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BestDay Coverage of Rendez-Vous de Septembre

The 2012 reinsurance renewal season is under way with the annual Rendez-Vous de Septembre conference in Monte Carlo, Monaco. BestDay will be providing daily reports.

Sept. 14, 2011

Asia-Pacific Catastrophe Reinsurance Pricing Will Rise, But Capacity Remains Abundant

A series of natural disasters in the Asia-Pacific region have raised reinsurance rates for affected catastrophe programs, but a widely upward pricing turn for global catastrophe risks is not expected to be directly driven by the region's events against a backdrop of adequate reinsurance capacity and demand.

"Localized losses should not affect other regions due to adequate reinsurance supply, and in most cases this argument was borne out in the renewals we achieved for clients at June 1 and July 1," said Malcolm Steingold, Asia/Pacific chief executive at Aon Benfield, a reinsurance broker.

"Pricing on catastrophe-affected programs has risen in Asia/Pacific as would be expected, and in most affected territories catastrophe perils have been taken out of pro rata treaties," said Steingold. In loss-affected regions, insurers increased their retentions to ameliorate the impact of increased reinsurance premiums.

Nevertheless, Steingold said global reinsurance capacity remains adequate and New Zealand exposures are still highly insurable at a price commensurate with incurred losses and inherent risks.

Japan's reinsurance renewals on April 1 did not see much change. "Prices went up for catastrophe cover, but overall cost increase was mild," said MM Lee, general manager of analytics at A.M. Best Asia Pacific Ltd.

"This should be similar to other markets in Asia. New Zealand faced and will face higher increases," added Lee. From the reinsurers' perspective, recovery of losses and repricing of catastrophe risk in New Zealand contribute to the increase.

"Due to the sudden change and high reliance on reinsurance, it may be difficult for companies in New Zealand to face the changes. However, the market will have to absorb and accept the changes. Deductibles have gone up quite a bit as well," said Lee.

To some extent, Japan's March 11 earthquake has influenced global reinsurance market and risk appetite will change as well. However, Lee said commercial losses from the earthquake "were not substantial to trigger any global changes."

The impact of the earthquake will drive demand for insurance cover and subsequently reinsurance need by insurers, but is unlikely to cause a major structural change to the current scheme in Japan before the January 2012 renewals. Steingold said "there will not be substantially more placement for capacity in international reinsurance markets in upcoming renewal discussions."

Following the high frequency of natural peril losses in Australia, Steingold said "the regulator has flagged its attention to introduce a capital charge on cedents' sideways exposures." For renewal discussions, reinsurers are generally taking a more cautious view on what they were previously regarded as nonpeak zones.

The global reinsurance industry's capital grew to about US$470 billion at the end of 2010 from US$411 billion in 2007. The level of capital is reflective of the returns investors believe they can achieve in the reinsurance market for investment, said Robert De Souza, president of Asia/Pacific at Aon Benfield. Most of the capital is conventional reinsurance capital, which takes a long-term view and does not base its capital position on the view of interest rates alone.

Due to losses in this first quarter, Lee noted nonproportional business saw some signs of hardening. "Securing retro capacity in the market is getting more difficult for smaller reinsurance players as well," he added.

Capital positions of primary insurers vary across the Asia-Pacific region, influenced more by market conditions than losses although the latter has a clear impact, according to Souza.

Most countries in the region have considered introducing risk-based capital structures. Subsequent consolidation results in fewer primary insurers buying reinsurance in specific markets. "The consequence is bigger, more robust companies with reduced reliance on reinsurance," said Souza. When markets become more mature and sophisticated, the impact will be felt more strongly in the longer term.

Local companies in China and other developing markets are facing capital strains due to high market growth. "I don't see much hurdle in the renewal season as capacity is still plentiful," Lee noted. As the losses mostly came from catastrophe events and not from badly-funded growth, Lee said "we believe primary insurers should be able to secure reinsurance capacity if they opt to fund their growth through reinsurance."

"On the other hand, we see a clear trend from primary players that they are very much credit conscious, and also want to further diversify their reinsurance portfolio," said Lee.

In the United States, risk modeler Risk Management Solutions recently upgraded its hurricane model, with an increase of loss estimates (Best's News Service, Feb. 28, 2011). The full impact of this year's catastrophe events on modeling is still unknown. As models are essentially major loss-specific, Souza said there are still perils that are largely nonmodeled in certain Asia-Pacific regions such as nuclear, flood and hail.

Listen to the full interview with Lee at http://www.ambest.com/media/media.asp?RC=191484.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)

Cat Modelers Defend Methods, Warn of Over-Reliance on One Model

In a year of high natural catastrophe losses, cat models and their impact on underwriting are a hot topic at the annual Rendez-Vous de Septembre reinsurance meeting in Monte Carlo.

Many of the brokers and reinsurers who held press briefings at Rendez-Vous mentioned cat models as important factors --- and in particular, the recent revamping of key models --- one by RMS to its U.S. windstorm model and two last year by AIR Worldwide for European and U.S. windstorms.

Top executives of Scor and Munich Re, along with those at reinsurance broker Guy Carpenter & Co., said these changes in cat models tend to create uncertainty among primary insurers in that they tend to raise the potential loss levels insurers might face.

William Keogh, president of cat modeler Eqecat, said there tends to be two schools of thought on updating models. One will hold off on making incremental changes to their models, figuring they would disrupt their clients with one big change rather than interrupt them with several small changes over time.

Eqecat goes with the "second school," he said. "We found that small incremental changes are less disruptive." Eqecat updated its hurricane model seven times over the past eight years, for example.

Milan Simic, managing director at AIR Worldwide, acknowledged some insurers are troubled by model changes. But he said the impact is usually confined to those insurers that rely too much on one or a few models.

Simic said AIR's U.S. hurricane model was updated last year as well, which he termed significant.

"For insurers who use multiple models, updates are not that disrupting," he said. "It's more a problem for those who rely on one model."

Echoing the comments made by reinsurance and broker executives at Rendez-Vous, Simic told Best News Service that insurers should use multiple cat models as no single model can capture all the possible loss scenarios.

Keogh concurred, saying "there is no more one-stop shopping" for insurers seeking to model their catastrophe risks. "You've got to do a high degree of due diligence, and find's what's the best for specific risks," he said.

He added that no one model can be complete in its assessment of risks. If it were, it wouldn't be a model.

AIR Worldwide announced expansions of both its European windstorm and European earthquake models during Rendez-Vous this year. Simic noted the changes are not to the model methodology, but rather an expansion of their scope.

The windstorm model adds six countries to its geographic scope, bringing the total to 18. The earthquake model adds 24 countries, bringing the total to 30.

To watch the interview with William Keogh, please go to http://bcove.me/4z55sz3z.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Growth Beckons, but With Complications, for Reinsurers in Sub-Saharan Africa

Sub-Saharan Africa has weathered the global economic slump well, and with a 4.5% gross domestic product growth rate in 2008 and 2009, the region offers reinsurers an expansion alternative, said Junior John Ngulube, chief executive of Munich Reinsurance Company of Africa Ltd.

Positive economic growth throughout the region and in particular, South Africa, will continue to drive reinsurance growth, said Ngulube. He added that South Africa, by far the region's largest economy, will adopt a Solvency II framework in 2014, a development that will further encouraged reinsurance buying.

"Our estimates indicated that the average insurance company will require additional capital as a result [of Solvency II]," he said.

Even with the growth prospects, foreign reinsurers will still have "great difficulty" establishing a presence in Africa, due to its sheer size and differences among sub-regions, according to Ngulube.

With 45 countries spanning a very large geographic spread, sub-Saharan Africa poses a formidable challenge for reinsurers seeking to set up a profitable infrastructure, he said.

Ngulube added that regulatory structures vary widely among sub-regions in Africa. "The English-speaking world, because of a shared history, tends to have very similar regulatory frameworks," he said. "In French-speaking West Africa they tend to have a single regulatory framework which applies in all 17 countries."

Countries with a Portuguese legacy have different regulatory frameworks as well, he said.

Ngulube estimates that Africa's reinsurance market is worth about US$6 billion, with South Africa representing $2.9 billion of that. South Africa's nonlife insurance total is about $37.9 billion, with the entire continent registering $51.5 billion in premiums.

Munich Re Africa is now doing business in 45 African countries. The reinsurer has a subsidiary in Mauritius from which it deals with the French-speaking markets in North Africa. An office in Ghana covers western Africa and another in Nairobi, Kenya does business in eastern Africa, said Ngulube.

The reinsurer's main office in Johannesburg and a branch in Cape Town covers southern Africa.

To listen to the interview with Junior John Ngulube, please go to http://www.ambest.com/media/media.asp?RC=191485.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Debate Targets Reinsurers' Ability to Expand Risk Coverage

Reinsurers absorbed billions of dollar in catastrophe losses over the past year, but market participants of all stripes say the industry can do more to cover future losses.

Grahame Chilton, chairman of broker Aon Benfield, noted in a panel debate at the annual Rendez-Vous reinsurance meeting in Monte Carlo that much of the reinsurance capital lost in recent events has largely been replaced.

But he added that capacity doesn't seem to be changing the market. "There are still enormous retentions left to primary insurers and people on the street (or government)," he said.

"I'm disappointed that we such such enormous gaps between economic and insured losses," added Michael McGavick, chief executive of XL Capital Ltd. "We should challenge ourselves to close that gap."

McGavick added that the industry must convince governments that have a big stake in their domestic insurance market to allow the private market a greater share.

Even with the desire to expand markets, reinsurers are caught in a market that doesn't want to budge from its current inadequate pricing cycle.

According to McGavick, despite some pricing improvement in lines such as U.S. property, the current reinsurance market is a "not-yet market."

"With terrible investment yields, years of falling prices, reserve releases declining and the first-half losses, all the elements are there to change the perspectives of risk," he said. "There's dry kindling all around. We should see it turning sooner rather than later."

Peter den Dekker, risk manager for Netherlands-based manufacturer and service provider Stork BV and president of the European risk management trade group Ferma, countered that insurers and reinsurers often place too much emphasis on pricing.

Referring to talk about too much market capacity, Dekker said after the Sept. 11, 2001, terrorist attacks, insurers and reinsurers had a "seriously irresponsible response," raising prices quickly, in some cases by four times, and taking out capacity in several lines.

"You may think buyers are only interested in price, but we need access to adequate capacity as well," he said.

Dekker said risk managers don't want to see another "irresponsible response" in another year or two in reaction to catastrophe and investment losses.

"You're inclined to talk prices up," said Dekker of reinsurers. "You should connect with the markets a little more" and talk with the "end user" of insurance.

Torsten Jeworrek, Munich Re management board member responsible for reinsurance, said the Sept. 11 disaster was a "surprise risk" that proved many industry risk assumptions wrong.

"The market contracts and reacts not only to price by with a structural shift," he said. Market changes can be severe when something happens that no one anticipated, but insurers and reinsurers then work out a solution to the new reality, he said.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Hiscox US Chief: Reinsurers Must Adjust to Low Investment Yields

Record catastrophes and weak pricing aside, Robert Childs sees the greatest danger for reinsurers coming from the investment side, fully half a reinsurer's business that he believes is too often ignored.

"Nothing that has happened recently is really a game changer," said Childs, the chief underwriting officer and chairman of Hiscox USA. "Nothing except the continuing low interest rates, which I have been talking about for two years."

According to Childs, interest rates have been so low in the past few years that the investment income lost to the reinsurance industry is equivalent to a US$100 billion catastrophe loss. He figures that to compensate for the lost investment income, reinsurers would have to shave eight points from their combined ratio.

"No one wants to accept that this is the new norm," Childs told Best's News Service at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo. "Insurers and reinsurers are talking a lot about the gyrations in the pricing market. The combined ratio is their dial; turn that dial according to the ups and downs of the market."

Childs said half a reinsurer's business, "half the dynamic," is investments. "When CEOs, CFOs and chief investment officers recognize this is the new environment, that will change the game," he said.

Given the pessimism regarding investment income, Childs said reinsurers will have to raise prices, even at the expense of market share and premium income.

Looking at game-changing events, Childs noted the Sept. 11, 2001, terrorist attacks turned the entire property/casualty market. In 2005, Hurricane Katrina turned mainly the property catastrophe market, a more limited impact.

"Reinsurance has been under pressure ever since," he said. The natural disasters in the Asia/Pacific region this year were costly, but abundant capital in the reinsurance market cushioned the blow.

Childs sees some rate hardening in U.S. property lines, due in part to severe tornado events this year. "Smaller Midwest insurers took a lot of losses," he said.

Hurricane Irene, by contrast, is not expected to hit the reinsurance market hard. Losses are estimated at about US$6 million onshore -- about $4 billion of that from wind damage.

"The larger primary insurers will retain much of that loss," said Childs.

Hiscox, which has 31% of its book in reinsurance, expects better long-term rate conditions in small-ticket retails lines, where as Childs puts it the "price setters" like Hiscox like to operate.

Operating in these lines, Hiscox has seen price increases averaging about 10%. "Price takers" are in the large-ticket wholesale lines, where Childs expects less improvement.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Minister Asks Reinsurers to Consider New Zealand for the Long Term

Devastated by a series of earthquakes that began a year ago, the government of New Zealand brought its case for risk management help to the annual Rendez-Vous de Septembre reinsurance gathering in Monte Carlo.

Gerry Brownlee, minister for Canterbury Earthquake Recovery, told a Rendez-Vous audience that reinsurers should take a close look at the New Zealand market as a long-term investment.

He estimated New Zealand's earthquake losses at about NZ$30 billion (US$24.5 billion), adding about NZ$12 billion of that is covered by the government.

"We think we lost about 1,400 commercial buildings," said Brownlee, who added New Zealand's economy took a proportionately bigger hit than other big disasters. The March 11 earthquake and tsunami in Japan, for instance, cost about 4% of that country's gross domestic product. Hurricane Katrina took about 1% of the U.S. GDP.

The Christchurch quake cost New Zealand about 8% of its GDP.

But even with that devastation, Brownlee said the Christchurch economy managed to grow by about 2% in the last quarter. "Our people are inventive and determined to rebuild," he said.

Although the New Zealand government has played a big role in absorbing some of the losses, Brownlee prefers more private-sector participation. Describing a bigger government role as a "slippery slope," he said "I'm firmly in the camp of having the private market participate."

"Eventually everything comes back to politics," said Brownlee. "Even the most extreme right-winger would look for quick solutions."

Brownlee expressed some frustration with the risk management industry and its response to the country's disasters. He claimed that some risk modelers are designing new models for New Zealand without having visited the country and without consulting with the Crown Research Institute, a New Zealand organization that compiles data on natural disasters.

He also said primary insurers in some cases have been slow to process claims.

Brownlee said New Zealand and other countries are learning from each others' disasters. "We borrowed some legislation from Australia" to mitigate the loss impact, he said, adding that Japan then borrowed some legislation from New Zealand.

Brownlee said New Zealand authorities have also been in consultation with authorities in Chile concerning building standards.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Sept. 13, 2011

Reinsurers Cautious in Asia-Pacific Markets Amid Record Catastrophe Losses, Volatile Financial Markets

Record level of natural catastrophes in the Asia-Pacific region and volatile global financial markets are prompting reinsurers to take a cautious approach to renewal discussions at this year's Rendez-Vous in Monte Carlo.

The industry's profitability has been eroded after a series of catastrophe losses in late 2010 and early 2011. Prices are "now more susceptible to rise in respond to further major losses," said Clarence Wong, chief economist for Asia with Swiss Re.

Claims burdens in the first quarter of 2011 already made an impact on negotiations for treaty renewals at July 1 globally. "I expect these effects will have an appreciable influence on renewals at Jan. 1, 2012," said Tobias Farny, chief executive of Asia-Pacific at Munich Re.

The year 2011 has already had the "highest-ever economic losses in record" globally, said Farny. Insured losses were nearly five times higher than the average since 2001. Natural perils caused global economic losses of US$265 billion and estimated insurance losses of $60 billion in this first half, according to Munich Re. The March 11 earthquake in Japan presented more than 80% of total economic losses.

The losses are already reflected in recent renewals with price hardening for those loss portfolios, most visible in New Zealand, followed by Australia and Japan. "Rates for natural catastrophe events will likely remain elevated in these markets going forward against the backdrop of sufficient reinsurance capacity at the right price," said Wong.

After downward pressure for pricing in the past six to eight years in the Asia-Pacific region, Farny said "prices have gone up."

"The losses and claims paid these days show that we need risk-adequate prices over the whole cycle, regardless of business and region," said Farny. In some areas, pricing for natural catastrophes lines is 70% to 80% below what it used to be.

In New Zealand, Australia and Japan, Wong said many cedents are reviewing the adequacy of reinsurance programs, keeping in mind the need to cover earning volatility. Regulators have encouraged insurers to review their programs in areas such as reinsurance limits and modeling assumptions.

In other markets, Wong said capital relief remains a key topic for renewal discussions in view of tightening statutory solvency requirements and volatile asset markets.

Original rates are expected to remain stable due to sufficient capacity and intense competition in other Asian markets, said Wong. Casualty and noncatastrophe property lines still face strong pricing competition in most regions.

Recent financial market volatility and fears of recession will likely make reinsurers and insurers more cautious in committing their capital. "Any asset impairments will filter through into reduced available capital,' said Wong.

Companies are taking comfort from the prospect of stable low interest rates extending into 2013 as articulated recently by U.S. monetary authorities. "As such, the coming renewal will be highly challenging in terms of capital and cycle management of reinsurers," said Wong.

The global reinsurance industry's capital increased 14.4% to $470 billion between 2007 and 2010, according to reinsurance intermediary Aon Benfield. Continuing low interest rates and recovery of global asset markets contributed to this record level of capital at the end of 2010. According to Wong, the series of loss events in late 2010 and early 2011 are generally described as earnings rather than capital events.

Tightening solvency requirements in the Asia-Pacific region have increased insurers' need for capital, along with the need to fuel expansion in new and emerging markets. "It is expected that reinsurance will continue to be in strong demand for relieving capital strains for insurers. Quota share treaties can be an efficient way to structure reinsurance capital support," said Wong.

Some Southeast Asian insurers are thinly capitalized in a highly fragmented market conditions, said Wong. Japanese insurers remain well-capitalized despite the earthquake impact.

In Japan, insurers have still maintained a high solvency margin ratio at around 600% to 800% for the fiscal year after the earthquake and aftershocks. The insurance sector "must be considered sound," said Hiroshi Fukushima, president and chief executive of Toa Re. No loss of capital has been seen from insurance losses related to the quake.

Japan's government-backed residential earthquake scheme offers coverage for personal dwelling risks. Its reinsurance scheme is jointly operated by private nonlife insurers and government and risk is not ceded to international markets.

Japan's Kyosai, or mutual cooperatives, are important carriers of earthquake residential risks, but they do not participate in the government-backed earthquake scheme. These cooperatives are mostly protected against natural catastrophes with excess of loss covers purchased in international markets. The reinsurance costs to Kyosai seeking renewals increased in the March renewal period , given expected losses from the portfolio and probability of aftershocks and further events, said Wong.

Following the March 11 earthquake, Fukushima noted Japanese consumers and corporations are increasingly interested in risk management and earthquake insurance.

"Contingent business interruption has shown that there is more than property destruction. This is an area Munich Re expects many companies in the region to look into more closely over the next two years," said Farny.

New Zealand's Earthquake Recovery Minister Gerry Brownlee will lead a government delegation to London and the September Rendez-Vous to meet with Lloyd's underwriters and reinsurers including Swiss Re, General Re, Munich Re and Renaissance Re. "We believe the manner and pace of recovery makes a strong case for insurers to confidently re-enter the Canterbury market while continuing to offer comprehensive coverage to the rest of New Zealand," said Brownlee in a statement.

"As premiums escalate across the country, we need to engage with insurance markets so they have an accurate and informed view of risk," said Brownlee. Several major insurers are not writing new insurance cover in Christchurch as continued seismic uncertainty makes accurate pricing risks difficult. Local governments-owned insurer, Civic Assurance, was forced to withdraw its property insurance coverage fro municipal councils after it failed to find adequate reinsurance (Best's News Service, July 26, 2011).

New Zealand's Earthquake Commission, which offers natural disaster insurance to homeowners, has more than doubled its estimated residential claims from the Canterbury quakes to NZ$7.07 billion (US$5.9 billion), up from initial estimate of NZ$3.05 billion (Best's News Service, Aug. 30, 2011). The commission said the previous estimates were based on international models on damage calculation from single event and they were not designed to evaluate the impacts of multiple events.

"Losses were however beyond expectations, reflecting needs to factor in realistic model assumptions and interconnectivity of risks," said Wong. Reinsurers at the same time are reminded of poor economies of surplus treaties with catastrophe exposure. "These insights will drive some of changes in conditions for upcoming renewal discussions," he added.

Listen to the entire interview with Clarence Wong at http://www.ambest.com/media/media.asp?RC=191466

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)

A.M. Best: Reinsurers' Capital Strong Despite Big Catastrophe Losses

Reinsurance capital held up well this year despite severe catastrophe losses and economic uncertainties, according to A.M. Best Co. analysts.

A.M. Best Group Vice President John Andre said capitalization "is still robust" in the reinsurance market, even after the severe catastrophe losses seen in the Asia/Pacific region in the first half of the year.

Vice President Robert DeRose, who led the team that wrote A.M. Best's recently released "Global Reinsurance --- Market Review," added that many reinsurers are prepared to take advantage of any turn in the market that might be triggered by further losses. Some reinsurers have issued preferred stock, and some are prepared to use sidecars and contingency capital strategies to stay ahead of the business.

Regarding the catastrophes in the first half, DeRose said, "We still view them as earning events rather than capital events," with little impact on reinsurer capital positions. DeRose added it is likely many reinsurers will find it difficult to achieve break-even combined ratios for the year.

View the entire video interview with John Andre and Robert DeRose at http://bcove.me/zho85qb0

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Hannover Re Encouraged by Improvements in Property, Specialty Lines

Midyear treaty renewals went fairly well for Hannover Re, but the reinsurer's management says pricing is just not good enough in many lines to expand capacity, though property catastrophe and some specialty lines are improving.

"April, June and July renewals went relatively well for the reinsurance market," said Chief Executive Ulrich Wallin at a Rendez-Vous briefing in Monte Carlo. With first-half catastrophes driving some price rises in property, Wallin said the outlook is positive, but "there is a big debate about whether there is a hard market."

Wallin echoed the industry consensus that persistent low interest rates have dampened investment returns for reinsurers, making it more urgent that insurers increase rates. And underwriting discipline does appear to be holding. "We have not seen any reinsurers try to gain market share by lowering prices," he said.

Michael Pickel, executive board member for the U.S. and Germany target markets, added that U.S. pricing was boosted by a rough tornado season.

In Germany, where Hannover Re is the second-largest reinsurer, there is some optimism given that many of the reinsurers clients are smaller insurers and mutuals, who will need increased capital protection, he said.

Pickel added that the German motor market's profitability deteriorated somewhat this year after a good 2010, a trend he expects to continue into 2011.

Specialty lines have seen some improvement according to Jurgen Graber, executive board member for specialty. According to Graber, Hannover Re does well in these lines as they are "fairly restricted" to a few knowledgeable underwriters.

In aviation, while there has been pressure on rates in the past few years, Graber expects improvement as more developing countries are adding aircraft to their commercial fleets. Brazil and other BRIC countries (including Russia, India and China) is adding new aircraft. "We are getting better rates here because of the limited number of players," he said.

Graber pointed to credit and surety as other growth specialty lines. Credit reinsurance enjoyed good years in 2009 and 2010 after two difficult years due to the global financial crisis. "Over-capacity is back but clients tend to be loyal. They remember who stayed with them," he said.

Brazil again is a strong market for surety. Because the country is hosting the World Cup in 2012 and the Olympics in 2014, there is a construction boom under way, said Graber. "Lots of construction means lots of bonds that need to be covered," he said.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

For Scor, Consistency Key in a Turbulent Market

Reinsurers are in "a different world from a year ago," and will have to make some tough decisions about where they want to go, according to Scor SE Chief Executive Denis Kessler.

The reinsurance market worldwide is fragmented and primary insurance is in danger of being commoditized, said Kessler at a Rendez-Vous briefing in Monte Carlo. For many reinsurers, there will be some difficult decisions about what lines to focus on and where to deploy capital.

According to Kessler, Scor's approach in the past few years has been different. By establishing a franchise presence in 140 countries and focusing on long-term relationships, the reinsurer is sticking to its ground-level focus.

"You have to know the market; be on the spot," he said.

Kessler said another key part of Scor's strategy is its "twin-engine" structure --- about half its business in nonlife reinsurance and half in life reinsurance.

The group further increased its diversification efforts through acquisition and opening a Lloyd's operation. Scor recently closed on its acquisition of a U.S. mortality portfolio from Transamerica Re that brings with it US$1.8 billion in assets (Best's News Service, Aug. 10, 2011). Kessler said this acquisition gives Scor a strong position in the U.S. market and further diversification on the life side.

Last November, Scor announced the formation of a new Lloyd's syndicate. The reinsurer plans to focus Syndicate 2015 on shorter-tail lines outside the United States, excluding reinsurance treaty business.

Aside from those moves, Kessler said Scor remains focused on its current market positions and is not interested in diversifying into non-reinsurance lines. "We only do reinsurance business," he said.

The desire to limit diversification is a capital management issue, as new operations in primary insurance generally have a hard time becoming profitable. "That's why there have been few new life insurance companies created," said Kessler. "Those that tried, failed."

Kessler added that capital management strategies are a key part of risk management. Scor took out a $75 million contingent capital program last year just after Rendez-Vous. That capital came in handy in the first half of 2011, allowing Scor to cut its $300 million in catastrophe losses to $225 million.

Scor also recently raised 650 million Swiss francs (US$735 million) in 5.375% perpetual subordinated notes, hedging it against a rising Swiss franc. The funds partly funded the Transamerica Re transaction. According to Kessler, this was a good issuance in a difficult bond market.

Further on the bond front, Scor decided three years ago to sell its investments in the sovereign debt of Greece and other troubled European countries. The move proved prescient. "That was an example of good risk management," said Kessler. "We have no great problems about the Eurozone crisis."

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Sept. 12, 2011

Lloyd's CEO: Catastrophes Have Not Shaken Pricing From Doldrums

Some specialty reinsurance lines are showing signs of pricing improvement, but the view from Lloyd's indicates that most of the reinsurance market has yet to gain traction, despite big catastrophe losses this year.

"It's been an interesting market we've had to deal with," said Chief Exective Richard Ward. "There was an expectation that the catastrophes we experienced in the first half would have had an impact on rates. I think the market's disappointed that the rates are still crabbing sideways, and we're still awaiting some other significant event to see an upward movement in rates."

A few classes, such as offshore energy, are seeing price improvement, but Ward said reinsurers are still waiting "for a directional move."

With an ongoing low interest-rate environment and equity market volatility, insurers and reinsurers both are finding it difficult to make good investment returns, putting further pressure on the pricing of risk, said Ward.

Jan. 1, 2012, renewals are too early to call, according to Ward, given that the U.S. hurricane season is still in full swing and European windstorms are a threat. The best the market can expect come Jan. 1 will be "further sideways moves" in pricing, without a major catastrophe between now and then, he added.

Listen to the full interview with Richard Ward athttp://www.ambest.com/media/media.asp?RC=191467.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Hiscox CEO: Investment 'Decimation' a Crucial Problem for Reinsurers

Reinsurers went into January 2011 renewals with expectations that pricing for property covers would go down in a softening market, but while that has happened, the year's events -- along with continuing pain on the investment front -- triggered a change in perception as to where the market would be heading.

"There was a real change in attitude and expectation in the first half of the year with a combination of factors," said Chief Executive Bronek Masojada of Hiscox plc. First among them was the March 11 earthquake and tsunami in Japan. New Zealand's second major earthquake and extensive floods in Australia made up the second big factor.

"And finally the man-made earthquake of the new model releases," he said.

Catastrophes made the news for insurers and reinsurers this year, but Masojada said economic conditions are as important if not more. "The thing for me that's been missing in the conversation about reinsurance pricing, and also insurance pricing, has been the investment environment," said Masojada. He cited the "decimation of investment returns" over the last three years.

"The investment float over the past few years has yielded such a poor return, it needs to be reflected in even higher pricing," he said.

Masojada pointed out that April 1 renewals were disrupted by the earthquake in Japan, placing more of the highlight on June and July renewals, which showed some signs of hardening.

Looking to January 2012 renewals, he said there should be some improvement even of catastrophe losses are low the rest of this year.

Listen to the entire interview with Bronek Masojada athttp://www.ambest.com/media/media.asp?RC=191465.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

A.M. Best Analysts: Reinsurers Face Capital Erosion From Volatile Economy

Reinsurers weathered record natural catastrophe losses well this year, but economic and regulatory problems may have a larger effect on earnings for them, and even more so for their clients - the primary insurers.

A.M. Best Co. Group Vice President John Andre said that even after record losses in the first half, their strong capital positions are allowing for quick recovery. "A material part of shareholders' equity was lost in the first quarter, but a fair amount of that has been made up in the second quarter," he said at Rendez-Vous de Septembre in Monte Carlo.

Andre said A.M. Best doesn't expect to see an aggregate profit from reinsurers for 2011, and the industry's aggregate combined ratio is likely to be "north of 100." But A.M. Best has a negative outlook on only one reinsurer and Andre doesn't anticipate downward movement on reinsurer ratings.

In addition to catastrophes, both reinsurers and primary insurers are concerned about economic conditions and regulatory developments, said Stefan Holzberger, managing director of analytics for A.M. Best Europe - Rating Services Ltd.

Solvency II could be a boon to reinsurers as it could force primary insurers to use more reinsurance to shore up their capital positions, said Holzberger. Small to medium-size insurers in particular may "need to shed additional risk," he said.

But reinsurers will be affected by economic conditions which are contributing to investment volatility. Holzberger said such volatility along with economic issues could erode capital for reinsurers.

There will also be increased uncertainty as countries outside the Solvency II sphere will see "reduced fungibility" of capital. It is possible reinsurers based in third countries could see collateral requirements, or higher requirements where they exist.

Holzberger said a transition period for Solvency II compatibility will help.

Economic uncertainty is being fed by a number of conditions - the U.S. sovereign debt downgrade and anemic economic growth, a weak labor market in both the United States and Europe, volatile financial markets, the economic and political costs of additional stimulus programs and the danger of a double-dip recession.

Holzberger said A.M. Best stress tests on insurers in both the United States and Europe are encouraging. The U.S. results led to no immediate downgrades but he added A.M. Best is involved in ongoing "and sometimes very difficult" discussions with companies' management.

In Europe, there is concern about the sovereign debt issues facing countries including Greece, Portugal and Ireland. A debt crisis in those countries may not have a big effect on insurers, but run-on effects on Italy and Spain, with their much larger economies, may have more impact, said Holzberger.

"If there was to be negative deterioration in any of these countries it could have an impact on ratings," he said.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Munich Re Sees Emergence of 'Deep' Risks on a Global Scale

From Munich Re's view, the natural disasters of 2011 served to highlight deeper risk issues reinsurers and their clients need to consider.

Torsten Jeworrek, the group's reinsurance chief executive, said big natural disasters today president many more complex problems than once was the case, when locally accumulated losses were most of the story.

Speaking at the Rendez-Vous reinsurance event in Monte Carlo, Jeworrek pointed to the March 11 earthquake and tsumani in Japan and its as yet unkown impact on supply chain losses as an example.

"With the globalization of economic and financial markets, manufacturers can't even know their second-tier suppliers and beyond," he said.

Unknown risks to global supply chains, along terrorism and aging populations around the world, are some of the factors adding to the uncertainty insurers and reinsurers are facing.

These are "complex accumulation risks," as Munich Re describes them. The reinsurer developed a software tool called Complex Accumulation Risk Explorer (CARE) which it says will aid in the quantitative and qualitative analysis of complex accumulations.

"There's a big demand for risk solutions to these problems," said Jeworrek. "Insurers must develop ways to calculate such risk exposures. What's most important is that these risks are held independent of other risks."

Given the need for new solutions to new and more complex risks, Jeworrek warned that insurers and reinsurers must be careful not to overreach and become too exposed to losses whose severity cannot be anticipated, such as those involving war and computer viruses.

"Sometimes it's a good idea not to be too innovative," he said.

As he spoke on the 10th anniversary of the Sept. 11 terrorist attacks, "a watershed event" for re-evaluating risks, Jeworrek remarked that terrorism insurance pools involving governments have been set up in a number of countries, but cautioned they too may overreach.

Certain risks are excluded from these pools, such as nuclear, biological and chemical attacks. He warned that insurers must remain shielded from these risks. "The costs of a nuclear attack could exceed US$500 billion," he said. "There is just no way to estimate the exposure."

Jeworrek added that the Sept. 11 attacks, like Japan's quake and Hurricane Katrina, was a game-changer for insurance in that it opened a view to a new magnitude of potential losses.

Regarding aging populations, Jeworrek said the concurrent demand for pension and savings products will strain the ability of life insurers to come up with them. "How do we get mortality estimates right?" he said. "I don't see a solution yet."

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Sept. 11, 2011

Reinsurers Ponder If Cat Losses Are Enough to Harden Market

How this year's record-breaking catastrophe losses will impact reinsurance rates is likely to be a hot topic at the annual Les Rendez-Vous de Septembre conference in Monte-Carlo, experts said.

Reinsurers, sellers, buyers and brokers are gearing up for the conference, which gets under way this weekend. Printhan Sothinathan, chief strategy officer of Torus, said the conference historically marks the opening of Jan. 1 reinsurance renewal talks.

Perennial topics at the conference are how the market has performed over the last year and where rates are heading, he said.

"You can bet that the discussions will include the international catastrophe business, including the Japanese losses, the New Zealand losses, and any kind of wind storm activity," Sothinathan said during an interview. He said RMS version 11 will also be a significant point of discussion.

Robert DeRose, vice president at A.M. Best Co., said even though the cat losses from the first half of the year have consumed some reinsurance capital, reinsurance companies' balance sheets remain strong.

Cat losses are estimated to be as high as $60 billion for the first half of 2011, so "companies are hoping for, but not betting on, a more dramatic improvement in property cat pricing at the January 2012 renewal," A.M. Best Co. said in a Sept. 5 special report.

While industry experts will often point to a single event as being the pivot to turn a soft market hard, DeRose said, "You don't really need a large event. You need to look at the bottom line."

Rates and terms will harden when reinsurers struggle to make a bottom-line profit and underwriting profit, he said during the "State of the Reinsurance Market" webinar on Sept. 7.

Elizabeth Mitchell, president and chief executive officer of Platinum Underwriters Group, said despite cat losses from the first half of the year, there hasn't been a widespread hardening of the overall market.

That's because not everyone in the market has been hit with losses, she said.

"Some of the companies that specialize in casualty lines have not had a capital erosion," Mitchell said during the webinar. "It takes a certain amount of fear to change the market psychologically, and I don't see a whole lot of fear out there. I don't see the market as a whole, or a majority of product lines, really pushing for an improvement."

While the property market has seen rates rebounding, especially in cat-exposed areas, it's difficult to predict a change in the overall market because "it's really all about supply and demand," said David Kalainoff, chief underwriting officer of U.S. reinsurance operations for Alterra.

"Until the world economy starts to rebound a little bit, I don't know that we'll see any substantial pick-up in demand," said Bart Hedges, CEO of Greenlight Re.

Alkis Tsimaratos, regional director at Willis Re, said catastrophe modeling is the cornerstone of how primary companies evaluate their risk appetites, and that the new RMS version 11 is having an impact. In Europe, some events with a low return period, say a 1-in-10-year-storm, have seen their probable maximum loss increase by 250%.

Mario Vitale, president of Aspen U.S. Insurance, said the RMS model update is likely to add fodder to industry discussions on rates.

"What we normally worried about as underwriters and reinsurers was exposed property within a mile of the coast. Now we are saying further inland we need to be concerned. This will have a major impact," Vitale said.

To access the "State of the Reinsurance Market" webinar, go tohttp://www.ambest.com/webinars/reinsurance11.

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)

A.M. Best: Solvency II Will be a Boon to Europe's Reinsurers

The advent of Solvency II in the European Union will likely be a boon to reinsurers as primary insurers look for ways to boost their capital standards.

"We expect highly-rated reinsurers will benefit as primary insurance companies are charged for the reinsurer default risk," said Stefan Holzberger, managing director of analytics for A.M. Best Europe --- Rating Services Ltd. "We expect European reinsurers to benefit from increased demand under Solvency II."

Holzberger added that small to medium-size insurers may need to buy more reinsurance or shed risk "deemed to be more capital-intensive" under Solvency II. Some primary insurers with limited financial flexibility, such as mutuals, will struggle to maintain capital adequacy and may need more reinsurance cover to help them achieve that, he said.

He added that non-EU domiciled reinsurers "will face challenges over time if their home-country regulator doesn't obtain Solvency II equivalency." Although transition periods of up to five years for equivalency are "contemplated," they are not yet in place, thus non-EU reinsurers may find themselves at a competitive disadvantage in Europe under Solvency II, he said.

Listen to the entire audio interview with Stefan Holzberger athttp://www.ambest.com/media/media.asp?RC=191468

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Swiss Re's Gray: Low Interest Rates the Chief Problem for Reinsurers in 2011

The reinsurance market may have seen the worst first-half yet for natural catastrophes in 2011, but of even greater consequence is the continuing low-interest rate environment worldwide, according to Brian Gray, chief underwriting officer of Swiss Re.

"That has made a very large difference, especially in the long-tail lines of business," he said. "It's a very significant shock and arguably bigger than all of the natural catastrophes we have seen."

Gray pointed out that very low interest rates are bringing down investment returns and making it difficult for insurers and reinsurers to manage their assets and liabilities. Long-tail casualty lines in particular are "stressed" by low interest rates, he said. Gray added that nearly all lines of business are feeling the effect.

Swiss Re has seen continued softening of reinsurance prices in the Jan. 1 renewals, down by 2%. Gray said the market as a whole saw prices slip about 4% on average.

April I renewals were "a bit distorted" by the March 11 earthquake in Japan, while in July, Swiss Re saw across the spectrum of the renewals risk-adjusted price increases averaging 5%, he said.

Listen to the entire interview with Brian Gray athttp://www.ambest.com/media/media.asp?RC=191464 .

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

Guy Carpenter: Cat Model Changes, Regulatory Moves Add Uncertainty to Reinsurance Markets

Reinsurance markets are looking at new uncertainties following a record first half of catastrophe losses, but factors such as economic crises, catastrophe model changes and regulatory uncertainty are also taking a toll, according to reinsurance intermediary Guy Carpenter & Co.

Speaking at the annual Rendez-Vous in Monte Carlo, Chief Executive Alex Moczarski said uncertainty about the scope and timing of Solvency II's adoption in the European Union, along with recent updates by risk modelers RMS and AIR Worldwide, for U.S. and European windstorm respectively, are contributing to uncertainty among insurance buyers about how to proceed, and among reinsurers trying to decide how to deploy capital.

Moczarski said insurers and reinsurers are trying to figure out how to achieve growth "in a directionless market."

Chris Klein, head of sales operations for the United Kingdom and Europe, Middle East and Africa (EMEA), said reinsurance earnings were "hit very hard" by first-half catastrophes. He said first-half losses this year were five times that of the first-half average over the past five years.

Despite that, reinsurance capacity remains abundant and pricing should firm up, but Nick Frankland, CEO of EMEA for Guy Carpenter, said Europe in particular will not likely see rising rates.

Capital is still above historic averages, and Europe has seen little in terms of severe catastrophe activity, he said.

Bill Kennedy, CEO of global analytics and advisory, added that those reasons, plus the uncertainty added by cat model changes and Solvency II, are holding the market back.

Kennedy said cat models are "very useful" in assessing risk exposures, they still "reflect highly imperfect science and carry levels of uncertainty far greater than their influence would suggest."

"The recent model changes will be disruptive into next year," he said.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)