15 billion in cat bonds. Good news for us, yes, but even better news for our client partners. When risk is the raw material, our solutions are your opportunity. Find out more at

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23/08/2010 14:41

News Agenda

Behin the Model behaviour The insurance industry has its own specific examples of what appear to be poor rating calls. Both Moody’s and Fitch cut American International Group’s ratings two notches in September 2008 after the collapse of Lehman Brothers triggered the wider fi nancial crisis, and S&P dropped the insurer three notches. The deep cuts suggest that the original rating assumptions were incorrect. One critic from the reinsurance industry points out that many of the insurance and reinsurance companies that hit trouble during the fi nancial crisis were in the double-A range. “I can’t think of an A- company that had a

curtain Criticised for failing to predict the banking crisis and for the simplicity of their financial strength models, has the illusion of power wielded by the rating agencies finally been broken? Ben Dyson investigates

problem,” he says. “It calls into question the accuracy of the ratings and the robustness of the rating models.” Part of the reason for the crisistriggered downgrades, argues the critic, is that rating agencies’ insurance financial strength rating models had failed to take into account the asset side of reinsurers’ balance sheets, and so did not spot the risks they were taking on there. He also says the fi nancial strength models themselves leave a lot to be desired. “They continually update them, but they struggle. Capital adequacy modelling is extraordinarily sophisticated and the rating agencies are never going to truly know what’s on the inside of a reinsurance company. The ability to make those fine gradations between the different rating notches is not there.” A further concern for some is that the ratings are not solely based on capital models. Rating agencies will typically incorporate opinions on a company’s management and business strategy, among other qualitative measures, into their verdicts. The >


In early June, billionaire Warren Buffett leapt to rating agencies’ defence during his testimony to the fi fth hearing of the Financial Crisis Inquiry Commission in New York. “I think they made a mistake that virtually everybody in the country made,” he said of agencies’ failure to call the bursting of the US housing bubble and reflect this in the rating of mortgage-backed securities. But Buffett, whose company, Berkshire Hathaway, is the largest shareholder in Moody’s, is the exception rather than the rule. Everyone else, it seems, is queuing up to tear strips off the agencies, from journalists to politicians, and even the issuers and institutions that pay rating agencies to rank their bond issues, creditworthiness or claims-paying ability. Those looking to take shots at rating agencies will find no shortage of ammunition. Aside from failing to spot the housing bubble, some argue that they had over-rated what turned out to be weak financial institutions. Lehman Brothers, for example, was rated A by Standard & Poor’s (S&P) directly before its collapse.


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23/08/2010 16:49

News Agenda


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News Agenda reinsurance executive recalls asking why a downgrade had been made, only to be told that doing so had made one of the agency’s rating committee feel more comfortable. “What do you do with that?” he asks. Above all, rating analysts are not infallible. “There were times when I came to realise that I had blown the rating – where my rating conclusion should have come in lower and I was very unhappy with the result,” one former rating analyst says. “Ratings are opinions and they are not going to perfectly predict risk for any number of reasons.” Even when they make the right call, the rating analysts’ actions can be delayed by executives eager to keep their company afloat. A downgrade below the A-range can effectively put an insurer or reinsurer out of business because insureds or cedants will no longer consider it secure enough to place business with. It seems some executives will stop at nothing to forestall this, even when a downgrading is justified. One chief executive actually reportedly stormed into a rating agency office to confront an analyst about a decision. Cutting a company’s rating below the critical A-range can also be delayed because analysts need to be certain about decisions that could put a company out of business. “Downgrading a company’s rating is not a simple matter, as the downgrade is more than just an opinion; it can become a selffulfi lling prophecy as the market reacts to this new information,” says the former rating analyst. “For me, downgrading a company required a higher burden of proof – sort of like sitting in the jury box where the judge instructs the jury not to convict if there is reasonable doubt.” A possible indicator of the waning confidence in ratings is that some reinsurance cedants are now using credit default swap spreads as early-warning systems, because fi nancial strength ratings do not respond quickly enough.

Missing the point? While acknowledging that rating agencies are not perfect, the former rating analyst believes their performance over time is good. He says that judging by the default rates published by S&P and Moody’s, which go back 30 years, three in every 100 triple-A-rated companies would fail over a 10-year period, compared with between four and five for double-A and between five and six for single-A. Some rating agencies say complaints about their models and methodology are rare. “Generally, we have received very favourable feedback from investors and other users of our ratings on how we responded with respect to insurance

comparisons between company projections challenging. Despite complaints about rating agencies’ use of softer measures, such as management strength, the agencies themselves argue that this is essential for rating companies. Mosher explains that, while a purely model-driven approach works for rating fi nancial instruments, the relatively changeable nature of companies renders such an approach is useless for rating them. “A company could buy another that completely changes its risk profi le. That doesn’t happen with an asset-backed security – it doesn’t change overnight,” he says. “That is why management and qualitative factors are as important in a corporate rating.”

Staying relevant

‘There were times when I came to realise that I had blown the rating – where my rating conclusion should have come in lower and I was very unhappy with the result’ A former rating analyst

and reinsurance company ratings as events of the fi nancial crisis unfolded,” Fitch group managing director and global head of insurance ratings Keith Buckley says. Others feel that criticising model capability misses the point. While reinsurance executives may argue that their own internal capital models are more sophisticated than those of the rating agencies, for example, rating agencies contend that this can only be expected given their role. “When you look at what reinsurance executives are trying to do with their model, you would expect it to be more sophisticated and specific to fit their needs,” says senior vice-president of global property/casualty ratings at AM Best, Matt Mosher. “Rating agencies are looking at a broad spectrum of companies and we have to be able to look at them on a consistent basis.” While acknowledging that there are more sophisticated economic capital models available than those typically used by rating agencies, the former analyst says: “For comparison purposes, a static, riskbased capital model in my mind is superior to the most sophisticated economic dynamic fi nancial analysis.” He adds that the number of company-specific assumptions made in a dynamic model can make

While ratings are not perfect, and often need to be used in conjunction with other tools, the guidance they offer can be a boon for security committees at brokers or cedants as they provide an independent opinion on a reinsurer’s financial strength, and offer broader, deeper coverage than a committee alone. Yet despite their usefulness as a guide, some feel rating agencies’ days are numbered. Financial centres around the world have introduced or are introducing advanced solvency regimes, such as the European Commission’s Solvency II directive. “Rating agencies run the risk of becoming irrelevant for reinsurance companies,” the reinsurance executive says. “If a public, governmental entity whose only task is to monitor insurance solvency says these reinsurance companies pass every test they can devise, what is the point of an A versus and A+ versus a AA-?” The former rating analyst argues that previous attempts by governments to set up rating agencies have failed, however, and a single central agency would not be able to offer the diversity of opinion that multiple agencies can. “I don’t think there is a perfect solution. I think you can improve the current solution, but I don’t think you can fi nd something better than having multiple rating agencies covering the same companies,” he says, adding: “The devil you know is probably better than the devil you don’t, as rating quality can be handicapped by the intelligent user.” GR FIND OUT MORE ONLINE: IT ALL ADDS UP To read this article, and for more on the rating agencies and the people behind capital modelling, see or


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02/08/2010 12:51

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

KEEP A CAT IN THE BAG Catastrophe bonds could be a viable alternative to traditional reinsurance for captives

BUYER’S MARKET Lloyd’s businesses may look ripe for the picking, but cash is tight for private equity firms and insurers are cagey

In my view Measuring up the metrics The PML concept is a fundamentally flawed approach to catastrophe risk management, argues Karen Clark, pointing to a lack of scientific data and an inability to adapt to large, complex organisations. So what measure should be used to assess and monitor risk instead? One of the most challenging problems with respect to catastrophe risk is determining metrics for monitoring and managing the risk. Catastrophe models generate lots of numbers: average annual losses (AALs), probable maximum losses (PMLs), and worse-case scenarios. You can select point estimates from the exceedence probability (EP) or ranges such as TVaR (tail value at risk). You can slice and dice your losses in so many ways, that you can virtually drown in a sea of numbers. You can’t manage your business to all of these numbers, so which one(s) to choose? There is no ‘right’ answer, and company decisions are largely dictated by regulators and rating agencies. External stakeholders use specific metrics to compare one company to another, to assign fi nancial strength ratings, and to regulate solvency. AM Best and Standard & Poor’s gravitated to PMLs derived from the model-generated EP curves. In particular, the 1-in-100 and 1-in-250 year PMLs have become key metrics. If you want to maintain a certain rating, you must keep your PMLs relative to capital within specified ranges. Lloyd’s took a different approach to catastrophe exposure management. Instead of relying on model-generated PMLs, Lloyd’s developed a set of realistic disaster scenarios (RDS). These scenarios have evolved over the past several years, but they generally represent low probability, large loss scenarios in the peak catastrophe zones. As a catastrophe modeller, I didn’t give much credence to the RDS events because they are deterministic and do not cover the full spectrum of possible events and losses.

RDS events are static, have no associated probabilities, and you can underwrite your book around these events. You don’t even need a catastrophe model to generate the RDS losses! Now, after working more closely with company executives, I’ve come to realise just how flawed the PML concept is for catastrophe risk management. There are major problems with this metric, not least of which is a false sense of accuracy in estimating the probabilities of large event losses. Probability estimates derived from the models are highly uncertain owing to the lack of scientific data. In the New Madrid Seismic Zone, for example, scientists don’t

You can slice and dice your losses in so many ways that you can virtually drown in a sea of numbers know the probable maximum earthquake and currently assign it a magnitude range of 7.2 to 8.0. The return period range is from 500 to 1,500 years. In California, there are


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People & Opinion


HAITI AND MOZAMBIQUE MOST VULNERABLE TO NAT CATS Italy, Japan, China, USA, Spain and France rated ‘high risk’

unknown faults, and scientists frequently change the estimated magnitudes and return periods for even the most studied fault segments. What data is available to estimate the probability of a category 3 or 4 hurricane in the north-eastern USA? Scientists don’t know the overland wind speeds, or intensities, for any storm before Gloria in 1985. Given the paucity of scientific data, it’s no wonder the models differ significantly and the loss estimates, particularly PMLs, can change dramatically when models are updated. Managing a business to ever-changing PMLs simply doesn’t work. Other problems with PMLs are that they are not transparent or additive across regions, perils and policies. PMLs are not intuitive or operational risk metrics, particularly in large, complex organisations because actions of one business unit can dramatically affect the PMLs of other business units. Once you accept that we simply don’t know the probabilities of the events underlying the PMLs, the RDS approach looks eminently more sensible. Why are we trying to pinpoint a number from the tails of distributions that are highly uncertain and volatile? We can instead pick a set of events that we know can happen with probabilities of around 1% or lower, and manage to that set of events. A fi xed set of events allows better comparisons across companies and more robust risk management strategies within companies. The concept of fi xed event sets has considerable merit. You can use the models to generate event sets for full coverage in your peak zones, but once you’ve created a credible and robust set of events, you can stick with these for risk monitoring and management. This is similar in concept to creating a very large set of RDS events, and Lloyd’s has been on the right track all along. GR Karen Clark is president and chief executive of Karen Clark & Company, independent experts in catastrophe risk, catastrophe models, and catastrophe risk management

Weblog It has been a results extravaganza on the Global Reinsurance site over the last month as reinsurers’ fi rst-half numbers came flooding in. It was the usual suspects that created the most powerful headlines, with Swiss Re, Munich Re and Berkshire Hathaway, to name but a few, all in profit. Online readers also took a shine to AIG’s results, as the US giant reported a staggering $2.7bn Q2 loss. Our story ‘Tough half takes toll on reinsurers’ results’ was the most clicked on by our online readers during the last period. It was a round-up of results from some US-listed (re)insurers, highlighting the strains of the heavy losses that have hit the market since the beginning of the year. Also attracting a host of clicks and sitting comfortably in the top five was the latest developments at

Bermuda-based reinsurer PartnerRe after its acquisition of French counterpart Paris Re last year, with job cuts at the Paris-based operation reaching a conclusion. It’s also worth noting that the latest people moves within the market are an area of close interest to our online readers, as proved by Miller’s new reinsurance trio, which was the fi fth most popular story. Keep an eye out for the next edition of GRTV on the site, as well as coverage from the 2010 Monte Carlo Rendez-Vous this month. If you’re into social networking, you can also follow us on Twitter – @GlobalReins – and pick up the breaking news, share it with your followers or send us a tweet. To contribute to the website, email Danny Walkinshaw at danny.walkinshaw@

Online top five TOUGH HALF TAKES TOLL ON RESULTS But some reinsurers’ profits improved NEAL BILL ‘VIOLATES TAX TREATY’ German ambassador slams attempts to close reinsurance tax loophole PARTNERRE FINISHES PARIS RE STAFF CUTS Post-merger staff integration complete EQECAT, AON LAUNCH ASIA TYPHOON MODELS Both models tackle multi-country exposures MILLER HIRES THREE TO REINSURANCE UNIT Broker poaches Guy Carp and Evolution execs

Up the ladder How did you make it to where you are today? Ambition, drive and hard work! How has the industry changed since you first joined it? Technology has completely changed our industry since I first joined. Although to some extent the London market is still dragging its feet in embracing new technology, there has been a total transformation in the way we communicate. What would you say are the key challenges ahead for you and the industry? The lack of growth in the market in general is a challenge for every business, given the economic conditions. This has led to a predominance of mergers and acquisitions in recent times. What are the biggest opportunities? Given the current inefficiencies in the market, there is always the opportunity to make our industry more efficient and generate better margins.

What advice would you give to someone starting out in reinsurance? Provided they have a good social manner, are responsible and willing to work hard, and are responsive, they will do very well. What is the biggest mistake you’ve made? There have been a few, but I maintain that it’s far better to look forward than backwards. You should always learn from your mistakes and then move on. What comes to mind when you think of your friends and contemporaries in the market? I have always found the insurance market generally to be occupied by fun, amiable people. What do you do to relax? I’m always relaxed, but I love all sports, both playing and watching. Toby Esser is the chief executive of Cooper Gay


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People & Opinion Two reinsurance titans; one seriously demanding economic environment. Ben Dyson talks to the men in control, steering their operations towards growth, and mindful of the challenges ahead

On the MUNICH RE: STEADY AS SHE GROWS Torsten Jeworrek, head of Munich Re’s reinsurance division, is clearly not a gambling man. While he plays for high stakes – offering large lines of capacity to clients is one of the cornerstones of Munich Re’s unique sales proposition – he doesn’t want his underwriters to leave anything to chance. “I might see a €1m ($1.2m) treaty that produced a €50m loss but congratulate the underwriter on a job well done,” Jeworrek says. “Yet I might see a similar treaty with no losses, and accuse the underwriter of doing a lousy job because it was written on unprofitable assumptions, despite the fact we were lucky this year and had no loss.” He adds: “A large loss is not a problem per se: losses are part of our business. But, irrespective of the loss, the question is whether the treaty was written on reasonable assumptions that would have allowed profitability under normal conditions.” Jeworrek argues that if Munich Re’s underwriters were penalised for large losses despite underwriting the risk correctly, they might be deterred from offering clients large amounts of capacity.

Measured approach Munich Re takes underwriting profitability very seriously, and has a raft of systems in place to ensure that nothing in what Jeworrek describes as the “complex animal” of its global reinsurance operation goes awry. At the heart of this is the value-based management (VBM) metric, which the company uses for all its profit centres. As part of this, Munich Re insists that all its divisions earn a 15% return on risk-adjusted capital (RORAC) after tax

on the capital they are allocated by the group. A profit centre can receive more capital than it is initially allocated for growth purposes, but if it does not feel that it can earn a 15% RORAC, it must return it to the group. A further component of Munich Re’s underwriting profitability drive is employee selection. Jeworrek says the company pays especially close attention to the personal characters of its managers. “This may sound strange, but we have learned over time that profit centre heads who are greedy and want to pursue short-term success are not the best managers for our business,” he says. He argues that it would be easy, for example, to add an additional €2bn of top line at the next renewals, but the price and terms would be so poor that reserve strengthening would be required several years down the line. “Production is not an art in our business and can be done by anyone. The combination of profitable growth and measuring the profitability in the right way is the art.” Maintaining underwriting profitability through the cycle is only one of Munich Re’s priorities, however. The second is enacting its strategy of offering what Jeworrek describes as a premium reinsurance product. “We believe our competitive advantages are extremely good fi nancial strength, high rating and large capacity combined with the best risk knowledge,” he says. Munich Re’s strategy has three main parts. The fi rst is serving its traditional client base – insurance companies – with everything from standard products through to risk modelling and capital management advice. The second is attempting to make large and complex risks more manageable for clients, for example by offering modelling capabilities, in the hope that this will in turn generate more reinsurance business. The third element of the strategy involves offering primary insurance for specialty industrial risks, large projects and public-private partnerships. The Munich Re group has a primary insurance arm, ERGO, but these products are offered by the reinsurance group under the auspices of Munich Re Risk Solutions. It could be assumed >


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People & Opinion

inside SWISS RE: REVERSAL OF FORTUNE Starting a new job is always challenging, but prize for the worst first week in post should surely go to Swiss Re chief executive Stefan Lippe. He was named successor to previous chief Jacques Aigrain, a former investment banker, on 12 February following the revelation of a 2008 loss of CHF864m ($835m) on the back of CHF9.5bn of realised investment losses. Lippe recalls presenting the finalised set of results on 19 February to an audience clamouring for answers about the company’s new strategy. He promised to return in 100 days with answers. By many measures, Lippe inherited a mess. Unrealised investment losses arising from a portfolio of credit default swaps (CDS) and portfolio credit default swaps (PCDS) held by Swiss Re’s asset management division helped to wipe CHF11.4bn off Swiss Re’s shareholders’ equity. The capital reduction prompted rating agency Standard & Poor’s to cut Swiss Re’s rating to A+ from AA-. This was despite a CHF3bn capital injection from Berkshire Hathaway via a convertible instrument, which was announced on the day the losses were fi rst revealed. This action called into question both Swiss Re’s solvency capital adequacy and the strength of its client franchise; many cedants are only comfortable placing certain risks with reinsurers rated in the double-A range. It also raised concerns about whether the company was still over-exposed to risks on the asset side of its balance sheet. Fortunately, the underwriting part of its business was sound. The property/ casualty combined ratio for 2008 was 97.9%. Also Lippe, with his strong reinsurance underwriting background, was arguably best placed to shift the focus away from taking asset risk.

Lippe’ll fi x it Lippe immediately set about tackling Swiss Re’s problems. This included hiving off the troublesome CDS and PCDS instruments, plus the company’s financial guarantee reinsurance business into a separate section labelled ‘legacy’ and withdrawing from them. It

also meant making the reinsurer’s asset mix more conservative. “There was never a doubt that this company was good at underwriting and managing the cycle. But we strayed from our core reinsurance strategy,” Lippe says. “We still do asset management – insurers and reinsurers need to perform asset-liability management – but we will not compete with investment banks and other professionals in the banking world.” A heartening fi nd for Lippe was that, despite the downgrade, Swiss Re’s clients had not taken fl ight. Far from it. “Even I had underestimated the strength of our client franchise,” he says. “No major client said they would stop doing business with us because of counterparty risk concerns, and some even called us asking whether they could help with capital.”

Fortune favours the brave By the second half of 2010, Swiss Re was back on track. The fi rm made a fi rst-half 2010 profit of $970m, compared with a loss of $212m in the same period last year. The company’s capitalisation at 30 June was $10bn more than is required for a double-A S&P rating. One of the keys to the successful turnaround, says Lippe, was resisting the temptation to ditch the toxic assets at the earliest opportunity – and the lowest price. “We didn’t panic, even though the rest of the market was. We had offers to sell off our legacy portfolio at a significant discount, but we made a $100m profit.” Lippe admits, however, that fortune was on his side in that the market conditions improved in the second and third quarters of 2009, allowing >

‘Even I had underestimated the strength of our client franchise. Some clients even called us asking whether they could help with capital’ Stefan Lippe, Swiss Re


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People & Opinion that Munich Re’s core client base would baulk at competing in the same market as them, but Jeworrek insists that his division’s foray into the primary market has been carefully managed to avoid upsetting customers. “We have Chinese walls in place and, for our large industrial risks business, even a separate board member – Thomas Blunck – who oversees that business,” he says. “Also, clients have learned that we are a responsible player and don’t aggressively compete for volume. I think Munich Re Risk Solutions has been well received in the market but of course our clients’ concerns are always taken into consideration.”

for a more profitable sale of the unwanted assets. The result is that the notional exposures in the legacy book are now greatly reduced. The company no longer has any exposure to CDS, while the PCDS exposures have fallen to $300m from $13bn at the end of 2009. The company still has $3.9bn of its $14.7bn in exposures from the financial guarantee reinsurance business, but Lippe says the majority of this is government-protected. In addition to addressing the asset side of the balance sheet, Lippe has also been repositioning Swiss Re’s property/casualty reinsurance book. “We axed $1.2bn of top line in the fi rst quarter and I have more or less personally thrown out around $500m on the credit side,” he says. “If you want to improve your bottom line, you have to have the guts to do what you think is right, despite the opinion in the street.” There is still work to be done, however. For one, Lippe is keen to get Swiss Re’s double-A rating from S&P back. “Only S&P can decide whether we get it. The only thing we can do is show them that we have profitable business and significant excess capital, and put pressure on them that way.” Lippe would also like to redeem the Berkshire Hathaway convertible at the earliest possible date, which is March 2011. “If there are no very big events, we are on track to redeem in March 2011. This will remove some uncertainty surrounding our stock. Our shares are currently discounted because people would like us to put this issue behind us, and I fully understand that.” Even without the Berkshire funding, Lippe asserts that Swiss Re will still have more than enough capital to support an S&P double-A rating.

Going for growth

The right deal at the right time

‘Centre heads who pursue short-term success are not the best for our business’ Torsten Jeworrek, Munich Re

With Swiss Re back on an even keel, Lippe can focus on growing the business. The company is expecting average annual growth of 6.5% in its property/casualty business and 3.7% in its life and health business. The majority of the P&C growth, says Lippe, will come from emerging markets, particularly demand for natural catastrophe cover. Lippe is also keen for Swiss Re to do more Admin Re deals, under which it buys closed blocks of life insurance business. Due to the financial crisis, Swiss Re has not done an Admin Re deal for a year and a half. “Most of the deals we saw in the past 18 months were about laying off bad assets, rather than deals that were truly transferring insurance risks,” Lippe says. “Now this market is changing and we are well prepared to look for deals. I would like to see a deal there.” Another area of growth for the fi rm is longevity risk – that of people living longer. Lippe says Swiss Re is participating in longevity swaps with clients to help ease their risk burden. “People are knocking on our door,” he comments. “It is not only insurance companies, but also large corporates with billions of dollars of pensions liabilities on their balance sheets, whose shareholders don’t like them to have this risk.” After a challenging start to his new job spent tackling past mistakes, it must be a welcome change for Lippe to be able to focus on future growth. GR


While Munich Re is in all major markets and lines of reinsurance business, Jeworrek still believes there is opportunity for expansion. For one, he believes the European Commission’s new Solvency II capital regime, due to come into force in January 2013, will encourage insurance companies to buy more reinsurance, particularly from highly rated reinsurers. “Solvency II is going to change the insurance industry substantially,” he says. “Small- and medium-sized insurers without a substantial fi nancial cushion and whose portfolio is not highly diversified will profit much more from reinsurance solutions.” Jeworrek also sees opportunities in insuring risks arising from the use of new technologies. “There is a huge demand for risk transfer solutions coming from new technologies or changes in the supply chain, for which our industry has not found adequate products yet,” he says. “If we do that in a responsible way, I believe we can develop new types of business.” Jeworrek is keen to expand into insuring renewable energy sources. “Renewable energy is at an early stage and will develop substantially in the coming decades. I believe now is the right time to develop appropriate insurance products and build partnerships with technology companies to understand their products.” Munich Re is the co-founder of Dii, a private joint venture aimed at accelerating the implementation of the DESERTEC Concept – which aims to establish fields of solar panels in deserts to generate sustainable power – in Europe, the Middle East and North Africa. “New insurance products like performance guarantee covers reduce the investment risk for private investments in these new technologies, which helps to attract private investors,” he says. “Munich Re has the necessary expertise on board to develop such products. This is one of the motivations for our role in Dii.” Jeworrek’s strategy seems to be paying off. Despite a fi rst half marred by heavy natural catastrophe losses, Munich Re’s reinsurance segment made a consolidated profit of €1.05bn, down from €1.31bn in the fi rst half of 2009. The reinsurance property/casualty ratio for the fi rst half increased to an unprofitable 106.4% from a profitable 97.9%, but excluding the 12.8 percentage points added by natural catastrophes, the 2010 figure would have been 93.6%. Just don’t put it down to luck. GR 24 SEPTEMBER 2010 GLOBAL REINSURANCE

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20/08/2010 11:54

Profile He may have a tough act to follow, but incoming PartnerRe boss Costas Miranthis isn’t sweating it. Taking time out from a well-deserved holiday, he talks to Muireann Bolger about staying calm and cautious – after all, even small steps can lead to new directions There is no doubt about it: incoming PartnerRe chief executive Costas Miranthis has some big shoes to fi ll. As of I January 2011, he officially takes over from legendary chief executive Patrick Thiele. In his ten-year tenure, Thiele steered the reinsurer through the September 11 2001 attacks and the 2004-05 hurricanes, before going on to seal the deal of the year in a $2bn merger with Paris Re in 2008. The mega-merger added $1.7bn in new shareholders’ equity at the height of the fi nancial crisis, helping PartnerRe leapfrog into the ranks of the top 10 market players. To top it all off, the reinsurer reported stellar results for 2009, posting a net profit of $1.54bn for the year – a sharp increase from the $46.57m it made in 2008. But PartnerRe’s golden streak seemed to be on the wane this year, when profits dipped 56% in the fi rst half of 2010, coming in at $270.6m, compared with $625.8m in the same period last year. And this blow became a double whammy with the announcement of the departure of its long-serving leader.

You won’t find better Yet if Miranthis is worried about building upon his predecessor’s weighty legacy – or a shift in company fortunes – he shows little sign. “Today we have a company that defi nitely functions very well. All the processes work; there is no panic. The company knows what it is and knows what it stands for,” says Miranthis in heavily accented English. “Our clients know what we stand for; we have great brand recognition with our clients.” But what of the company’s recent dip in profitability? Miranthis is confident the reinsurer’s stellar track record will help weather such blips. “Our performance over the past several years has been very good. We exceeded our long-term return target of 13% over the period. Reaching the same performance over the next couple of years will be more challenging. FIND OUT MORE ONLINE: THE DAY AFTER TOMORROW To read this article on the legacy of Patrick Thiele, and for more on PartnerRe, see or

We are very open about this with our shareholders. We are in a low interest rate environment. When risk-free interest rates are 2%-3%, achieving a 13% return is a difficult challenge, but we think we can still deliver reasonable risk-adjusted returns,” he says. As for the tricky matter of managing shareholder expectations, Miranthis’s assured response is that many shareholders would be hard pushed to fi nd a better deal elsewhere. “You have to look at what else is out there. That is my answer to shareholders. If you think you can get another operation

‘What do I say to my shareholders? If you think you can get an operation with a better return on your money for similar levels of risk – just go for it’ Costas Miranthis, PartnerRe

with a better return on your money for similar levels of risk – just go for it,” he says fi rmly.

Caution’s in our DNA Indeed, Miranthis’s own surefooted career history complements the steady track record of the company he is about to head. Before joining the ranks of PartnerRe, he spent 16 years with Tillinghast-Towers Perrin in London, joining the reinsurer as chief actuary in 2002. He went on to become deputy chief executive of PartnerRe Global before taking the job of chief executive at PartnerRe Global in July 2008. Consequently, analysts predict that, under Miranthis, PartnerRe is set to build upon its reputation for stability and calm; maintaining a long-term track record for good returns. Indeed, the company is so well known for caution and stability that it can suffer by comparison to adventurous rivals such as Swiss Re and Renaissance Re.

Don Miranthis admits this is a reputation that is unlikely to change under his leadership. “There are no overriding needs that I see now as requiring immediate changes in direction or strategy,” he says. Miranthis does say, however, that the now two-year-old merger with Paris Re has given it more clout on the facultative side, while he adds that the company is aiming to seek a better balance in its life portfolio. Caution is part of the company’s DNA, he says. “Being cautious is part of who we are; that is not something that is about to change. We have a reputation for being cautious and that’s a choice. We are not the ones to try things first and see what happens. We do think in small steps, but small steps can lead to a new direction. I can’t tell you where that direction may take us, but it may be somewhere different from where we are today.” Will his management differ from Thiele’s? Again, Miranthis admits his style may be a little less exuberant but insists he has no plans to rock the boat. “We are different individuals and we have somewhat different working styles and personalities,” he says. “It is hard to say. Perhaps I am a little bit more operationally focused, a little bit more shy. However, I have an informal management style, as does Patrick, so from that perspective, it is not going to be very different.”

Why not merge? It is just as well Miranthis favours a steady hand, as he predicts a rocky road ahead for the sector, with sluggish economic growth, the ongoing soft market and low interest rates taking their toll. “The next five years will be a lot more challenging than the last five or 10 years, and we need to evolve to cope with these new challenges. “We are all struggling with low economic growth, an environment that


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n’t panic directly affects the insurance market and consequently the reinsurance sector, so demand in the fi rst place is going to be sluggish. At the same time, there is excess capital in the industry. There is an environment of low interest rates, so all of that certainly doesn’t bode very well for top line or for profitability.” Moreover, he adds, there is little pressure for the much-anticipated hard market to emerge. “We are in an environment where we will keep chugging along as we are for a little while yet,” he says. “I don’t see tremendous pressure for the market to turn. There are a lot of people speculating on when the market will turn. I think it is a little bit futile; nobody knows.” This challenging climate, he predicts, will trigger a wave of M&A activity as strength in numbers becomes the route to survival for smaller companies. “There are a number of companies at

the lower end of the field that are going to face challenges,” he says. “Economic logic would say: why not merge?” Two years into PartnerRe’s own megamerger with Paris Re, Miranthis believes that things have largely gone according to plan. But he does admit some aspects need to be ironed out. “We still haven’t completed all of the regulatory integration. Some of the legal entities need to be merged. There are still some back-office things to do, but everything has pretty much gone according to plan, and I expect that by early next year the whole thing will be behind us.”


Do the right thing So, what of the spectre of culture clash that haunts many an M&A? “It can be a problem,” he admits, but points out: “When we looked at Paris Re, we had a fair idea about what type of culture we were likely to encounter. Although it wasn’t identical to our own, it was not very different, so from that perspective it hasn’t been a major challenge. “It is not as if we had to merge a direct operation with a reinsurance company, or an American company with a European company; that’s when you usually fi nd big differences.” While matching Thiele’s legacy will remain a tough challenge, Miranthis emphasises that developing a reputation for level-headed decision-making and integrity will be his paramount concern. “I want to do a good job, would like to have a positive impact. There are decisions I regret where, with hindsight, I can say those were wrong decisions. But I am very comfortable that I haven’t done anything that I could be ashamed of; decisions were made with the right intentions. I want to do the right thing, with the right kind of results for the people who work with me and for the people that I work for.” It seems that, while reinsurance may be in a state of flux, the message from Miranthis is that, for now at least, it will be business as usual at PartnerRe. GR GLOBAL REINSURANCE SEPTEMBER 2010 27

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‘We want people to set us apart from the crowd and understand our risk appetite, rather than treat us like just another cedant’ With plenty of capacity and a continuing soft market, the 1 January renewals should hold no surprises. But, talking to cedants in the run-up to Monte Carlo, Ben Dyson discovers that meeting the needs of reinsurance buyers is about more than just the right price 28 SEPTEMBER 2010 GLOBAL REINSURANCE

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Cedants At fi rst glance, it appears that the discussions leading up to the 1 January renewals will be fairly relaxed this year. Despite a number of large losses in the fi rst half of 2010, rates in most lines are softening – though not enough to trouble the reinsurance industry too greatly. Reinsurers have plentiful capacity on offer and, thanks to their high levels of capitalisation, are unlikely to present buyers with many counterparty risk concerns. “The April and July treaty renewal seasons showed general market softening, which appears likely to continue through to year-end,” RSA group reinsurance director Alan Fowler says. “The outlook therefore appears to be further softening, with no shortage of capacity for the coverage required.” He adds: “The expectation is for a generally smooth year, not unlike the 2010 renewals, where we found plenty of capacity at acceptable prices.” That does not mean the negotiations between cedants, reinsurers and brokers in Monte Carlo, BadenBaden and other industry forums in the run-up to 1 January 2011 will be a mere formality, however. While acknowledging that they will not need to fight for capacity this time around, buyers still have a number of issues that they need to hammer out with their business partners.

It’s all in the details The main focus for many cedants during the discussions will be to ensure that the reinsurers charge them based on their individual risk portfolios and loss experience, rather than on reinsurers’ general views about a market, business line or client segment. “We’re a bit like a stuck record on this one: it’s differentiation, differentiation, differentiation,” says Lloyd’s insurer Barbican’s commercial deputy underwriter Conor Finn. “We are grossline underwriters, we use reinsurance as a second line of defence, and we don’t dollar swap with our reinsurers. “We defi nitely want people to set us apart from the crowd and understand

‘Every year we look at alternative products, such as cat bonds, but the pricing differential is still such that it makes no economic sense for us’ Alan Fowler, (pictured), RSA

Weighing up the alternatives Alternatives to reinsurance, in particular catastrophe bonds, are now an accepted form of risk transfer. So much so that they are no longer the preserve of experimental, well-capitalised reinsurers. Many large ceding companies now employ them, with AIG general insurance subsidiary Chartis joining the list of issuers this year. It is clear that such instruments remain a minority, however, and many buyers are sticking to tried-andtested methods of protecting their balance sheets from extreme risks. While the surge in cat bond issuance so far has been partly attributed to the instruments’ pricing being roughly on a par with traditional coverage, for some the numbers simply do not add up. “Every year we look at alternative products, such as cat bonds, but the pricing differential is still such, particularly for UK perils, that with abundant traditional capacity available it makes no economic sense for us to move away from our current structures,” says RSA’s Alan Fowler. When asked what types of innovations he would like the reinsurance industry to offer, he responds: “We would like to see the capital markets make alternative products more attractive via price and coverage.” While acknowledging that Allianz’s group reinsurer, Allianz Re, taps the capital markets for retrocessional coverage, as it did in May this year with its third Blue Fin securitisation, Jan Störmann at AGCS says: “Should we have a need at all, we would refer to Allianz Re here, but at this point in time we don’t foresee any need.” Even alternative reinsurance structures, such as multi-year deals, are not finding favour with some cedants. “We looked at some last year, but when we looked at the pricing differential it wasn’t worth it,” Barbican’s Conor Finn says. “Why tie yourself into what looked like a top-dollar price? It didn’t strike us as a very smart play.” However, he adds: “We are always interested in talking to people about multi-year products.”

our risk appetite, rather than treat us like just another cedant.” Finn acknowledges that being treated appropriately requires efforts from the cedant as well as the reinsurers and brokers. “The onus is fi rmly on us to differentiate ourselves,” he says. “It’s no good blaming the reinsurer for not understanding us.” RSA’s Fowler agrees, adding: “We understand that the more granular and transparent we can be, the better the deal we will get.” However, Finn feels reinsurers could also be more proactive in how they use the data cedants provide them. He recounts situations where Barbican has spent a lot of time preparing and submitting data, but an answer comes back from the reinsurer with little discussion. “It’s not that the information is disregarded, but it doesn’t seem to have the desired impact,” he says. “The process seems very commoditised, and that is not what we want.” >


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Cedants For others, the key will be ensuring that reinsurers don’t jump to the wrong conclusion about their reinsurance prices because of trends in the marketplace. Global head of reinsurance at Allianz Global Corporate & Specialty (AGCS) Jan Störmann explains that falling prices on the primary side do not necessarily mean greater risk exposure for the reinsurer. “We would rather exit business if we believe the original side is underpriced, which means we would reduce exposure,” he says. “We would expect this to be reflected in the reinsurance pricing. It is important to make this apparent to reinsurance underwriters because they will naturally be trying to avoid price reductions.”

Good relations

‘We are gross-line underwriters, we use reinsurance as a second line of defence and we don’t dollar swap with our reinsurers’ Conor Finn (pictured), Barbican

Störmann acknowledges that reinsurance underwriters might also fi nd it difficult to explain to their boards of directors that process should be lowered. But far from fi nding cedants’ attempts at negotiating lower prices annoying, Störmann contends that reinsurers welcome the opportunity to discuss risks and exposures in detail. Just as cedants want to give as much information as possible about their exposures to ensure they are charged the correct price, reinsurers are keen to gather data to understand the risks they are assuming. “We have regular meetings with reinsurers all year round, not just for renewal purposes but to explain all the developments in our book. They enjoy that,” Störmann says. “It stabilises our relationships, helps us to create trust and confidence, and eases the discussions.” Barbican’s Finn agrees that the discussions will be as much about relationship-building as fi nding the right price. Maintaining continuity is all important. “We are now trying to build bigger relationships, possibly with fewer reinsurers, across a wider range of classes. We think that is better for our business than spreading ourselves thinly,” he says. “We have some very good key relationships and we hope to enhance those.” Like Störmann, Finn is keen to ensure that not all discussions with reinsurers centre on rates and renewals. “In addition to Monte Carlo, we are planning trips to Bermuda and Europe so we can spend a more time with key reinsurers,” he says. For the most part, any changes made to existing reinsurance arrangements will be minimal.

Cedants’ wish list While cedants are generally pleased with the service they get from their reinsurers, they acknowledge that everyone can always do better, and they have certain products and services on their wish lists. A particular interest among cedants is coverage across classes of business rather than for single classes. Barbican’s Conor Finn would like to see a product that simply protects an insurer against having a bad year in a number of different areas at the same time. “It would be nice if there was a product that stopped a loss ratio going beyond a certain level across multiple classes,” he says. “We are quite interested in talking to people about that kind of product.” Jan Störmann at AGCS agrees. “One area we are interested in, if we look at retention management, is structures and solutions that go across lines of business.”

“We always re-examine our major programmes to make sure they satisfy our needs with regard to retentions and capacity, but at this stage we would not anticipate any big changes,” Fowler says. Störmann agrees. “Our core structures are fairly stable, as are our reinsurer relationships, so I’m not planning on changing lead reinsurers or making significant alterations to the panel.” However, he adds: “We are constantly working on optimising our retention management strategies, and again that is something we are looking at.” Changes are likely to be more marked for Barbican, which launched in November 2007. Finn explains that, as a newer business, Barbican previously bought reinsurance in lower layers than its peers to protect its balance sheet as it was growing. This is now changing, however. “I would expect us to retain more risk this year,” he says. “The pricing in some instances does not work for us – after the reinstatement, you get so little risk transfer that it is not worth it. You might as well run more of the risk yourself.”

Storm brewing While it is currently a buyers’ market, and the mood is generally relaxed from the cedants’ perspective, the North Atlantic hurricane season could throw a spanner in the works. The season runs from 1 June to 30 November, leaving plenty of scope for industry-changing surprises. >


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“There are Performers and then there are Outperformers”

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Cedants ‘We have regular meetings with reinsurers all year round, not just for renewal purposes but to explain all the developments in our book. They enjoy that’ Jan Störmann (pictured), Allianz Global Corporate & Specialty

Many renewals discussions have been upset by stormy weather: few will forget the fraught negotiations in Baden-Baden in October 2005 after the triple whammy of hurricanes Katrina, Rita and Wilma. Some forecasters believe there is a distinct possibility of an active year. Hurricane forecasting fi rm Tropical Storm Risk, for example, expects Atlantic Basin and US landfalling tropical storm activity to be up to 80% above the long-term average from 1950 to 2009. It expects 2.6 hurricanes to make landfall in the USA in 2010, for example, compared with the historical norm of 1.5. “A major US hurricane would present a big challenge. I suspect that, depending on the size of the event, capacity will become scarce and reinsurers will try to raise prices,” Finn says. However, even despite the heavy catastrophe burden already witnessed in the fi rst half of the year, some feel that only a very extreme second half would remove enough capital from reinsurers’ balance sheets to influence rates greatly. “Anything less than a $50bn event won’t even marginally affect the market, and probably even a $50bn event would not change anything,” Störmann says. While he believes a combination of events could result in large enough losses to move the market, he thinks the chance is remote. “I am currently planning for something more modest: probably slightly more events than last year and probably even more than average. But modestly more than average will have absolutely no impact on the market,” he insists.

Well prepared Reinsurers’ improved fi nancial strength and exposure management are helping them to weather storms more effectively than in the past. “The hurricane season always causes some potential anxiety, but reinsurers have replenished balance sheets, and the uncertainties around

Brokers’ consulting services While a cynical observer might conclude that reinsurance brokers’ consulting services are an afterthought tacked on to their risk placement activities, cedants disagree, arguing they are a core part of the offering. “I think it is important for brokers to move away from a pure placement skill set into a more conceptually oriented environment,” AGCS’s Jan Störmann says. “Some brokers are moving in this direction more than others, but it is happening at all the global brokers, which is very helpful for us.” Of particular importance for Störmann is brokers’ ability to match their knowledge of available reinsurance capacity with his company’s risk capital needs. Barbican’s Conor Finn welcomes feedback from brokers on the way his firm structures its reinsurance programmes. “They are always providing us with analysis on our numbers,” he says. “The brokers have been very good on some of our lines of business, for example property cat, where they have identified the risks driving our reinsurance price.”

their investment portfolios have largely disappeared,” RSA’s Fowler says. “Reinsurers’ abilities to better manage their accumulations post Katrina, Rita and Wilma, the current abundance of capacity and capital, and RSA’s lack of exposure in the USA should help us,” he adds. Despite the forecasts, the North Atlantic season has been quiet so far, with only three named storms, of which only one – Alex – reached hurricane strength. But even with a benign season, uncertainty remains. Claims from some of the fi rst-half events could turn out to be worse than expected. Some reinsurers’ estimates for the Chile earthquake have increased. Munich Re, for example, raised its loss estimate from the event to $1bn after retrocession in June, up from its April estimate of $700m. And although energy company BP’s decision to self insure has cushioned the industry to some extent against losses from the explosion of the Deepwater Horizon rig, there is still a lot of uncertainty about liability claims from the event. Barbican’s Finn says that marine price increases seen as a result of the Deepwater loss have mainly been more prominent on the insurance side, but he adds: “We are waiting to see how much of a pricing change there is following Deepwater. It is having quite an effect on the market.” GR FIND OUT MORE ONLINE: THERE MUST BE ANOTHER WAY … To read this article, and for more cedant news and analysis, see or


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Catastrophe Modelling 2010 A one day seminar hosted by the International Underwriting Association ETC Venues The More Suite, 2nd Floor Dexter House No 2 Royal Mint Court Tower Hill, London EC3N 4QN

Tuesday 12th October 2010

Register now! For registration and sponsorship forms contact Deborah Finch on 020 7617 4451 or email : IUA Member Registration fee £250+VAT General Registration fee £365+VAT Confirmed Speakers to date: • • • • • • • • •

Conor McMenamin – Head of Risk, Capital and Technology, Renaissance Re Paul Nunn – Head of the Exposure Management Team, Lloyd’s Peter Taylor – Research Fellow, James Martin 21st Century School Robert Stevenson – Head of Insurance Operations, Kiln Plc Dr Anselm Smolka – Head of Geo Risks, Munich Re Professor David E. Smith – Oxford University Nicola Stacey – Director, Property and Specialty, Swiss Re Lucy McGill – Chaucer Dickie Whitaker – Consultant Full programme to be available on our website in due course: Subjects to be discussed include: Scenario vs Probabilistic Approaches to Cat Modelling, Communication within the Cat Modelling Food Chain Post Loss Amplification, Exposure to Data Quality, The 2010 Windstorm Season UK Open Access Cat Modelling and Lessons learned from Chile – Can we trust Building Construction Codes?


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Lines & Risks

The shippin forecast Marine rates threaten to plummet to new lows as a result of overcapacity and a lack of major losses. Helen Yates navigates the stormy seas of todayâ&#x20AC;&#x2122;s market


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Lines & Risks ‘The container market has been absolutely on its knees. There is still serious overcapacity as world trade slows down’ Nigel Miller, Miller Insurance Services


In an effort to diversify away from property catastrophe, several players have in recent years entered the marine insurance market. This, in turn, has added capacity to an increasingly unprofitable class of business. While marine rates climbed marginally in the aftermath of Hurricane Katrina in 2005, this was less in response to claims and more a result of the contraction of capital in the industry. Miller Insurance Services marine broker Nigel Miller says: “For classic blue-water tonnage, hurricanes don’t have the impact you might think because of the vessels’ ability to manoeuvre out of the way.” Much of the new capacity in the market has come from Bermuda operators in the Lloyd’s market. “Bermudian capacity has entered the Lloyd’s market to write catastrophe reinsurance,” Miller says. “Under the business planning regulations Lloyd’s has imposed, operators have to show a balanced portfolio in their book. So there are quite a few organisations now entering the direct marine market. This is causing people to say the sector doesn’t need any more marine capacity.” Apart from a few exceptions – the most notable being cover exposed to increased piracy risk in the Gulf of Aden (see box, page 38) – the trend of declining rates continues. Pressures on the shipping industry and marine insurance market have grown since the financial crisis reached its peak in 2008. The drop in

world trade is affecting cargo volumes, freight rates and vessel values.

Perfect storm brewing New tonnage that was ordered four or five years ago has caused an oversupply of vessels. Despite the downturn, 2009 was the busiest year for shipbuilders since 1985. At the start of 2010, around 270 million tonnes of dry-bulk ships were still under construction or on order – around 59% of the current fleet. The number of cancellations is fewer than might have been expected, writes Miller in its 2010 marine market report. Scrapping and revised order books are expected to assuage fears of oversupply in the tanker market, while further scrapping is expected in the single-hull market. Nevertheless, an oversupply of vessels remains a concern. Daily charter rates for capesize bulk carriers – very large carriers – was around $100,000 a day in 2008, but just $40,000 a day in 2009, reveals Miller. “There is 48.2 million dead weight tonnage [DWT] of new bulk carriers coming through and only 9.8 million DWT due for scrapping.” Figures suggest that 10%-15% of the world’s container fleet is laid up, but it is thought the real figure could be much higher. Very large crude carriers are trading better, as demand for energy resources continues to remain high. “The container market has been absolutely on its knees,” Miller says. “There is still serious overcapacity as world trade slows down. This is coupled with the largest rebuilding programme in history. That said, there are signs at present of a modest recovery.” The oversupply in vessels, a drop in world trade, softening insurance rates and a lack of pure good underwriting results for insurers means this is a disaster waiting to happen, believes Miller. “When there is a shipping downturn, people start slow-steaming [reducing speed from 25 to 20 knots] and doing deferred repairs. So you classically see an increase in the repair cost at a time when the marine market is as soft as it’s ever been. “It’s a perfect storm because you’ve got a delay in the claims frequency, rates that have never been cheaper and capacity that’s bulging.” >


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Lines & Risks

Minimal Deepwater impact Marine reinsurance prices also remain soft with plentiful capacity. While energy rates are expected to harden substantially over the next few months, this will not trickle through to marine accounts, according to Guy Carpenter’s July renewals report. “Although the Deepwater Horizon loss is potentially a market-changing event, it is geared principally towards energy and liability exposures,” the report says. “Reinsurers will be hard pressed to justify rate increases for clients writing traditional cargo/hull accounts.” Unless reinsurance rates fi rm up, direct marine rates are unlikely to change direction. “I’d be very surprised if there are any material changes in the current rating levels, which are, at best, inadequate because there’s too much capacity,” Miller says. “There are examples of where new European insurers are coming in and quoting at rates that are 50% and 60% of those rates charged in the more traditional markets, which are already inadequate – it’s quite frightening.”

Piracy on the high seas

In the run-up to renewals, the only factor likely to turn the market is a major loss. But, even big losses are not felt as widely in the market as they may have been in the past, when risks were shared around a greater number of players.

‘You’d need a high-capacity loss – a big cruise ship or a very large tanker with an oil spill – to change things’ Andrew Moulton, Ascot Underwriting

“You’d need a high-capacity loss – a big cruise ship or a very large tanker with an oil spill – to change things,” Moulton says. He thinks the good performers will continue to subsidise the poorer performers to a certain extent. “Over the past 12 months, those owners that have performed well have seen some sort of amelioration through performance credits. Those owners that have performed badly have had increases in rates, but whether they’ve had sufficient increases in rates is up for debate.” GR FIND OUT MORE ONLINE: GUY CARPENTER NAMES NEW HEAD OF MARINE To read this article, and for more news on the marine industry, see or

Of the 20,000 ships in the waters of the Gulf of Aden and off the Somali coast, 217 were attacked by pirates in 2009, according to the Piracy Reporting Centre. More than 1,000 crew members were taken hostage in these attacks, which are increasingly occurring further from the Somali coastline. To date, the insurance cost arising from piracy attacks tops $100m. There has been a lot of dispute over what policies actually cover and what losses insurers are responsible for. “Most ship owners have the piracy risk covered in their war policies, so anyone going through the Gulf of Aden or going up and down the Somali coast is charged a separate premium for doing that,” Ascot Underwriting’s Andrew Moulton says. “The volume of income in respect of that has been going up because it will cover the physical damage to the vessels if they’re being shot at.” He continues: “It’s always a moot point whether piracy and ransom are covered under hull or war policies. A number of lawyers have argued that ransom payments are a payment made to avoid a loss, which is why some hull and war policies have been paying out in respect of piracy losses.” Miller recommends purchasing separate kidnap and ransom cover, which “is an additional expense for shipping companies but should be considered seriously by any company operating vessels in the areas affected by piracy. It is the only form of insurance specifically covering a ransom”. “Five years ago one ship could have been insured for 12 months at $3,000,” Miller Insurance Services’ Nigel Miller says. “Today, to go on a one-off transit through the Gulf of Aden, the cost could be in excess of $20,000 per transit. It’s that sort of quantum – it’s extremely expensive.” In January, the operators of Greek-flagged supertanker Maran Centaurus reportedly paid a record ransom of between $5.5m and $7m to retrieve the vessel and its precious cargo of two million barrels of crude oil. “The payment of ransoms has been a way to safeguard many lives and quite a few assets at an affordable cost,” Miller says. “Most have been between $3m and $4m, although some have gone to $6m. At any one time, there are 400 to 500 seafarers being held hostage and in many cases it’s only as a result of the efforts of the commercial market, not assisted by most governments, that these people have been freed.”


The shipping industry boom experienced in the years before the downturn has also inflated the incidence of claims. “When the ships were constantly employed, the owners didn’t want to take them out of service. So you don’t necessarily fi nd out about some of the knocks and scrapes through dry docking that you might have done in the past,” says Ascot Underwriting marine hull underwriter Andrew Moulton. “This led to some of the deterioration in losses with the downturn. People said: ‘Let’s put the ship into dry dock – do the maintenance and look at them.’ And then they realised there were bumps and scrapes they wanted to sort out.” He adds: “The insurance market was very supportive of the shipping market during [the fi nancial crisis] because, unlike the property market, we didn’t force people to revalue their vessels in line with market conditions, which meant banks didn’t have to foreclose on loans. It would have been quite easy for us to demand the vessels be re-valued on a market basis.” Many in the shipping industry are looking to China in the hope that its economic growth will bring trading levels back up again. As China’s economy bounces back from the financial crisis, the country is importing vast quantities of raw materials from countries such as Brazil and Australia. After a 35% drop in freight rates in the six weeks before Christmas 2009, there were encouraging signs as the market entered 2010.


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23/08/2010 16:38


Movers and shakers Getting to grips with mega-earthquakes

44: Built to last

Sound construction can make all the difference in a quake


46: Hereâ&#x20AC;&#x2122;s the science bit

Changes to the US Geological Survey maps are affecting exposure

47: Q&A with Kate Stillwell

The latest developments in earthquake modelling

Ground breaking With 2010 already shaping up to be a significant year for earthquakes, Global Reinsurance investigates the key issues affecting the sector



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Special Report: Earthquakes The earthquake in Chile this year was the seventh largest ever recorded. While it is impossible to predict where and when the next mega-quake will occur, certain regions are more at risk than others

Movers and shak As scientists and insurance industry experts continue to study the Maule earthquake that struck Chile on 27 February this year, it is clear the quake itself did not come as a surprise. Reaching 8.8 on the Richter scale, it ranks as a major tectonic event – one of the largest ever recorded. Yet it pales into comparison with an earlier earthquake in 1960, which shook the country with a magnitude of 9.5. It was also weaker than the 9.3 Sumatra earthquake in 2004, which caused the Boxing Day Tsunami. A number of regions around the world are prone to high-magnitude earthquakes. According to research by Aon Benfield, the Caribbean, Cascadia in North America, Chile, Indonesia and Japan are most at risk of experiencing magnitude 8+ earthquakes. Aon Benfield’s When the earth moves – megaearthquakes to come assesses these vulnerable regions and addresses the (re)insurance implications (see map).

Plate movements The Chile earthquake was typical in that it occurred along a major subduction zone. This is where one tectonic plate moves under another, sinking into the earth’s mantle as the plates converge. Such boundaries are noted for their high rates of volcanic and earthquake activity as pressure builds up and is released. “The rate of the movement between the Nazca and the South American plate is around 7cm a year. The fault accumulates strain and then ruptures suddenly, and that spreads all over the coast of Chile – producing seismic waves and even a tsunami because the fault slip distorted the ocean floor,” says Guy Carpenter senior vice-president Javier Perez-Caballero, a specialist in earthquakes. “The similarities and lessons learned from this earthquake can apply to FIND OUT MORE ONLINE: DEEP IMPACT To read this feature, and for more on mega earthquakes, see or

Mexico, where the Cocos plate moves into the North American plate,” he says. “For the USA, north of California all the way to Washington and Vancouver, is the Cascadia zone, a subduction zone where the Juan de Fuca plate goes into the North American plate.” The Great Alaskan earthquake of 1964 was the most powerful recorded in North American history at a 9.2 magnitude. It was shallow, at a depth of 25km, and triggered secondary hazards including a tsunami, liquefaction of the soil and a series of major aftershocks.

‘A building can have moderate damage, but if the sprinkler system is damaged and goes off, water can flood the interior’ Randall Law, Ace Tempest Re Group

“There is a little information about the ground motion for that level of earthquake,” Perez-Caballero says. “So there are networks of accelerographs and they measure the ground motion movement, both horizontal and vertical components. That allows the scientists to determine where the earthquake comes from, as well as recording in many places the intensity of the earthquake itself.”

Tremor timing The Chile-Peru subduction zone is frequently subject to major earthquakes. Scientists anticipate the northern part of the fault is most at risk of a quake. By studying historical activity along plate boundaries and examining fault lines, it is possible to quantify the risk levels, but it is impossible to state with any certainty where the next big one will occur. Scientists believe the next big quake will come from the northern segment of the subduction zone.

In areas where earthquake events seem to be overdue, scientists talk about a “seismic gap”, says Munich Re’s earthquake expert for geo risks research, Dr Michael Spranger. “The Chile earthquake was in an area where you would expect an earthquake, simply because we hadn’t seen one for 170 years,” he says. “In the south there was the 1960 earthquake and in the north, the 1985 Acapulco earthquake. The north and south had already ruptured, so in the middle was a seismic gap.” The Chilean earthquake was relatively shallow for a subduction zone earthquake, occurring at a depth of 35km. “Small earthquakes are like a strong hammer – it really hurts but is relatively short and high frequency,” Spranger says. “Subduction earthquakes are more like a big bell – you can hear them from a long distance but they’re not so harmful and they last longer.” It is for this reason that the 8.0 magnitude earthquake in Sichuan, China, in 2008 is thought to have caused such widespread damage. The earthquake occurred along a reverse fault or thrust fault, with the northward convergence of the India plate against the Eurasia plate, and had a shallow epicentre at a depth of 19km. Earthquakes that occur at a depth of less than 70km are termed ‘shallowfocus’ earthquakes. “Magnitude 8 earthquakes along fault zones like the Sichuan earthquake are rare and much more dangerous,” Spranger says. While the Chile earthquake caused around 500 deaths and is expected to cost $30bn in economic losses and $8bn in insured losses, according to Munich Re, the country’s strong building codes and earthquake preparedness helped to minimise the damage. “If the same earthquake had been in a different country, with the exception of Japan, I would have expected to see more damage,” Spranger says.

Aftershock damage Damage from major earthquakes does not just occur during the event. Such


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Special Report: Earthquakes Major earthquakes to come: the five most vulnerable regions for mega-earthquakes

kers North America (Cascadia) – The last megaearthquake on this subduction zone occurred 300 years ago. While the short- to medium-term probability of a mega-earthquake may be low, insurers should not disregard the associated risks to the cities along the coast. Chile – As the only segment of the Chile-Peru subduction zone not to have ruptured within the past 100 years, the north Chile segment is considered at high risk from an earthquake similar in size to the 2010 event. Following this year’s quake in Maule, reinsurance programmes are renewing with increases of 75% or more.

quakes tend to have sizeable aftershocks and can trigger tsunamis. Aftershocks can often cause further damage to already weakened building structures, while tsunamis can cause devastation in low-lying coastal areas. Following the Chile earthquake, the largest aftershock was a magnitude 6.9, which did not cause a great deal of additional damage. However, a series of tsunamis triggered by the event reached 2.6m, causing damage to coastal towns. Another hazard following a major earthquake is fi re. It was the fi re following the earthquake that caused most damage in the 1906 San Francisco earthquake. The 7.9 magnitude event on 18 April has become a benchmark for many subsequent events, because it was the fi rst time a major earthquake had tested a built-up environment. Immediately after the quake, fi res broke out in as many as 30 locations throughout the city. While some were extinguished, others spread and merged into a full-scale conflagration. Landslides and soil liquefaction are other perils linked to earthquakes. Liquefaction caused a number of buildings to sink into the ground following the 1964 Alaska earthquake. In earthquake-prone cities, there is also the potential for sprinkler damage. “A building can have moderate nonstructural damage, but if the sprinkler system becomes damaged and goes off, water can flood the interior,” says ACE Tempest Re Group’s, vice-president, research and development, Randall Law. “So a building with minor damage could have all its contents ruined due to water damage.”

Caribbean (Lesser Antilles) – The 2cm-a-year rate of plate convergence is enough to produce a mega-earthquake of 9Mw once every 3,000 years. A major loss in the Caribbean would quickly use up available reinsurance capacity. SOURCE: AON BENFIELD

Earthquake clusters Another characteristic of major earthquakes is that they can occur in clusters, one event triggering another. In an earthquake cluster, ruptures can occur in a predictive manner, rather than randomly. One example includes four earthquakes reaching 7-plus magnitude that occurred in a two-month period in 1811-12 in the New Madrid region. This sequence of quakes is thought to have been triggered by the pressure changes caused by subsequent events along a linked fault system. Another is a series of major earthquakes off the coast of Sumatra, including the 9.3 magnitude earthquake of 26 December 2004, which triggered a massive tsunami causing 240,000 deaths. According to Aon Benfield’s megaearthquake report: “The phenomenon of stress transfer … is when the occurrence of a mega-earthquake on one part of the subduction zone transfers stress onto adjacent segments, bringing them close to failure and producing a sharply increased probability of earthquake rupture. This applies, at least, to the Sumatra-Andaman and Japan subduction zones.” Scientists studying the recent Haiti earthquake believe such a clustering phenomenon could be witnessed there, and say another quake could be imminent. “In certain seismic zones in the world – for example, the Anatolian Plateau in Turkey – one system tends to load another when an event happens, so you can almost predict where the next will occur,” Law says. “When it’s going to occur is a different story.” GR

Indonesia (Sumatra) Padang is regarded as being at high risk from a mega-earthquake comparable to that in 1797, with a magnitude of 8.5 or more. A mega-earthquake would undoubtedly increase the price of reinsurance following a sizeable insured loss.

Japan – The South Japan subduction zone (Nankai Trough) has a complex pattern of three segments. The largest earthquakes rupturing along the whole subduction zone may have magnitudes up to 8.6. A megaearthquake in this region is likely to be a market-moving event.

World’s biggest quakes, by magnitude 22 May 1960: A 9.5 earthquake in southern Chile and the ensuing tsunami killed at least 1,716 people. 27 March 1964: A 9.2 quake in Prince William Sound, Alaska, and the ensuing tsunami killed 128 people. 26 December 2004: A 9.0 quake off Sumatra triggered a tsunami that killed 226,000 people in 12 countries, including 165,700 in Indonesia and 35,400 in Sri Lanka. 13 August 1868: A 9.0 quake in Arica, Peru (now Chile), generated catastrophic tsunamis; more than 25,000 people were killed in South America. 31 January 1906: An 8.8 quake off the coast of Ecuador and Colombia generated a tsunami that killed at least 500 people. 1 November 1755: An 8.7 quake and ensuing tsunami in Lisbon, Portugal, killed an estimated 60,000 people and destroyed much of Lisbon. 8 July 1730: A 8.7 quake in Valparasio, Chile, killed at least 3,000 people. 15 August 1950: A 8.6 earthquake in Assam, Tibet, killed at least 780 people. 15 June 1896: An 8.5 quake in Sanriku, Japan, caused a tsunami that killed at least 22,000 people. 11 November 1922: An 8.5 quake on the ChileArgentina border killed several hundred people. 7 November 1837: An 8.5 magnitude quake in Valdivia, Chile, generated a tsunami that killed at least 58 people in Hawaii. 20 October 1687: An 8.5 quake in Lima, Peru destroyed much of the city. SOURCE: THE GUARDIAN



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Special Report: Earthquakes

Built to last The fi rst two months of 2010 were characterised by two earthquakes. On 12 January, a magnitude 7.0 quake hit 16 miles west of Haiti’s capital, Port-au-Prince. Thousands of poorly constructed homes and commercial buildings collapsed or were severely damaged, leading to more than 220,000 deaths. By contrast, on 27 February a massive 8.8 earthquake shook Chile so violently that it is thought to have shifted the earth on its axis, according to Nasa scientists. In Chile, the death toll came in at just over 500. The fact that far fewer died in Chile is testament to its more advanced economy and strict building codes. Situated on the Pacific’s so-called Ring of Fire region, Chile is frequently subject to earthquakes, whereas Haiti had not experienced a major quake since the 18th century. “Unfortunately Port-au-Prince has become much larger since the 18th century, so there’s really no memory of earthquakes there,” say Aon Benfield UCL Hazard Research Centre researcher Dr Simon Day. “There’s no realisation of the urgent need for proper earthquake resistance of buildings.” “The obvious contrast to the Haiti earthquake is the Loma Prieta earthquake of 1989 [which struck the San Francisco Bay area in California],” he continues. “It was a similar-sized earthquake and there were just a FIND OUT MORE ONLINE: FIRST-HALF CAT LOSSES ARE DOUBLE AVERAGE To read this article, and for more on natural catastrophes, see or

few dozen casualties. That reflects a high building standard in California and a style of timber-frame wooden building that happens to be intrinsically earthquake-tolerant. It underlines the importance of building buildings right. There’s a popular saying among earthquake engineers: ‘Earthquakes don’t kill people, buildings do’.” In Haiti, buildings were not built to code. According to a briefi ng from catastrophe modelling organisation Eqecat, buildings in the region tend to be built with heavy materials (concrete, masonry) and with little or none of the lateral reinforcing needed for earthquake resistance. “Had the rupture been directed toward Port-au-Prince, the city would have experienced even more devastation,” said the 14 January briefi ng. “While this is little solace in light of such a human tragedy, it is relevant considering this earthquake, which ruptured only a portion of the fault, increases the chances of another large earthquake in the coming decades on the eastern portion of the same fault.” While the country was unprepared for the 2010 earthquake, there is a chance it can better prepare for future quakes. “Haiti is a poor nation with virtually no building codes and many decades between major earthquakes, whereas Chile is the wealthiest nation in South America and had very strict building standards. It’s not just about having the code; enforcement is the big issue,” says ACE Tempest Re Group’s vice-president, research and development, Randall Law.

Parametric insurance Port-au-Prince is slowly starting to rebuild, much of the funding coming

Insurance Facility (CCRIF), a publicprivate initiative set up in 2006 to help cover the cost of catastrophes in 16 Caribbean nations. Developed through funding from governments and international organisations, including Japan, Canada, the UK, France, the European Union, World Bank and Caribbean Development Bank, CCRIF is supported by a panel of reinsurers including Munich Re, Swiss Re, Paris Re and Lloyd’s insurer Hiscox. It is the fi rst multi-country catastrophe pool and represents a significant shift in how governments, particularly those in poorer nations, view catastrophe risk. The Haiti quake triggered a payout from the CCRIF of $7.75m, around 20 times its premium for earthquake coverage of $385,500. “As Haiti so starkly reminded us, large earthquakes have the capacity to cause massive damage and loss of life, and even though much rarer than major weather events in most given locations, they often contribute significantly to long-term socio-economic risk,” says chief executive of Caribbean Risk Managers, the CCRIF facility supervisor, Dr Simon Young. “They are thus usually closer to the ultimate defi nition of a ‘catastrophe’ event, exposing affected populations and economic activity to impacts that are impossible to cope with in the absence of either individual or national safety nets such as insurance.” CCRIF payouts are triggered by agreed parameters, such as wind speed or, in the case of an earthquake, ground shaking. The aim of such a parametric solution is to provide payouts quickly – within two weeks – bringing efficiency to the claims process. For a developing region such as the Caribbean, a pooled approach helps to spread risk and bring scale, making the solution more attractive to the international reinsurance and capital markets, which may otherwise remain inaccessible to individual countries. It is hoped the facility will also bring technical capacity, including tools to better analyse and manage risk. “When you look at the macro risks on this planet, including earthquake exposures, we see that the damages from these natural disasters are increasing over time,” says Swiss Re head of public sector Reto Schnarwiler. “It’s volatile, and in many developing countries a large portion of the burden


The recent and contrasting experiences of Chile and Haiti following major earthquakes show how important it is for high-risk countries to be equipped for the unexpected at all times from the Caribbean Catastrophe Risk


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Special Report: Earthquakes actually falls back to individuals and the governments because the insured portion of the loss is very small.” Such a model is one of two solutions to catastrophe risk in parts of the world that lack adequate insurance cover. The CCRIF represents a direct relationship between the government – or governments – and the reinsurance and capital markets. A second option to covering earthquake risk – as used in countries such as Turkey and Taiwan – is an earthquake insurance pool, from which homeowners buy their policies on a mandatory basis. Schnarwiler thinks a combination of the two approaches in developing countries will be of most help to the governments of such regions. “For the homeowners’ market, a pooling facility – ideally on a mandatory basis to avoid adverse selection – would be the best goal. Then for the government, for areas such as relief efforts, emergency response efforts and rebuilding infrastructure, we see a parametric solution purchased by a government as a very good complement to such a pool. “Clearly there is a lot of need out there – if you look at the total economic damage from natural disasters and the small portion that is actually insured these days, you see huge potential for such solutions. There are many hurdles and barriers to overcome, and that’s why we don’t see hundreds of these examples yet.”

Chinese need There is a growing recognition in China, a country with a long historical record of earthquakes and significant earthquake exposures, that a catastrophe pool in some shape or form could help cover the cost of future events. On 12 May 2008, an 8.0 earthquake shook the Chinese province of Sichuan, resulting in more than 70,000 deaths. However, the total insurance payout reached around CNY1bn (about $147m), the equivalent to just 1% of the total economic losses, according to the China Insurance Regulatory Commission (CIRC). The low insurance penetration could delay rebuilding efforts following major earthquakes, warns the Asian Development Bank in a recent paper. In late 2003 the China Earthquake Administration, with the support of the CIRC and other government bodies, pushed for an earthquake insurance pool. However, it did not win the support of all relative agencies due to a lack of funding. Since the Sichuan earthquake, there has been a growing awareness of earthquake insurance programmes and

DEVASTATED Man walks past debris and earthquake-damaged buildings in downtown Port-au-Prince, Haiti, 30 June 2010

their importance. However, a number of insurers have also begun to exclude earthquake risk from their hazard insurance programmes. Many feel a public private insurance solution could be the answer the country needs. Finding adequate funding for such a solution is just one part of the challenge. Another is the time and effort required to set up a catastrophe pool, particularly on the scale of the CCRIF. “CCRIF took some time to be established,” says Schnarwiler. “Especially if you want a homeowners’ solution with a pool or if you need to put legislation in place – maybe an incentives system or tax incentives – it becomes complicated and you need a commitment from government. “You need a champion within government with strong support from development agencies such as the World Bank or the Inter-American Development Bank (IDB) to get this going, and then it takes a lot of energy on all sides to really implement it,” he continues. Schemes similar to the CCRIF are being proposed for the Pacific Islands and for Central America and the Caribbean. The latter scheme, proposed by the IDB, comprises a regional insurance facility (created in conjunction with Swiss Re) to transfer risks from governments in the region to the international fi nancial markets. Over time, Schnarwiler thinks such solutions will grow in number. “I see tremendous appetite for natural disaster risk from emerging and developing countries, and that provides a huge opportunity for these countries to tap that market at very efficient rates.” Such solutions will continue to provide a key financial role in helping countries

‘If you look at the total economic damage and the small portion that is actually insured, you see huge potential for solutions’ Reto Schnarwiler, Swiss Re

rebuild following a major catastrophe. However, mitigation measures are also of critical importance to prevent the scale of destruction witnessed in Haiti earlier this year. Introducing modern building codes and enforcing them will help ensure that fewer buildings collapse during future earthquakes, protecting populations and making it easier for countries and economies to recover from major catastrophes. “The key thing is to have proper building codes, construction standards and, most importantly, enforcement,” says ACE’s Law. “From what I understand, Haiti is starting to rebuild using proper standards. “Haiti is a double-whammy area because they can be hit by hurricanes as well. In a hurricane you want to have a strong, heavy building to withstand the wind, but in an earthquake you want the opposite: you want something flexible that won’t collapse. So now they have to build for both.” GR



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Special Report: Earthquakes Recent changes to the US Geological Survey maps demonstrate how small changes to the science that sits behind the catastrophe models can make a big difference to the exposure. But is it good news or bad news for reinsurers?

Here’s the science bit Modelling earthquake hazard is subject to many uncertainties because, by their nature, earthquakes – particularly large events – do not occur with much frequency. With an incomplete historical record, models must rely on information from the academic bodies that study earthquakes, along with simulations based on historical earthquakes, to predict how future earthquakes might behave in any given area. The fi rst wave of catastrophe models built for the insurance industry were developed in the late 1980s. The models factor in many years of research into the science of earthquakes, the response of structures to ground motion, and the quantitative measurement of risk. When the science that models are based on changes, it can have a significant impact on the output, as demonstrated by recent updates to the US Geological Survey (USGS) maps. The updates were the result of a project called Next Generation Attenuations (NGA), carried out by ground motion experts. They found that ground shaking in strike-slip earthquakes decrease more rapidly with distance from an earthquake’s epicentre than had previously been thought. California’s San Andreas Fault is one example of where strike-slip events occur.

New information The new understanding of attenuations has affected how the models view earthquake risk in parts of the USA exposed to strike-slip events. “The changes in attenuation relations can sizably alter expected losses from those catastrophe models that follow the USGS hazard model for quantifying earthquake activity and groundshaking intensity,” Impact Forecasting’s Andres Mendez says. Updates to vendor catastrophe models for US earthquakes have incorporated the new data, showing reductions in insured-loss estimates for California and much of the western USA. The


changes were less pronounced for Los Angeles, as the city is also subject to thrust earthquakes, where ground motion behaviour is better understood. “The new suite of attenuation relations may have mixed effects,” Mendez says. “In some cases, the hazard is increased, while in others it is decreased. Overall changes in expected losses will vary from portfolio to portfolio, depending on the spatial extent of the locations. It appears that the overall net effect of the NGA relations in the western USA – particularly California – is a reduction in hazard for most common portfolios with typical geographic spreads.” Larger magnitude earthquakes have shown the most reduction in hazard, as the data on ground shaking for these bigger events was based on limited historical data. “Statistics of large earthquakes are very poorly defined, because large earthquakes are rare events, and the extrapolation of the findings relating to smaller magnitude events carries uncertainties,” Impact Forecasting’s Guillaume Pousse explains.

Digging deep Overall, though, the scientific understanding of how different earthquake events behave has improved with advances in recording data. Large events, such as this year’s Chile earthquake, can be better analysed, providing crucial information on how a fault ruptures and how energy is dissipated during a quake. “The standard model treats earthquakes in terms of a magnitude and an epicentre, and that is way behind the state-of-the-art now,” says Aon Benfield UCL Hazard Research Centre researcher Dr Simon Day. “We understand much better how different types of seismic wave become amplified by different types of rock structure, and how the earthquake waves are generated.” “With digital broadband seismic records, it’s possible to record much more of the earthquake, taking it down to a lower frequency,” he continues. “With those records, it’s possible to produce fi nite fault models that are

effectively images of fault rupture. They tell you where there is a large amount of earthquake energy being generated, in places where most fault movement occurs in the earthquake and most energy is released, and where parts of the earthquake rupture don’t produce much movement on the fault in the earthquake and so don’t produce much seismic energy. So we understand the earthquake sources in more detail now.” There are now a high number of digital seismic recorders located in earthquakeprone places like Japan, Taiwan and parts of California, which can provide extremely detailed information when an earthquake occurs.

Data quality Despite the recent USGS updates and other ongoing work, changes to the science do not occur with great frequency. But insurers and reinsurers can hope to gain more accurate exposure information by improving the data that is fed into the models. “For us, it’s about being able to understand the aggregation of threat and to minimise exposure concentrations, because should unanticipated claims occur during an extreme event, it could adversely affect our operations,” ACE Tempest Re Group’s vice-president, research and development, Randall Law, says. “The biggest part of uncertainty is really the data quality of our exposures.” The changes to the USGS maps have had a significant impact on how insurance and reinsurance companies view their US earthquake risk, with resulting fi nancial implications. For many, it has seen their exposures reduce in California and the West Coast, allowing them to write more business in this region or other regions. However, a change to the science that sits behind the earthquake models does not happen very often. Insurers and reinsurers hoping to gain a more accurate understanding of the earthquake risk in their books of business are advised to continue improving exposure data, including construction and vulnerability of location information, for each property in their portfolio. GR


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Special Report: Earthquakes

Q & A Kate Stillwell with

EQECAT’s earthquake models product manager discusses the key issues and developments in the sector Q: So far, 2010 has been a noteworthy year for earthquakes. Tell us about the events and their significance. A:

The biggest significance has been in raising awareness – public awareness as well as industry awareness – of the potential devastation that can be wrought by earthquakes. The potential human tragedy of earthquakes – and the human tragedy we’ve already seen this year, particularly in Haiti – is not to be underestimated. There are many regions of the world that we, as an industry, could do better to serve in creative ways to alleviate the potential for human suffering. Scientifically, the occurrence of earthquakes has not been any more frequent than average. But the coincidence this year is that some of those earthquakes have occurred in populated areas.

Q: Does each event help to improve the modelling of earthquakes? A: Yes, significantly in the long run, because each event provides a wealth of data on which models can be improved. We receive data on strong ground motions, which informs our understanding of the footprint of shaking on the surface given a particular earthquake deep in the earth. In addition, we receive data on how buildings have responded: which types of buildings experienced damage – or no damage – and how we can improve our vulnerability curves by informing them with more empirical data and less analytical data.

universities and scientific institutions there. In addition, our parent company, ABS, is a consulting fi rm with offices in Chile and worldwide. Local ABS engineers are actively collaborating with us, providing data on damage observations.

‘The Japanese government estimates total economic damage of $1 trillion for a 7.3 magnitude quake hitting Tokyo’ Q: What earthquake scenarios would be most costly from an insurance perspective? A:

A very large earthquake in southern California or in the Tokyo area would be very expensive. EQECAT estimates a hypothetical earthquake on the Puente Hills Blind Thrust fault beneath Los Angeles could exceed $600bn in total economic damage and more than $120bn in insured losses. The Japanese government’s Central Disaster Management Council 2005 Report estimates total economic damage of around ¥112 trillion [$1 trillion] for a worst-case scenario 7.3 magnitude quake hitting Tokyo. (Source:

Q: Tell us about some of the other perils commonly associated with earthquakes. Q: How is EQECAT responding to Chile/ Haiti in terms of gathering intelligence? A:

We are actively involved in soliciting the strong ground motion records – acceleration records – and collaborating with those in Chile affi liated with the

very dense urban areas like Tokyo, and in that case it can cause more damage than the shaking itself. Another peril we factor into our USQuake model is the damage caused by sprinkler leakage. As a building shakes, it could trigger the sprinklers, resulting in significant water damage.


One peril is the potential for conflagration, a major fi re following an earthquake that spreads uncontrollably. This was the major agent of damage in the 1923 earthquake in Tokyo. The risk of conflagration is only significant in

Q: The US Geological Survey recently made some changes to national seismic hazard maps. How has that affected your updated USQuake model? A: It has significantly affected our updated USQuake model because the USGS science is the foundation of our model and other vendor models, as it is the scientific standard for earthquake science (see ‘Here’s the science bit’, left). The biggest change was modification of the attenuation relations, which are equations that describe how seismic waves diminish over distance. In other words, given a particular earthquake, what will the shaking and accelerations be at any point on the surface of the earth? The new equations predicted lower accelerations, particularly in areas close to the epicentre to an earthquake. Q: What are the uncertainties associated with earthquake modelling, and how important is it to understand these uncertainties? A:

The scientists who develop earthquake science and the scientists here at EQECAT admit that there’s a lot we don’t know, and we incorporate uncertainty into the model by including co-efficients of variation – the uncertainty – in every step of the calculation, so the end results include an embedded uncertainty. GR



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Uncharted waters The increasing frequency and severity of floods mean that more people want insurance cover, writes Muireann Bolger. However, the risks and costs are soaring. Will companies rise to the challenge? Until recently, the reinsurance sector has focused mainly on mitigating the threats posed by primary perils such as earthquakes and hurricanes. However, the risks posed by so-called secondary perils – including flash floods, torrential

rain, landslides, hailstorms, tornados and winter storms – are growing. In particular, the increasing occurrence and severity of flooding is leading to a conundrum for the insurance industry. Insufficient insurance penetration coupled with inadequate modelling and rising populations in

flood hazard areas means that it is a problem for insurers, and consequently the reinsurance market, to meet the demand for increased cover. The extension of the national flood insurance programme (NFIP) in the USA in July has highlighted the dilemma insurers and reinsurers face. This programme provides cover for homes and small businesses, delaying by five years the requirement of homeowners living in newly designated flood hazard areas to buy flood insurance. Consequently, pressure has mounted on insurers contracted to the programme as the US government forces them to take on more risk, most notably covering wind damage as well as flood damage. The American Insurance Association (AIA) president Leigh Ann Pusey warned that these >

‘On the one hand the sector would like to be more involved; on the other, there is the risk that some of the policies are not coverable’ Dr Gero Michel, Willis Research Network


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Claims 2009 Natural catastrophe loss

Costs rising There is no question that the risk – and costs – of flooding have soared. Swiss Re head of cat perils and treaty centre Andreas Schraft says: “Since 1970, insured flood losses worldwide have increased at an average rate of 12% per year (7% adjusted for inflation). Flooding is the main driver of so-called secondary losses, which contribute to around 30% of the global catastrophe loss amount. Depending on the way flood is insured it even dominates the loss history in some markets.” Munich Re’s head of research for hydrological hazards, Wolfgang Kron, points out that floods in Britain in 2007, along with the lower Danube in 2006, the Alps in 2005 and central Europe in 2002, all set new loss records in the regions where they occurred. Meanwhile, the latest Swiss Re Sigma study reports that the economic loss wreaked by natural catastrophes in 2009 totalled $62bn, of which $26bn was insured. More than half of this loss burden was triggered by secondary perils. Furthermore, since 1980, there has been an average of 33 secondary peril loss events per year, compared to an average of six primary peril loss events per year. And while primary perils continue to trigger the most natural catastrophe losses globally, in Austria, Germany and Canada, secondary perils are the principal sources of loss, exceeding half of these countries’ total natural catastrophe loss over the past 30 years. Understandably, there are increasing calls for the insurance and consequently the reinsurance market to cover these growing risks. Munich Re’s head of corporate underwriting, Heike Trilovszky, points out that while claims from the primary market have risen in accordance with increased flooding, the insurance density for floods remains much lower than that for hurricanes or earthquakes. “When you look at the major flood events, you see a huge amount of non-insured losses. The share of the insurance industry of that is really small,” she says. “The problem is that, in many markets, it is not standard to buy protection against floods. Plus, many insurance companies are not comfortable with this risk because it is a technically difficult risk.”

$62bn $26bn

The latest Swiss Re Sigma study reports that the economic loss wreaked by natural catastrophes in 2009 totalled $62bn, of which $26bn was insured

Indeed, the $36bn gap between the total economic loss and the insured loss of last year shows that lack of insurance cover continues to leave people and governments vulnerable. The US NFIP, for example, is already $19bn in deficit. Willis Research Network managing director Dr Gero Michel believes that while the reinsurance sector would welcome the opportunity to take on more flood risk, many obstacles stand in its way. “On the one hand the insurance and reinsurance sector would like to become more involved; on the other hand there is the risk that some of the policies are not coverable,” he says.

Flood barriers So what is the problem? One of the major obstacles is that flood peril is not particularly profitable, as not enough people take out adequate levels of insurance. “As few insurance schemes are compulsory, it is common that only policyholders who are highly exposed to flood will carry a flood insurance policy while others will opt out,” Schraft says. This, he explains, generally “does not allow for a large enough community of risks to guarantee a win-win solution for both the insured and the insurer”. Schraft adds that only by making flood cover mandatory can governments ensure that there is a sufficiently broad client base for flood insurance and incentivise insurers and reinsurers to develop risk transfer products and risk assessment methods to manage this flood risk. The lack of compulsory flood cover can also exert a downward pull on rates, which can be a problem following a catastrophic event. Chadbourne & Parke LLP partner Joy L Langford says: “It is also possible that the public sector involvement in property insurance will deter private insurers from charging rates sufficient to cover losses, to maintain necessary surplus for catastrophic events and/or to purchase reinsurance”. Another problem is that flood peril is notoriously difficult to assess as climate change continues to intensify the severity and frequency of floods. In addition, there are different types of flooding that can make risk assessment even more difficult. Schraft points out that, while river floods affect large areas over time, flash floods develop rapidly and intensely affect smaller areas. Then there are storm surges that affect coastlines as low air pressure causes sea levels to rise as winds push water onto the shore. Tsunamis have also proven to be a major trigger of floods in the Northwestern US.

“All of these factors need to be taken in to account when assessing flood peril,” he adds. Continued developments on coastlines and flood plains also make it a difficult task for insurers to take on flood risk. According to Munich Re’s Kron, today more than one-tenth of the population lives within 5km of a coast, while 15 of the world’s largest cities are located on coasts. He also points to an OECD study which recently showed that 113 million people will live in the most populated coastal cities by 2070, a five-fold increase on today. At the same time, assets in the 20 cities with the highest concentration of flood-exposed values are predicted to increase from a value of $2.2bn to $27bn in the next 60 years. Kron argues that development on floodplains continues as increased flood control measures lull people into a false sense of security, “leading people to expose more and more objects to the risk of flood”.

Get it right As the threat of flooding grows, catastrophe risk modelling company RMS senior analyst Helen Dewar points out that the lack of market-wide data for flood modelling technology continues to be a stumbling block for increased insurance penetration for flood risk and adequate risk assessment. She adds that, during the 2007 floods in the UK, half of those floods affected areas away from established flood plains. This, she warns, proved to be an important lesson for both insurers and reinsurers to invest in better modelling techniques. “One of the key things for the insurance market is to capture the exposure data. For example, flood risk can vary within postcodes. If you only have postcode data, that really isn’t going to be able to differentiate your risk as much as you might like,” she explains. Schraft emphasises that meeting increased challenges posed by flooding requires a collaborative approach. “They require a multi-stakeholder partnership in which the insurance industry, governments and property owners play distinctive key roles. Governments need to implement mitigation measures including urban planning, for example avoiding building in flood plains, and flood protection,” he insists. It seems that only then will the market meet increased reinsurance requirements for flood risk. GR FIND OUT MORE ONLINE: ASIA FLOODING CAUSES WIDESPREAD LOSSES – AON To read this feature, and for more on flooding, see or


updated requirements will force some insurance companies “to take a hard look at whether they want to continue participating in the programme”. While the threat of flooding grows, meeting the challenge of covering this risk may prove to be too great for many insurers.


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Country Focus

Game The global financial crisis barely registered on Brazilâ&#x20AC;&#x2122;s radar and now, as the country invests in a sporting future, opportunities abound for reinsurers. Helen Yates reports




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Country Focus

Inviting competition Rates remain soft, however, and with Brazil’s minimal catastrophe exposure,

there is little sign they will harden amid the competition to win business and gain market share. In the two years since the Brazil (re)insurance market opened up to global competition, the market share of state-backed IRB-Brasil Re has fallen to around 50%. Outerbridge believes that heavy competition has so far been kept in check by the requirement that ceded business must come through local reinsurance companies. In January, local reinsurers’ right to fi rst refusal was reduced from 60% of risks in the market to 40%. “A key part of this has been the continued strength of IRB, still very much a market force, which has had a strong hand in preserving market order,” he says. The leap from an IRB-led monopoly to choice among global reinsurers has helped develop the market, notes Outerbridge. “Access to additional capital, either through fundraising or reinsurance as a proxy, is allowing insurance companies to develop new risks, not only on the industrial commercial side of the market, but on the personal lines side. Over the past five years, more than 30 million people have moved up the economic ladder into the middle class, creating potentially many more insureds.” Reinsurers can apply to the regulator Susep (Superintendence of Private Insurance) to be registered as ‘local’, ‘admitted’ or ‘occasional’ companies. To achieve local status they must establish a subsidiary with capital of $35.6m, while admitted reinsurers need a minimum deposit of $5m and a local representative office. Occasional reinsurers are limited to 10% of the market and cannot domicile in tax havens. Swiss Re head of Brazil and Conosur (the southern cone of South America) Rolf Steiner says: “Since the market opened two years ago, we have noticed a strong registration of international reinsurers in Brazil. More than 80 reinsurers now have a licence to operate in Brazil, divided between the three different types of registration.” Among those to have already entered the market – monopolised for 69 years by IRB – are Lloyd’s, Swiss Re, Munich Re, Scor, XL, Catlin, Hannover Re, Transatlantic, Chubb, Everest Re, Ariel Re, Allianz, Mapfre Re, Zurich, Ace, PartnerRe and Navigators. Lloyd’s became the fi rst admitted reinsurer, while XL Re, Munich Re, Mapfre Re and J Malucelli have gained local reinsurance status. The majority of reinsurers have sought admitted status. Brokers continue to be the main distribution channel for most business. Authorised foreign

Governador Magalhaes Pinto Stadium, known as Mineirao, in Belo Horizonte, is being renovated to host matches of the 2014 FIFA World Cup, in Brazil

‘The Brazilian insurance market is expected to increase by 20% this year alone – and we are seeing evidence now’ Stephen Outerbridge, XL Re

reinsurance brokers include Willis, Guy Carpenter, Aon Benfield, Jardine Lloyd Thompson and Cooper Gay and United Insurance Brokers.

Focus of attention Reinsurance premiums amounted to $1.3bn in 2007, with nearly half going towards retrocession, but the market is growing quickly. Much of the focus is on engineering and surety, as companies look to provide capacity for the many infrastructure projects planned or under way. This includes a high-speed rail link between Rio and São Paulo, a hydroelectric power station in Belo Monte, and oil and gas investments. Swiss Re’s focus is on specialty lines, such as surety, marine, engineering, aviation and agribusiness, and it has development plans for commercial insurance and life and health. “The volume that goes to international reinsurers is probably below expectation. That means the IRB share is gradually going down but it still


When the global fi nancial crisis peaked in 2008, many feared it would slow the growth of the BRIC (Brazil, Russia, India and China) economies. In Brazil, the government was quick to respond, introducing a BRL503.9bn ($38bn), four-year stimulus programme – the Programa de Aceleraçao de Crescimento (PAC) – to invest in energy and infrastructure projects. Including private investment, the programme is worth more than $360bn. And, given the country’s winning bids for the 2014 World Cup and 2016 Olympics, the investment has helped the economy to quickly rebound. With a growth rate of around 5%, Brazil’s economy is also boosted by the country’s commodities – including soybeans, beef and paper – and oil and gas discoveries. But high demand for raw materials from China is putting Brazil’s old infrastructure under a lot of strain, leading to overcrowding and delays at ports, and increasing pressure to upgrade and develop transportation networks. XL Re Latin America president Stephen Outerbridge says: “Most Latin American economies have withstood the global fi nancial crisis very well, mainly because of strong fi nancial regulation already in place pre-crisis. This is particularly true for Brazil, which showed a momentary dip in gross national product, but is now moving ahead strongly. The insurance market is expected to increase by 20% this year alone – and we are seeing evidence now.” Most commentators on Brazil’s potential as a reinsurance market are upbeat. In a recent visit to Rio de Janeiro, Lloyd’s chairman Lord Levene said the country’s rapidly growing middle class and developing infrastructure demanded the attention of the insurance market. He revealed that Lloyd’s business in Brazil had doubled over five years and was the fastest growing of the BRIC countries. “This success has happened over all classes of business,” he said. “With an estimated growth rate of 8% per annum, it’s not surprising that more than two-thirds of our syndicates write business in Brazil.” Levene pointed to the insurance opportunities linked to the World Cup and Olympics, which it is estimated will attract $60bn of investment. “Many insurance needs are clear: new buildings, new rail links, airport upgrades,” he said. “But some risks are less obvious, from an athlete’s injury to the safety of the spectators, to the most unpredictable element: the weather.”


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Country Focus


Brazil Brazil is widely seen as the most attractive of the BRIC countries, with a growth rate of 5%. It is playing host to major sporting events, including the 2014 World Cup and 2016 Olympics, providing a wealth of opportunities to the insurance industry. The domestic reinsurance market is now open to international companies, with the market share of state-backed IRB-Brasil Re now around 50%.

Population: 192 million GDP (PPP) per capita: US$10,200 Unemployment rate: 7.9%

has a strong position in the market,” Steiner says. “For Swiss Re, we are here on a long-term play and we see a lot of opportunities, especially in surety and engineering, which is related to all the construction going on.” Ariel Re is the latest reinsurer to enter the market, announcing the opening of a representative office in Rio de Janeiro and its approval as an admitted reinsurer in July. Because Brazil is considered a tax haven by regulator Susep, reinsurers must seek a minimum of admitted status to access the market. “The immediate opportunity is in the surety reinsurance space,” says Ariel Re chief executive Tom Hulst. “An important part of our business is surety reinsurance and most of that business is contract surety, which is essentially driven by construction projects. Brazil – given its GDP growth and investment in infrastructure – has a high amount of need for surety (re)insurance capacity.” Prospects for insurers and reinsurers in the surety and trade credit class has prompted hedge fund manager Vinci Partners to set up a dedicated Brazil insurance and reinsurance company to underwrite this line of business. Its Austral start-up is aiming for more than $500m in annual premiums between its insurance and reinsurance entities, and to win 10% market share over the next five years, according to reports. “They have connections straight into the large construction companies,” says head of Guy Carpenter’s treaty business in Brazil, Judi Newsam. “There is a strong desire to see an additional fully owned Brazilian insurance company operating

in these areas. They want to see Brazilian companies benefit from these projects.”

Shape of the market There has been consolidation in the primary market but, like many Latin American markets, it remains highly fragmented. In 2008, Zurich’s Brazilian subsidiary bought a controlling 87.35% stake in Companhia de Seguros Minas Brasil from Banco Mercantil do Brasil and two private investors. It also agreed to acquire 100% of Minas Brasil Seguradora Vida e Previdência from Banco Mercantil. As part of the transaction, Zurich Brasil entered into an exclusive bancassurance agreement with Banco Mercantil. Life is the dominant line of business, followed by motor and health. Many primary companies have low levels of capitalisation and are largely monoline in their business profi le. “We’re expecting a slight increase on the merger front when the new solvency rules come into play,” Newsam says. “There is an expectation that many of the smaller entities will not be able to survive and will need to look to be taken up by somebody else.” Despite major catastrophe losses in the fi rst half of the year, the reinsurance market has shown no signs of hardening. “There’s downward pressure on rates across most lines of business,” Newsam says. “Property rates are very low, even by Latin American standards. “The big players all have treaty capacities of $100m-$300m, so the big treaties can absorb most of the risks the market can throw at them. Mega-risks

(Re)insurance players: IRB-Brasil Re, Swiss Re, Munich Re, J Malucelli Re, XL Re, Mapfre Re, Everest Re, Ariel Re, Hannover Re, Lloyd’s, SCOR, Catlin, Transatlantic, Chubb, Allianz, Zurich, ACE, PartnerRe, Navigators, Austral

are being done on a co-insurance basis because the original rates are so low.” The Chilean earthquake, which is estimated to cost the insurance industry about $8bn, according to Munich Re, has had little impact on reinsurance pricing in Brazil. But the two markets are not totally disconnected, Newsam says. “Some of the same reinsurers may be licking their wounds and looking to recover from the rest of the region. There has been a tightening on underwriting conditions. In Brazil in was perfectly normal to see proportional treaties with no event limits. That has now changed.” The industry is watching with interest to see whether Rio or São Paulo will emerge as the main insurance centre as the market develops. Rio was traditionally home to Susep, IRB and several broking houses, but São Paulo is home to many major insurers. A number of companies have opted to have offices in both cities, hoping the soon-to-be-introduced bullet train will prove a valuable link between the two. “Politically, the governor of Rio is very supportive of reinsurance and actively encourages reinsurers to set up their bases in Rio,” Newsam says. With support like that, perhaps it won’t just be the bullet train that will be moving fast for insurers in Brazil. GR FIND OUT MORE ONLINE: NAVIGATORS APPOINTS BRAZIL REPRESENTATIVE To read this feature, and for more on Brazil, see or


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Monty Our man packs his Louis Vuittons for his favourite gossip-fest, the Monte Carlo Rendez-Vous

Mark my words

There does seem to be a pattern emerging with these ventures. For banking, he’s teamed up with fellow City big hitter Sir David Walker and at the MoD he’ll be supported by Baroness Sheila Noakes. Perhaps all those years of dealing with Lloyd’s riff-raff have made him crave more noble company.

Well hello, and welcome to Monte Carlo. Another year, another Rendez-Vous. I’ve got so many happy, if woozy, memories of September days idled away in a résidence privée in Roquebrune-Cap-Martin, while everyone else rushes around getting their feet trampled in the crush at the Café de Paris. And it just wouldn’t be Monte without some scurrilous rumours doing the rounds as though they’re gospel, would it? So what will this year’s be? Well, how about this for starters: a merger of our pals over at the rating agencies, to provide one über agency? Now that would be a triple-A story.

Sniff ’em out Speaking of Lloyd’s, the place has never been the same since it had a franchise performance director stalking the halls like a headmaster trying to catch unruly schoolkids doing a bunk. Nothing against Tom Bolt and his predecessor Rolf Tolle of course – top blokes the pair of them, if a bit serious for me – but I’m not really sure why they are needed in the fi rst place. Everyone knows that the fastest way to fi nd a bad underwriter is to look for the longest queue of brokers. We can smell ’em a mile off.

Have I ever told you you’re my hero? Regular readers will know how fond I am of the Sage of Omaha, so it fi lled my heart with gladness to see Berkshire Hathaway continue its triumphant storming of the market. An extra $66m on earnings in the fi rst quarter of 2010 and $268m in the fi rst half, eh? I’ve read the biography and everything, but I still can’t figure out just how Warren Buffett manages to get it right every time. Answers on a postcard, please.

Rage against the machine

Turns out I’m not the only Buffett fan around here. I was speaking to a buyer the other day who practically idolises the bloke, and confessed to nicking his quotes at every opportunity. Presumably not the one where he’s defending rating agencies though. Even I couldn’t stomach that one.

Lording it over us Good lord. That Lord Levene chap doesn’t waste much time, does he? Only a month after it emerged he was setting up a company to buy governmentcontrolled bank assets, he’s landed another highprofi le job at his old stomping ground, the Ministry of Defence, chairing its reform panel.

I still can’t figure out how Warren Buffett manages to get it right every time

From Munich with love Being the well-connected, jet-setting type that I am, I’ve seen my fair share of fancy offices. Those big reinsurers certainly aren’t shy of splashing the cash on their headquarters. Munich Re’s gaff, however, takes the cake. It’s straight out of a Bond fi lm – all waterfalls, indoor rivers and underground passages. I can’t help wondering if Nikolaus von Bomhard has got a white cat. GR


Sick as a parrot

One thing that really worries me about Lloyd’s these days is all this talk of technology. Now, as many of you know, the top bods there have been banging on about streamlining this and that for years, but we’ve always managed to duck it. It looks more serious this time, though, which could mean an end to lunchtime sessions down the Lamb. Where will I get my gossip then?


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21/05/2010 15:26


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Willis Capital Markets & Advisory (WCMA) is a marketing name used by Willis Securities, Inc. (WSI), a licensed broker dealer registered with the U.S. Securities and Exchange Commission and member of FINRA and SIPC, and Willis Structured Financial Solutions Limited (WSFSL), an investment business authorized and regulated by the UK Financial Services Authority. Both WSI and WSFSL are Willis Group (Willis) companies. Willis is a global insurance broker and through its subsidiaries provides insurance brokerage and risk management services to clients around the world. Securities products are offered in the U.S. through WSI and in the U.K. through WSFSL. Nothing in this communication constitutes any legal or ďŹ nancial advice or an offer or solicitation to sell or purchase any securities.

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23/08/2010 17:41


TALE OF TWO TITANS As their stranglehold on the industry grows, we go behind the scenes at the rating agencies Strategy talk from Swiss Re a...

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