‘In many ways, the i insurance industry stepped up in the wake of the tragic events of 9/11’ Ellen Bennett, editor-in-chief G LOBAL RE I NSU RANCE.COM
MONTE CARLO 2011 FROM GLOBAL REINSURANCE MAGAZINE
DAY ONE
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“Cats, cats and more cats is going to be the headline going into Monte Carlo” Theresa Schugel, BMS’s head of global specialty casualty
“Those first dollars that flowed after 9/11 were not government dollars, they were insurance dollars”
Devaluation of government bonds in peripheral European economies is little more than a minor distraction for global reinsurers, says one analyst. “From my point of view, the sovereign debt issue from a reinsurance perspective is entirely a sideshow,” PricewaterhouseCoopers European insurance market reporting leader James Quin says. There have been some concerns that devaluations, downgrades or defaults in peripheral eurozone economies such as Greece, Italy, Portugal, Ireland and Spain could hit the balance sheets of reinsurers, as the bulk of their investment portfolios are made up of government bonds. But Quin, a former Citi
Sovereign debt crises in European cities like Greece will not hit reinsurer balance sheets as some expected
analyst, says: “The direct exposure to peripheral eurozone sovereign debt is extremely small. Munich Re has a little bit more than most but that’s because it has a primary life business, and even there the risks are relatively small because policyholders take most of the investment risk. I wouldn’t say it is irrelevant but it’s not far off.”
Will it be you spotted drinking coffee or sipping champagne in Monty’s diary tomorrow?
T T O N I G7 H Page
September 2011
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Gregory Serio, Park Strategies
‘Sovereign debt is a just sideshow for reinsurers’
OUT& ABOUT
OM E NC C E E I N S U RS AUN RC A G LOBAL RE I N
Remembering 9/11
changed ten years on How the industry has
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MONTE CARLO 2011
INSIDE...
‘With a big event like Christchurch, there are a lot of people that become real experts on geology by the bottom of the first pint and that’s no way to progress’
COMMENT READ MORE STAY INFORMED
September 2011
Liberty’s Dieter Winkel thinks ultimate net loss retro is the way forward PAGE 3
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WHAT NOT TO MISS TONIGHT AND WHAT TO AVOID PAGE 7
Gerry Brownlee, Canterbury earthquake recovery minister PAGE 6
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G LOBAL RE I NSU RANCE
Remembering 9/11 How the industry has changed ten years on
US states relax collateral rules for foreign reinsurers PAGE 4 Will catastrophe model update leave its mark on pricing? Chaucer’s Bruce Bartell thinks so PAGE 6
MONTE C ARLO
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1 Casino de Monte Carlo 2 Hotel Hermitage 3 Hotel de Paris 4 Fairmont MonteCarlo 5 Hotel Metropole Monte-Carlo 6 Port Palace Hotel 7 Eglise Sainte Devote 8 Gare de Monaco
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GLOBAL REINSURANCE MAGAZINE is published 10 times a year by Newsquest Specialist Media Ltd 30 Cannon Street, London, EC4M 6YJ, UK Tel +44 (0)20 7618 3456 Fax +44 (0)20 7618 3457 www.globalreinsurance.com © 2011 Newsquest Specialist Media Ltd. All rights reserved. No part of this publication may be used, reproduced, stored in an information retrieval system or transmitted in any manner whatsoever without the express written permission of Newsquest Specialist Media Ltd. This publication has been prepared wholly upon information supplied by the contributors and whilst the publishers trust that its content will be of interest to readers, its accuracy cannot be guaranteed. The publishers are unable to accept, and hereby expressly disclaim, any liability for 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.
11/09/2011 12:40:28
MONTE CARLO 2011
B Y L A URE N GOW lauren.gow@nsqm.com Catastrophe modelling firm AIR Worldwide has entered into a partnership with Trillium Software. AIR said the partnership will provide more precise geocoding, through the integration of Trillium’s geospatial software with its catastrophe modelling application. The integrated software is expected to help AIR Worldwide’s clients improve risk geocoding and catastrophe risk analyses for perils such as wind, flood, and earthquake outside the USA.
S AY WHAT?
“If you liken the uncertainty swirling around the market to a hurricane, the eye of that storm, we believe, may have settled over Europe” Nick Frankland, chief exec of EMEA operations, Guy Carpenter
Retro cover should be individualised Rising rates make buying retro very difficult Ultimate net loss gives broader coverage BY L A UREN GO W lauren.gow@nqsm.com Individualising retrocession cover will make it more appealing to buyers, according to Liberty Syndicates head of reinsurance Dieter Winkel. Winkel said retrocession cover is difficult to write and change, particularly when rates move up dramatically leaving retro buyers with fewer buying options. “You can’t go from 35% to 50% rate on line and expect buyers to stay on board. I don’t believe people will buy at those rates,” said Winkel. But Winkel believes there is a solution. “One option is to move retro towards a product that covers individual peak territories or separate pillars for US and international exposures, rather than providing worldwide.” Winkel also said that unlike catastrophe bonds and insurance loss warranties (ILW), ultimate net loss retrocession (UNL) provides much broader coverage. “To my mind, this is preferable to a situation where geographically diverse companies are limiting the amount of back up they have.”
Rendez-Vous regatta yachts remain docked due to unfavourable conditions
Liberty Syndicates’ Dieter Winkel believes UNL retro could help reinsurers in the battle of coverage versus cost
MATCH OF THE DAY
Mother Nature vs RVS Regatta Delegates taking part in the annual Rendez-Vous de Septembre regatta faced an anxious wait this morning as the race looked set for a false start due to a lack of one crucial element – wind. As competing crews gathered for their briefing down at the Yacht Club of Monaco it looked like an early victory for Mother Nature as she offered little sign of blowing a breeze for the action to get under way in the bay. With defeat on the cards for the 15 four-man boats, it was looking increasingly likely they would need to find another way to settle old scores or hope that they could make an extremely late come back in what was turning in to the first big match of the day. MOTHER NATURE 1, RVS REGATTA 0
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IN PICTURES
In 2011, following the impact of severe catastrophes, some reinsurers have run out of coverage, meaning additional back up has been needed. But the battle to weigh coverage against cost has been a constant stress for reinsurers, according to Winkel. Winkel added: “1 January renewals will be interesting as many clients perceive ILWs to be cheaper. But there are advantages to UNL coverage over ILW coverage. ILWs are often single-shot policies with restricted perils and territorial scope, so you get less for less.”
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C ST O A R TS N E R
AIR to partner up with Trillium
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$445bn
The estimated total global reinsurer capital as of 30 June 2011, according to Aon Benfield
Coffee, a map and reinsurance – what more could you want in life?
£50m
The amount racing drivers at the front of the grid can buy cover for
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ATOMIC BOMBS Every second, a large hurricane releases the equivalent amount of energy
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MONTE CARLO 2011
US REGUL ATION Illinois
Who has relaxed their collateral rules?
MARKET VIE W FROM QFC A
New York Indiana New Jersey
C A P TI V E R E G U L ATION S
Why Qatar makes good global sense Florida
Reformed collateral rules
Louisiana
Texas
Reform bills pending
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STATES have so far relaxed their collateral rules
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REINSURERS have been granted lower collateral status in Florida
20%
COLLATERAL approved by New York Insurance Department
Pioneer US states lower collateral requirements Catastrophe-prone states like Florida benefit Lloyd’s makes 80% cut for New York cedants Lower collateral requirements should bring more reinsurance cover to capacityconstrained markets. Encouraged by new legislation, a number of states in the USA have relaxed or are in the process of relaxing their collateral rules for foreign reinsurance companies. Title V of the Dodd-Frank Act – also known as the Non-admitted and Reinsurance Reform Act 2010 (NRRA) – makes it clear that it is the cedant’s home state that decides credit for reinsurance. While the act does not seek to reduce the 100% collateral rules that exist in many states, it has opened the door for indi-
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vidual state regulators to modify their terms. So far, Florida, Indiana, New Jersey and New York have relaxed their rules for unauthorised reinsurers’ collateral requirements and others are expected to follow. Florida was the first state to allow lower capital requirements for foreign reinsurers that are highly rated and financially stable. This potentially attracts further reinsurance capacity to the hurricaneprone state, making it less of a capital burden for international carriers. Hanover Re, XL Re, Ace Tempest Re, Hiscox Insurance and Partner Re have all been granted lower collateral in the state.
“That provision of DoddFrank does increase available capacity at least marginally,” says Insurance Information Institute president Robert Hartwig. “That’s important to some of the more catastropheprone markets like Florida. The impact is small but in a capacity-constrained market like Florida it’s important.” In July 2011, Lloyd’s received approval from the New York Insurance Department to post reduced collateral (to 20% from 100%) on reinsurance contracts with New York-domiciled cedants. Currently, Illinois, Texas and Louisiana have bills pending that will see them reform their collateral rules along similar lines.
Companies involved in large capital projects in the GCC are looking for more effective risk management strategies, exploring alternative risk transfer mechanisms such as captives. Further afield, an increasing focus on risk management among firms in Asia has led to more evaluating where to domicile a captive. A key step of Qatar’s captive hub strategy has been to set up a reliable regulatory environment. The QFC Regulatory Authority has released the Captive Insurance Business Rules 2011 and Insurance Mediation Business Rules 2011 (IMEB), which set out a regime for asset management in the Qatar Financial Centre. The regime introduces a class 4 captive that allows for innovative structures outside classes 1 to 3. Other changes include the adoption of a minimum capital requirement focusing on a risk-based model, customising the approved individual process, reducing application and annual fees, and allowing foreign captives to re-domicile to the QFC. The QFCRA’s new rulebook, IMEB, aims to re-classify intermediaries’ and captive managers’ activities more clearly. Provisions have been made to differentiate insurance mediation and captive insurance management and to simplify capital requirements. Moreover, the rules clarify that group policies are allowed, if they give authorised firms the sole benefit of the minimum indemnity levels required by the QFC, while lower reporting and fee requirements will apply to captive managers. The regime provides a strong foundation for a captive and reinsurance market in Qatar, which clearly benefits from its proximity to Europe, Asia and Africa. More and more companies in the GCC and MENA region are looking at using the QFC framework to set up captive insurers.
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11/09/2011 10:24:30
MONTE CARLO 2011
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“The industry stepped up in the wake of 9/11”
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s the industry descends on Monte Carlo today for the biggest event in its calendar, many people will be remembering the RendezVous of 2001. It’s hard to believe it’s a decade since 9/11, and to realise how much has changed since then. Aon and Marsh both had offices in the World Trade Center and hundreds of their workers’ lives were lost. Most
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people in reinsurance lost friends and colleagues that day and they will be in their minds today, as ever. Today is also an opportunity to reflect on how that event – unimaginable before it happened – changed the world’s perception of risk and the business of insurance forever. The aftershocks are still being felt, in the disputes over the rebuilding of the WTC as well as in the definitions of terrorism
risk and contract certainty. In many ways, the insurance industry stepped up in the wake of the tragic events. It honoured its commitments and was seen in a better light, both by its policyholders and by the US government. Barriers were broken down and communication improved. The industry also faced up to the scale of the new threats out there and tightened up policy wordings
Guy Carp: Cat models have too much influence Changes will be disruptive during renewals Cat models are a ‘highly imperfect science’ B Y BE N DYS ON ben.dyson@nqsm.com Catastrophe risk models have too much influence in the reinsurance marketplace and need to be put back in their place, according to Guy Carpenter’s chief executive of global analytics and advisory, Bill Kennedy. Speaking at a press conference at the Monte Carlo Rendez-Vous yesterday, Kennedy said that although recent changes to vendor catastrophe models were not the most disruptive event in the market over the past 12 months, he expected the changes to be disruptive during the 2012 renewal process. “Cat model influence is a bit like the tail wagging the dog,” Kennedy said. “We the industry need to put these models back where they belong – as one of a number of
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“Cat model influence is a bit like the tail wagging the dog. We the industry need to put these models back where they belong.” Bill Kennedy, Guy Carpenter
risk management tools providing insurers with a better understanding of their risk on a relative, not an absolute, basis.” Kennedy said it was important to understand the levels of uncertainty inherent in all models. “To be clear, we believe these models are very useful in assessing risk exposures. It is no surprise they have become essential tools for any insurer underwriting catastrophe loss coverage. “However, these models reflect a highly imperfect science, and they carry levels of uncertainty far greater than their influence would suggest.” Kennedy also called for greater transparency into the models’ workings and assumptions. “Model vendors cannot expect to be partners within the insurance industry if they are regularly producing and introducing opaque tools.”
and exclusions as a result. The industry can never be ready for another event on the scale of 9/11; and let’s hope it will never have to. Global security is on high alert today and delegates at the Rendez-Vous, like the rest of the world, will be looking back to the tragic events of 10 years ago and learning from them what they can.
ellen.bennett@nqsm.com
S AY WHAT?
“The market is adrift, directionless. There is very little indication and virtually no conviction of the market’s next move. Why is the market adrift? Uncertainty has run rampant. In my 30 years in the business I have rarely seen a market so riddled with it.” Alex Moczarski, president and chief executive, Guy Carpenter
“While I respect analysts, they don’t always appreciate how long it takes for price increases and other remedial actions to work their way through the portfolio.” Mike Wilkins, chief executive, Insurance Australia Group
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MONTE CARLO 2011
PRICING
Cat modelling adds to pricing pressure Major events this year contained in regions RMS 11 sparks fresh look at retention levels The big influence on pricing this year, beyond natural catastrophe claims, is a catastrophe model update. The influence of major natural catastrophes in the first half of the year on reinsurance pricing has so far mainly been contained to those regions that have experienced claims. In New Zealand in particular – following the second Christchurch earthquake in February – price rises of more than 150% have been experienced, while elsewhere more modest rate hikes of between 5% and 20% are more typical. But New Zealand is a clear outlier, according to Swiss Re head of division globals and member of the group management board Thierry Léger. “I expect a number of reinsurers have withdrawn capacity from that market, but the issue is that really big and companies are potentially thinking about splitting New Zealand cat from Australian cat to get
‘There’s a lot of time being spent by cedants and reinsurers looking at developing their own cat models’ Bruce Bartell, Chaucer the prices right,” he says. Beyond catastrophes, the biggest single driver of property catastrophe pricing in 2011 is changes to the vendor catastrophe models. The update that has had the biggest impact is RMS version 11 for US wind, which reveals higher exposures for areas inland from the
coast than had previously been the case. “RMS 11 will cause people to look carefully at retention levels and, where they’ve experienced frequency, there will be a combination of retention level correction and price movement,” says Chaucer chief underwriting officer Bruce Bartell. The impact is still being assessed, but for many insurers and reinsurers it means a higher probable maximum loss, assuming that they use RMS models to assess their exposures. These carriers have a choice: either they hold more capital to maintain the same book of business, buy more reinsurance to transfer some of the risk and maintain capital levels, write less business or rely less on RMS model outcomes. “I’m quite sure there’s a lot of time being spent by cedants and reinsurers at the moment looking at developing their own catastrophe models using a blend of externally provided models,” says Bartell. “I’m sure that will happen more in 2012.”
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THE FENCE What effect will the RMS updates have? THIERRY LÉGER, SWISS RE “These model changes are a catalyst – but insurance companies are smart – they know they cannot just rely on RMS.”
THE BIG SMOKE The world’s largest cigar was insured for just under £18,000 Measuring 12.5ft long and weighing 110kg, the cigar was insured for its retail value, but for a premium of just 50p. It took 315 hours to make and would take one person 339 days and nights of uninterrupted smoking to conquer
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BRUCE BARTELL, CHAUCER “The effects of version 11 have been VS felt right the way through the curve so that’s certainly going to put upward pressure on pricing.”
Christchurch: more data, less of the speculation
Gerry Brownlee dispels the myths surrounding Christchurch risks
B Y BE N DYS ON ben.dyson@nqsm.com The New Zealand government is aiming to dispel myths about earthquake risks in the country and ensure reinsurers are using the correct data when pricing risks there. “We want actuarial calculations to be based on good information and not some of the speculative stuff that runs around at times like this,” earthquake recovery minister for the New Zealand region of Canterbury Gerry Brownlee says. “It is understandable that with a big event like this, there are a lot of people that become real experts on geology by the bottom of the first pint and that’s no way to progress.” Brownlee is part of a New Zealand delegation that met with Lloyd’s on Friday and will also be making an appearance at this year’s Rendez-Vous in Monte Carlo. The delegation includes representatives from the New Zealand Reserve Bank, the Treasury, the government’s Geological and Nuclear Science agency, and the Department of Building and Housing. It aims to help the reinsurers understand the Christchurch earthquakes, how the government is responding and how these actions will help reinsurers quantify the risk in the future.
THERE BE MONSTERS Back in 1974, Cutty Sark Whisky offered a £1m prize for the capture of the Loch Ness monster
RED CARPET COVER Lloyd’s provides cover against the Academy Awards being cancelled
But insured itself against the possibility of actually having to pay out the prize money. The policy stipulated that it should be brought to London and identified by a qualified zoologist
This can be for anything from terrorist threat to fire. In 2004, Lloyd’s insured the £27m worth of jewellery worn by the stars at the Oscars.
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MONTE CARLO 2011
MONTY’S RENDEZ-VOUS
Watch this space for your face tomorrow!
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“If it rains, like it did last year, don’t run. You will definitely slip. And people will remember” Welcome to Monte Carlo, which, as you know, is my favourite time of year. I’m already down here and nicely settled, having a few drinks and eyeing up the very nice sports cars. As you ease yourself into the premier event on the reinsurance calendar, I thought you might like to hear some top tips from a man who knows what he’s taking about – moi.
Plans for the official regatta dried up – no wind, no race! I wonder how much that parking space cost?
Watch out for people wearing full suits during the day instead of the traditional, more relaxed, Monte Carlo attire. They’re either newbies or they need to save face for some reason. Be wary of reinsurers holding meetings on yachts – they may be trying to hide something under the wow factor. If it rains, like it did last year, don’t run. You will definitely slip. And people will remember. If you do get so drunk that you fall asleep in a public place, make sure your name badge isn’t showing …
The first of the meeting delegates, ‘working hard’ at Cafe de Paris
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TONIGHT
GO TO…
There’s only one place to see and be seen tonight – the annual Guy Carpenter cocktail party that kicks off the whole shebang. Get your glad rags on, your shades in place, invite at the ready and head down to the Hotel de Paris.
SEE…
The casino. It would be rude not to.
D R I N K … An ice cold cocktail.
Come on, you’re in Monaco – a lager’s just not going to cut it.
AVOID…
The Cafe de Paris, if you possibly can. With hordes of insurance folk meeting here or in the vicinity, the only thing you’re likely to get is lost.
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