Graham Buck

Graham Buck is editor of He can be reached at

Rendez-Vous Report

Pricing Pressure

Alternative capital is shaking up the reinsurance market, while issues such as Big Data are moving onto the agenda.
By: | August 4, 2014 • 6 min read

The café terraces of Monte Carlo will be bathed in sunshine, literally and figuratively, when reinsurers and brokers meet for Les Rendez-vous de Septembre (RVS), commencing Sept. 9.

Monaco is one of the few European locations to avoid the dark economic clouds that descended on the continent in the wake of the banking sector’s meltdown and ensuing financial crisis. Following five years of austerity, voters used the European Parliament elections in May this year to voice their dissatisfaction.

Yet, despite this sullen atmosphere, the biggest casualties of boom-to-bust such as Spain, Ireland and Greece have been steadily pulling out of recession over the past year.


While Munich Re is averse to speculating on the mood that is likely to prevail at 2014 RVS, its latest Insurance Market Outlook (PDF), published in May, predicted that a broad-based economic recovery across many countries would see global insurance premium growth accelerate to 2.8 percent this year, from 2.1 percent last year, with a further improvement to 3.2 percent in 2015.

Munich Re’s chief economist, Michael Menhart, noted that the pick-up comes after three years of relatively low growth rates.

“In many cases, reinsurance has been used as a means of managing any potential earnings volatility arising from these larger retained portions.” — Charles Whitmore, managing director, head of the property solutions group, Guy Carpenter

Charles Whitmore, managing director, head of the property solutions group at Guy Carpenter, said the “improving economic environment in Europe has enabled insurance carriers to repair balance sheets and press ahead with consolidation and increased retention appetites.”

“In many cases, reinsurance has been used as a means of managing any potential earnings volatility arising from these larger retained portions.”

This generally optimistic outlook was tempered by the fact that Munich Re expects reinsurance premium growth to be more modest than that for primary insurance.

Over the next six years, the German reinsurer expects average growth in global reinsurance markets in real terms of little more than 2 percent per year. RVS attendees will also look back on this year’s January 1 and April 1 renewals, where pricing pressures saw declines of as much as 20 percent for U.S. CAT business.

As Munich Re’s report noted, while the potential of the world’s emerging markets — particularly the so-called BRIC economies of Brazil, Russia, India and China — was a hot topic a few years back, for the time being the major industrialized nations are back in the driving seat.

While the group expects China’s premium volume (which was around $284 billion in 2013) to double by the end of the decade, it will still lag way behind the United States, whose premium volume it predicts will pass the $1,624 billion level by 2020.

Possibly the biggest BRIC disappointment — which attendees may seek to explain — is Brazil. Hopes were high when the country began liberalizing its reinsurance market six years ago, ending the near-70 year monopoly of state-owned IRB.

Within four years, more than 100 reinsurers had established a presence in the country. However, this summer’s World Cup underscored how the economic optimism in 2007, when Brazil won the rights to stage the contest, has steadily dissipated.

Insurer confidence on the country’s economic outlook has fallen to a record low and Standard & Poor’s is among those warning that profitability in the Brazilian reinsurance market remains elusive.

Many reinsurers instead appear to be focusing on gaining a presence in India, once the long-delayed Insurance Laws (Amendment) Bill 2008, which would allow foreign reinsurers to set up offices in the country, is finally cleared by parliament.

France’s biggest reinsurer, Scor, is among those that have signaled their intent to add an Indian operation. Such hopes will have been encouraged by the landslide election victory in May of Narendra Modi. India’s 15th prime minister swept to power on a promise to kick-start an underperforming economy, which reinsurers hope will mean an end to the stalling in opening up its market.

The Top Three

But which trio of issues is most likely to dominate the discussions in Monaco?

“We can be certain that one of the prime themes, as always, will be the prognosis for reinsurance pricing, capacity, [and] terms and conditions at the coming January renewal,” said Christopher Klein, managing director and head of Europe, the Middle East and Africa (EMEA) strategy at Guy Carpenter.


“A second topic will be the continuing influx of new capital into the reinsurance sector from so-called nontraditional sectors, despite the surplus of capacity.

“In the absence of a market-changing loss, continuing pressure on prices and returns can be expected. However, to date, the greatest effect has tended to be in the North American catastrophe market. We will be interested to see if the new capital will start to make significant inroads into the EMEA and Asia Pacific (APAC) regions and non-catastrophe classes.

“Finally,” Klein added, “a favorite topic of discussion at Monte Carlo is speculation about corporate activity and consolidation. This year, we have witnessed some high-profile attempts at consolidation in Bermuda. Expect this topic to continue to make headlines.”

Bryon Ehrhart, chief executive, Aon Benfield Americas

Bryon Ehrhart, chief executive, Aon Benfield Americas

Bryon Ehrhart, chief executive of Aon Benfield Americas, predicted at last year’s RVS that a further $100 billion of alternative capital would enter the reinsurance market by 2018 and said that so far, this prediction is on track.

He cited the decision in early June by the European Central Bank to cut its main interest rate to a record low of 0.15 percent and entering into what the headlines call “uncharted territory” by reducing its interest rate on deposits to a negative figure for the first time, of -0.1 percent.

This could mean that the predicted figure of $100 billion needs revising upwards. As he pointed out, major pension funds are making promises to retirees of returns of 4 percent upwards, against returns on conventional investments that are typically 1.25 percent to 1.5 percent.

Ehrhart cited two relatively recent entrants: Stone Ridge Asset Management — which launched two reinsurance-linked funds as recently as November 2012 and already has $2.5 billion under management — and LGT Capital Partners.

“The impact of the hedge fund reinsurers has been fairly transformative,” he said.

“They have put forward material capacity at very low prices and opened up a whole new set of opportunities for our clients.”

Inevitably, these pricing pressures continue to impact the long-established carriers. As A.M. Best commented earlier this summer, global reinsurance companies in the first quarter of 2014 benefited from below-average catastrophe losses and most continued to report favorable reserve releases, yet those that are publicly traded saw their stock lag the market. From a group of 20, only Bermuda’s Maiden Holdings managed a strong gain (of over 14 percent). The ratings agencies will doubtless dissect this overall sluggish performance at Monte Carlo.

Big Data and El Niño

What else is likely to be on this year’s agenda? The big keynote session or “presentation-debate” will be on Big Data and its potential to significantly change how reinsurers do business. While details of participants were sketchy at the time of writing, the session will be chaired by Michel Liès, chief executive of Swiss Re and the reinsurer said that it “wants to examine with RVS participants and clients how Big Data can enable new business opportunities and how privacy concerns can be addressed.”

Gretchen Hayes, managing director, global strategic advisory at Guy Carpenter, noted the “reinsurance industry is still at the beginning stages when it comes to the potential and competitive advantages of Big Data in combination with predictive analytics.”

“As these technologies continue to advance, insurance companies are reaping the benefits of gathering and analyzing vast amounts of information that come through their own internal networks as well as that of their business partners and even through new external sources.”

Video: The Weather Channel reports on some of the possibilities associated with an El Niño in 2014.

With reports suggesting that there is a 90 percent chance that an El Niño will disrupt global weather patterns this year, the recurring climate phenomenon could also force itself on the discussions.

Beginning as a vast expanse of water in the Pacific that becomes abnormally warm, El Niño has the potential for adverse weather effects ranging from a weaker-than-usual monsoon season in India that starves its paddy fields of vital rain, to scorching heat and bush fires in Australia and sharply reduced fishing catches in South America.


The European Centre for Medium-Range Weather Forecasts predicts that the El Niño phenomenon is highly likely to occur this year; indeed, the organization believes it could potentially be the most damaging since 1997-98, which produced the hottest year on record and a string of natural catastrophes, an estimated 23,000 deaths and total economic losses in the region of $35 billion to $47 billion.

Graham Buck is editor of He can be reached at
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A Taxing Reinsurance Dispute

Would cutting a tax concession claimed by reinsurers help or hurt U.S. consumers?
By: | September 15, 2013 • 7 min read

The U.S. economic recovery is building up a head of steam — a development noted with some envy in Europe where growth is, at best, still anemic. Nonetheless, there is still that pesky deficit to be tackled, which means that tax-raising proposals that never gained much traction before now can still be periodically brought out and dusted off.

Prime examples are bills H.R. 2054 and S. 991, introduced this summer, respectively, by Rep. Richard Neal, D-Mass., who serves on the House Ways and Means select revenue measures subcommittee, and Sen. Bob Menendez, D-N.J., a member of the Senate Finance Committee.

Following President Obama’s budget announcement in April, which raised the possibility of ending some tax breaks commonly enjoyed by international reinsurers doing business in the United States, the duo revived proposals to legislate against U.S.-based companies that claim tax deductions for reinsurance premiums paid to foreign affiliates free from U.S. tax law.


The measure, which has been launched on previous occasions without success, has been promoted this time around as closing an “unintended tax loophole;” one that costs ordinary U.S. taxpayers billions of dollars, as well as handing an unfair advantage to foreign-owned insurers serving the U.S. domestic market over their home-based competitors.

Proponents of the bills cited a $12 billion slice from the deficit over a period of 10 years as the prospective prize if they are pushed through.

Neal has mounted a formidable assembly of facts and figures to back up his argument, such as a steady increase in the amount of reinsurance ceded by insurers to offshore affiliates, from $4 billion in 1996 to $33 billion in 2008; much of the latter figure comprising nearly $21 billion to Bermuda affiliates and over $7 billion to Swiss affiliates.

Meanwhile, Menendez has attacked “the increasing trend of foreign insurance companies moving profits made in America offshore and sticking Americans with the bill,” which he describes as “incredibly troubling.”

CDII Bangs the Drum

The main support for the legislation has, unsurprisingly, come from The Coalition for a Domestic Insurance Industry (CDII) whose slogan is: “Seeking a level playing field for all insurance companies.” The CDII’s 13 U.S.-based members include such big hitters as W. R. Berkley Corp., Chubb, Berkshire Hathaway and Liberty Mutual. Berkley Corp.’s chairman and CEO, William R. Berkley, urged Congress back in May to waste no time in adopting the legislation.

“Congress never intended to give a preference to foreign-controlled insurers over their domestic competitors,” said Berkley. “Closing unintended loopholes to recover lost revenue is one of the best ways to offset the cost of needed tax reform.

“Closing this loophole, staunching the flow of capital overseas, and restoring competitiveness for this important domestic industry is a win for us all.”

Yet the forceful language has not yet attracted mass support for the cause.

As the CDII acknowledged, the legislation has been successfully blocked over several years by what it called “scare tactics” employed by the opposition “claiming that it will adversely affect pricing and capacity in the U.S. market.”

The Federal Insurance Office (FIO) in the U.S. Treasury, set up as a result of the Dodd-Frank Act, has also not been won over by the arguments that lie behind H.R. 2054 and S. 991. This fact was noted by Randi Cigelnik, general counsel at the Property and Casualty Insurers Association of America, when she spoke recently at an insurance conference in Bermuda.

“The domestic industry is split on the [taxation] issue and the FIO is neutral,” said Cigelnik. “Some believe that it will make it more difficult for non-reinsurers to meet the U.S. market’s demand for reinsurance.”


The legislation is also opposed by organizations that stress they are “no friend of the insurance industry” and can, therefore, judge impartially on the taxation issue, such as the Florida Consumer Action Network. Its executive director, Bill Newton, said the proposed legislation would impose “punitive” tax increases on many insurers that Florida residents rely on for hurricane cover.

Newton cited a study by Massachusetts economic consulting firm the Brattle Group on the economic impact of an earlier version of the Neal-Menendez bill. It found that ending the tax concession would result in a 20 percent decrease in the net supply of reinsurance in the United States. According to the study, the impact on Florida consumers would be an overall annual increase of more than $817 million in their insurance bills. The study saw homeowners’ insurance rates rising by 4 percent and a 13 percent hike in commercial insurance rates.

“By shifting the financial burden of rebuilding after a disaster onto already strained domestic insurers and their policyholders, this tariff would disrupt insurance markets while failing to raise revenue in any significant way,” Newton concluded.

The word “protectionism” has also been used, as in a commentary by the think tank R Street Institute. Senior Fellow R. J. Lehmann wrote of the proposal: “This is a protectionist measure that serves the interests of certain large domestic companies by discouraging foreign-based competitors from devoting their capital to U.S. risks.

“It also is simply bad policy, in that it would tend to concentrate U.S. risks within the United States, rather than allowing the global reinsurance system to spread them throughout the globe.”

Back to the Beggining

Brad Kading, president and executive director at the Association of Bermuda Insurers and Reinsurers, said that other consumer groups also oppose the bill, including the European Commission; the governments of the U.K., Germany and Switzerland; former U.S. trade ambassadors; and industry bodies including the Risk Management Society (RIMS).

“The proposal to close the tax loophole has been around for the past seven years and has been part of the president’s budget for the past three,” said Kading. “However, Congress is continually looking at new ways to raise taxes, so the issue hasn’t gone away — even though six insurance regulators and Florida business groups have ‘got the message’ and are opposed to the proposals.

“Indeed the opponents’ coalition has always been much broader based than that of the proponents,” he said.

“Back in 2007, the original proposal was supported by Berkley and Chubb, against which 50 letters of opposition were submitted. So the proponents made their case long before now. However, the Senate has decided that it will go back and begin with a blank sheet of paper in redesigning the tax code and is open to all potential methods of raising revenue.

“Everything is up for grabs,” Kading said, “and this bill might always get through as a part of wider tax-raising proposals. Dave Camp, [R-Mich.], chairman of the House Committee on Ways and Means, wants to have the tax bill ready by the fall. So, theoretically, there could be a floor vote following the Committee vote.”


The external affairs committee at RIMS is also working hard on the issue, as it believes the effects of the bill would be detrimental to members, said Carolyn Snow, the committee’s board liaison member and also director of risk management for health care company Humana.

In April, RIMS wrote to the House Ways and Means Committee’s International Tax Reform Working Group, expressing its disagreement with the administration’s proposed 2014 budget, which includes a proposal to eliminate the tax deduction, as outlined in H.R. 2054 and S. 991.

In the letter, RIMS President John Phelps said the budget proposal to eliminate the tax deduction “would have a chilling effect on the use of foreign reinsurance.”

“As a result,” he wrote, “the availability of coverage would be reduced and costs for consumers would increase significantly, particularly in urban areas subject to terrorism risk and areas prone to natural disasters.”

Snow added that the bill submitted to the Senate by Menendez has, so far, had a notable lack of success in attracting co-sponsors, while that submitted by Neal had gained only one.

“However,” she said, “the U.S. has a big budget deficit and the president has talked of the measure as part of the overall deficit reduction program. So it’s true that there is the potential for it to go through attached to another bill — although quite possibly there’s no more than an outside chance of it happening.

“Nonetheless, it might be regarded as one of the ways of ‘closing the gap’ without creating too much pain, particularly if the general public regards the tax measure as something that affects only corporations. It could, in reality, increase insurance premiums significantly, with household insurance among the classes affected where the insurer cedes reinsurance offshore,” she said.

Snow added that Bermuda-based companies are quietly campaigning against the proposed measure and there is some hope that it might “die a death” naturally, given the strength of the opposition expressed on sites such as

“One positive sign is that U.S. economic growth shows signs of picking up but there is some question as to how sustainable these signs of recovery are,” she said. “The housing market is showing signs of recovery — but still the deficit remains a major issue.”

Graham Buck is editor of He can be reached at
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In for the Long Term

Low interest rates fuel a continued flow of third party capital into the reinsurance market.
By: | September 1, 2013 • 7 min read

Delegates at this month’s Monte Carlo Reinsurance RendezVous will have as many issues as ever to digest over coffee at the principality’s terrace cafes — not least the relentless rise in third party reinsurance capital and the insurance linked securities (ILS) market, which are making steady inroads into the books of business held by traditional property/casualty reinsurers.

A report by Guy Carpenter suggested that around 15 percent of the global property/catastrophe reinsurance market will be represented by alternative capacity in 2013, including catastrophe (Cat) bonds, industry loss warranties (ILWs) and other collateralized reinsurance, against around 8 percent in 2008.


The threat to market share, pricing and profits — currently one of the high margin lines for reinsurers, will be “a hot topic at the RendezVous,” said Stefan Holzberger, managing director, Analytics at ratings agency A.M. Best.

“The demand for ILS is already leading to sharp reductions in rates. In fact, ILS investors drove down rates on Florida natural catastrophe by roughly 15 percent for 2013 renewals. The traditional markets felt this pressure and were forced to drop rates themselves to remain competitive,” he said.

So what this means for January 2014 renewals will definitely be debated by Monte Carlo delegates.

A recent research report by Michael Zaremski, an analyst at Credit Suisse, spoke of the increasing pressure that both third party capital and ILS are putting on the traditional players. Institutional capital market investors such as hedge funds, pension funds, high net worth individuals and specialist insurance-linked fund managers are increasingly venturing into the global reinsurance market.


Credit Suisse is, of course, widely recognized along with Nephila Capital (with an estimated $9 billion of assets under management) and Fermat Capital Management as being one of the main alternative capital providers that has done so much to shake up the market.

More recently, Leadenhall Capital Partners, the joint venture between Lloyd’s of London group Amlin and former Swiss Re alumni John Wells and Luca Albertini has enjoyed considerable success in growing its assets under management (AUM). In addition, the success of Securis Investment Partners since its first fund launched in 2005 persuaded Northill Capital to acquire a majority interest last year.

“P/C reinsurers are in the midst of a transformative period whereby competition from external ILS market growth is testing and transforming current business models,” wrote Zaremski. “Traditional reinsurers are weighing and/or balancing internal ILS platform start-ups, which pressures returns within reinsurers’ existing legacy portfolios given the competitive overlap of many ILS structures.”

He singled out for special mention the Cat bond market, which was taking up major chunks of business from reinsurers such as Validus — whose shares dropped sharply when the report was first issued, although the group has set up its own third party capital operation in the AlphaCat ILS funds and also has sidecar vehicles.

“Cat bonds will continue to make inroads into traditional reinsurers’ business,” Zaremski predicted. “Reinsurance has become more of a commodity, due to lower barriers to entry and vendor models.”

Equally concerning for reinsurers was the recent report from Swiss Re that Cat bond pricing has fallen by as much as 35 percent in the past year and made them for the first time as cheap as traditional reinsurance, or possibly even cheaper.

Cat bond issuance peaked in 2007 at $8.2 billion in the aftermath of hurricanes Katrina, Rita and Wilma, but 2013 is on course to match and possibly exceed that figure, according to Swiss Re.

However, the group’s head of ILS Structuring and Origination, Markus Schmutz, doesn’t believe that it will entirely replace traditional reinsurance. “Cat bonds will always complement the traditional market and sponsors will place a certain share of their [reinsurance] program into this market to get diversification,” he predicted.

A Growing Share

Others commented that while the relentless advance of the ILS market is not about to be halted, it is still relatively small compared with the overall reinsurance sector and, as Holzberger pointed out, is mostly limited to catastrophe risk. The majority of ILS deals to date have covered U.S. windstorm and earthquake, and European windstorm.

“Within the reinsurance market segment, nontraditional capital providers are estimated to make up roughly 15 percent of capacity — although this will likely increase in the years to come,” he added.

Paul Schultz, chief executive of Aon Benfield Securities, said prospects for further growth in ILS are strong, due to the established track record of good investment returns that they have demonstrated coupled with the fact that there are currently fewer opportunities to invest in alternatives than there have been traditionally.

He also admitted that the managers of alternative capital are ensuring that they have the necessary underwriting and analytical talent. “Some of our colleagues at Aon Benfield are among those who have moved over to the new providers to take on the role of analyst and manager.

“Whether the market will continue to grow or will plateau sometime in the near future is hard to say although we really don’t foresee any decrease in the flow of capital coming into the industry,” Schultz added.

This view is based partly on the fact that a fairly long decision-making process precedes any decision made by institutional investors to commit to a particular market. “The 2008 global financial crisis demonstrated the low-correlated nature of the returns provided by ILS, which has encouraged more of them to enter the market — particularly the pension funds,” he said.

This trend was noticed relatively early on by the more astute traditional reinsurers, which responded to growing investor interest in the reinsurance market by establishing their own ILS or collateralized reinsurance vehicles, but others are belatedly putting similar plans into action.

Alastair Speare-Cole, chief executive of JLT Reinsurance Brokers, said that the convergence market created by the coming together of insurance and the capital markets has, so far, proved to be highly transparent, with even investors in vehicles such as sidecars confident that they are taking a slice of the portfolio in a narrow area for only a limited period of time.


“This investment proposition is undoubtedly a threat to the existing players, who are losing major chunks of business,” he noted. “And as the asset class becomes steadily deeper and more liquid, so it continues to attract new capital.”

It could also, in time, see the new capital venture beyond P/C reinsurance, Speare-Cole suggested. “Liability classes are certainly more problematic an investors’ proposition and there are many different issues involved. Nonetheless, we might see a more tradable position emerge over time, for example focusing on the ‘dead’ business with a run-off portfolio.”


Room for All?

But should traditional reinsurers necessarily regard these newcomers as a threat, or is there enough business out there to keep all parties happy, especially given the tougher new capital adequacy requirements set out under the Solvency II regime?

“As respects capital requirements, the allocation of AUM to the insured event risk class by the capital markets is but a small fraction of the total,” Peter Hearn, global chairman of Wills Re, pointed out. “Assign a 1 percent asset allocation to insurance event risk and it would equal 87 percent of the estimated global reinsurance P&C surplus.”

He noted that the pension funds also enjoy a competitive advantage over traditional reinsurers relative to their cost of capital, enabling them to write P/C reinsurance at a lower margin than the longer-established market participants.

Hearn added that the prolonged low interest rate environment that has resulted from efforts to kick-start economies on both sides of the Atlantic has undoubtedly contributed to the influx of new capital into the reinsurance market. Once rates begin to climb again, other forms of investment will regain their attraction.

“There are potentially several other factors that could bring about a reduction in the current inflows,” Hearn said. “These are, in no particular order, capacity and/or margin compression, significant loss activity, model uncertainty, inflation and alternative asset classes offering similar returns but less volatility.”

It would take a very large loss to staunch the influx of new capital.

As Speare-Cole noted: “A loss in the region of $20 billion no longer qualifies as a major event. To cause disruption, the figure either needs to be substantially more — or some totally unexpected development occurs, something that has never been factored in by the market and fundamentally challenges the basic assumptions that underpin the new capital.”

A.M. Best’s Holzberger agreed. “These [new] investors understand the risk, and demand for alternative vehicles such as ILS still far exceeds supply,” he said. “It is possible that a year of ILS losses could scare away some capital market players, but the reality is that there would likely be several new entrants ready to take their place.”

Graham Buck is editor of He can be reached at
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