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Reinsurance Update

Ripe for Reinvention

Amid rapidly changing market dynamics, reinsurers must establish their relevance to clients.
By: | November 3, 2014 • 7 min read
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The global reinsurance market is facing a series of unique challenges, according to the major players in the market who assembled in Monaco for the annual Les Rendez-Vous de Septembre.

The Monte Carlo Rendez-Vous has always marked a key point in the year, as reinsurers, brokers and rating agencies assess where the market stands as it enters the last three months of 2014, especially when it comes to renewals. And there is now a common consensus that the reinsurance market is facing a softening market environment.


James Vickers, chairman, Willis Re International

James Vickers, chairman, Willis Re International, told Risk & Insurance® that continued softening of the reinsurance market set the overall mood at the Rendez-Vous, with good results and low levels of major claims leading to a plentiful supply of capacity but an increasingly lower level of demand for reinsurance.

“The cost of reinsurance is dropping and there are no positive signs on the horizon,” Vickers said. “The trend is also for more clients looking to retain risk. But some reinsurers are at or near the bottom and if the market softens any more, they and the ILS (insurance-linked securities) investors may well start to walk away.”

According to Vickers, another issue raised at the Rendez-Vous was what amounted to the “tiering” of reinsurers by cedents as they look to consolidate their reinsurer line-up, rating reinsurers according to size, security and breadth of service offering. Bigger beasts like Swiss Re and Munich Re are seen as being in a “premier” division and others in less important divisions beneath them.


In this climate, Vickers said, clients are increasingly looking for added value, asking themselves what, precisely, they’re getting from their reinsurance contracts — not to mention their reinsurers. “Terms and conditions are clearly on the agenda. It’s a legitimate tactic for reinsurers to maintain premium levels by offering broader terms and conditions. They’re being pragmatic,” he said.

“With this background, buyers are being more sensitive when it comes to where they are placing business. They need to be very clear in their minds who their long-term and sustainable reinsurance partners are going to be.”

The state of the reinsurance cycle was also a topic of interest for Swiss Re. Speaking at the Rendez-Vous, Michel M. Liès, chief executive officer of Swiss Re Group, said, “In my 35 years of experience in the business, I’ve seen many turns of the reinsurance cycle and have learned that pricing is only one dimension of it.

In order to succeed, you need to develop your business model based on a deep understanding of market fundamentals, participants’ behaviors and the evolution of your clients’ needs. Rigorous cycle management, portfolio steering and underwriting discipline remain the obvious tools for profitable success. There are opportunities for our industry — especially in high-growth markets.”

Hannover Re agreed about the softening of the market, adding that the pressure on prices, especially in the U.S. natural catastrophe business, has been further exacerbated by the inflow of capital from alternative sources — i.e., the ILS market, which for its part is experiencing substantial cash inflows from pension and hedge funds.

Competitive Pressures

In a statement released just before the event, Hannover Re added, “As a further factor, the protracted low level of interest rates is putting a strain on reinsurers, with pricing discipline taking on particular significance in the face of diminished investment returns. These general conditions are in turn likely — provided the current year is once again spared market-changing major loss events — to shape the treaty renewals as of 1 January 2015.

“Innovative insurance solutions in new areas are the key to long-term profitable growth.” — Torsten Jeworrek, reinsurance chief executive officer, Munich Re

“On the one hand, competitive pressure will therefore probably remain high. On the other hand, reinsurance prices should — leaving aside a few exceptions — stabilize relative to the business renewed for the 2014 underwriting year because scope for further rate reductions is limited in light of the return on equity required by reinsurers.”

In its press conference at the Rendez-Vous, Munich Re announced it believes that there will be a moderate rise in demand for property-casualty reinsurance. In the highly developed markets in Europe and North America — which already have large premium volumes — it anticipates growth of 1 percent in each of the next three years. In Asia-Pacific and Latin America, the growth forecasts are 3 percent and 4 percent, respectively, but starting off from a much lower level, with this growth being fueled partly by increasing market penetration and rising values of material assets, particularly in emerging markets.

Torsten Jeworrek, Munich Re’s reinsurance chief executive officer, stressed that “innovative insurance solutions in new areas are the key to long-term profitable growth.”


According to Munich Re, the environment for the start of negotiations on reinsurance treaty renewals at Jan. 1, 2015 is still dominated by strong competition and extremely low interest rates for investments. Years where losses were relatively low are magnifying pressure on prices.

Jeworrek said, “We provide cover for loss events that do not occur every year, but we need to earn adequate premiums over all those years. In our business, if your thinking is short-term, you pay a high price later.” Munich Re underlined that it intends to stick with its rigorous underwriting policy.

Fitch Ratings’ fundamental outlook for the reinsurance sector is negative due to the softening market. In addition, the onslaught of alternative capital leads it to expect that prices will continue to fall, and that terms and conditions will weaken into 2015 across a wider range of business lines.

Fitch added that price adequacy is expected to decline in 2015, although rates of return are expected to remain above reinsurers’ cost of capital. Earnings pressure is forecast to increase across the sector as softening pricing in property business will migrate to other lines, such as casualty, as reinsurers look to redeploy capital in more profitable areas.

“Persistence of low investment yields increases the risk of adverse investor behavior as both reinsurers and investors seek higher returns,” the ratings agency said in a statement. “The inflow of alternative capital has included select use of hedge fund-based investment strategies, which not only impact balance sheet quality, but are designed to provide a pricing advantage for the reinsurer that can aggravate softening markets.

Long-Term Implications

“Alternative reinsurance and changes in reinsurance purchasing are expected to have long-term implications. The growth of alternative capital is viewed as a credit negative for traditional reinsurers’ ratings, as a significant portion of capital-market funds is expected to remain permanent. Thus, Fitch views the current soft market as not just a normal cycle.”

“Some reinsurers are at or near the bottom and if the market softens any more, they and the ILS (insurance-linked securities) investors may well start to walk away.”  — James Vickers, chairman, Willis Re International

Fellow rating agency Standard & Poor’s believes that reinsurers have a continuing role to play in the global economy, but they must find a way to prove their worth to new clients and reinvent their business models to remain relevant in a climate of rapidly changing market dynamics.

It stated that: “Competition from traditional and non-traditional sources in reinsurers’ core markets is forcing them to make adjustments to retain their relevance in a rapidly changing global economy. [We] believe that the traditional reinsurance business model is under threat from external sources, such as corporations and technology companies that could become substitute providers of risk protection. If reinsurers fail to make use of their key strengths and expertise to establish their relevance to new and existing clients, the traditional reinsurers could find themselves marginalized.

“As reinsurance capacity outstrips demand, competition in the global reinsurance market is intensifying. Premium rates declined materially at the major renewal dates in 2014. As reinsurers look to deploy excess capacity, we observe that competition is spilling over from the catastrophe lines of business, and is now weakening pricing in most lines around the globe.”


Rating agency A.M. Best came to a somber conclusion in a briefing note on the global reinsurance market that it released a month before the Rendez-Vous. It stated that: “Given where rate adequacy is, it will continue to take optimal conditions, including benign or near-benign catastrophe years, a continued flow of net favorable loss reserve development and stable financial markets, to produce even low double-digit returns. Such return measures would have been considered average or perhaps mediocre just a few short years ago.

“In our view, companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this type of operating environment, and have greater ability to target profitable opportunities as they arise. It also places increased emphasis on dynamic capital management in order for companies to manage the underwriting cycle and remain relevant to equity investors.”

Marc Jones is a freelance writer based in London. He can be reached at
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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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Sponsored: Healthesystems

Changing the WC Medical Care Mindset

Having a holistic, comprehensive strategy is critical in the ongoing battle to control medical care costs.
By: | November 3, 2014 • 6 min read

Controlling overall workers’ compensation medical costs has been an elusive target.

Yet, according to medical experts from Healthesystems, the Tampa, Fla.-based specialty provider of innovative medical cost management solutions for the workers’ compensation industry, payers today have more powerful options for both offering the highest quality medical care and controlling costs, but they must be more thoroughly and strategically executed.

Specifically as it relates to optimizing patient outcomes and controlling pharmacy costs, the key, say those experts, is to look beyond the typical clinical pharmacy history review and to incorporate a more holistic picture of the entire medical treatment plan. This means when performing clinical reviews, taking into account more comprehensive information such as lab results, physician notes and other critical medical history data which often identifies significant treatment plan concerns but frequently aren’t effectively monitored in total.

Healthesystems’ Dr. Robert Goldberg, chief medical officer, and Dr. Silvia Sacalis, vice president of clinical services, recently weighed in on how using a more holistic, comprehensive strategy can make the critical difference in the ongoing medical care cost control battle.

Fragmentation, Complexity Obscure the Patient Picture

According to Dr. Goldberg, fragmentation remains one of the biggest obstacles to controlling overall healthcare costs and ensuring the most successful treatment in workers’ compensation.

Robert Goldberg, MD, discusses obstacles to controlling overall medical costs and ensuring the best treatment in workers’ compensation.

“There are several hurdles, but they all relate to the fact that healthcare in workers’ comp is just not very well coordinated,” he said. “For the most part, there is poor communication between all parties involved, but especially between the payer and the provider. Unfortunately, it’s rare that all the stakeholders have a clear, complete picture of what’s happening with the patient.”

Dr. Goldberg explains that health care generally has become a more complex landscape, and workers’ comp adds another level of complexity. Physicians have less time to spend with patients due to work loads and other economic factors, and frequently there isn’t adequate time to develop a patient specific treatment strategy.

“Often we don’t have physicians properly incentivized to do a complete job with patients” he said, adding that extra paperwork and similar hurdles limit communication among payers, nurse case managers and other players.

In fact, Dr. Sacalis emphasized that it’s not only the payer, but often the healthcare provider who is not getting a complete picture. For example, a treating doctor may not be the primary care physician and therefore they may not have access to the total healthcare picture for the injured worker.

SponsoredContent_HES“Most of all, payers need to adopt a more collaborative approach in their relationships with physicians, employers and patients, as well as networks involved. It will result in getting people back to work through appropriate medical care and moving the case along to a prompt closure.”
– Robert Goldberg, MD, FACOEM, Chief Medical Officer, Healthesystems

“It’s often difficult for multiple physicians to communicate and collaborate about what’s happening because they may not be aware of each-others involvement in that patient’s care,” she said. “Data sharing is lacking, even in integrated healthcare systems where doctors are in the same group.”

Done Right, Technology Can Bridge the Treatment Strategy Gap

Dr. Sacalis explained the role technology advancements can play in creating a more holistic picture of not only an injured workers’ post-accident state or pace of recovery, but also their overall health history. However, the workers’ comp industry by and large is not there yet.

“Today’s technology can be very useful in providing transparency, but to date the data is still very fragmented,” she said. “With technology advancements, we can get a more holistic patient view. However, it is important that the data is both meaningful and actionable to promote effective clinical decision support.”

Silvia Sacalis, PharmD, explains the role that technology advancements can play in creating a more holistic picture of an injured worker’s overall health.

Healthesystems, for example, offers an advanced clinical solution that incorporates a comprehensive analysis of all relevant data sources including pharmacy, medical and lab data as part of a drug therapy analysis. So, for example, the process could uncover co-morbidities – such as diabetes – that may be unrelated to a workplace injury but should be considered in the overall treatment strategy.

“Healthcare professionals must ensure there are no interactions with any
co-morbidities that may limit or affect the treatment plan,” Dr. Sacalis said.

In the majority of cases where Healthesystems has performed advanced clinical analysis, information gathered from the various sources has uncovered critical information that significantly impacted the overall treatment recommendations. Technology and analytics enable the implementation of best practices.

She cites another example of how a physician may order a urine drug screen (UDS), yet the results indicating the presence of a non prescribed drug were not reflected in the treatment regimen as evidenced by the lack of modification in therapy.

“Visibility and transparency will help with facilitating a truly effective treatment plan,” she said, “Predictive analytics are necessary tools for proactive monitoring and detection of trends as well as early identification of cases for intervention.”

Speaking of Best Practices …

Dr. Goldberg highlighted that the most important overall best practice needed to secure the optimal outcome is centered around getting the right care to the right patient at the right time. To him, that means identifying patients who need adjustments in care and then determining medical necessity during the entire case trajectory.

“It means using evidence-based medical treatment guidelines that are coordinated,” he said.

“You must look at the whole patient, which means avoiding the typical barriers in the workers’ comp treatment system, issues such as delays in authorizations, lengthy UR processes or similar scenarios that are well intentioned but if not performed effectively they can get in the way of expedited care.”

Dr. Goldberg and Silvia Sacalis provide recommendations for critical steps payers should take to achieve the best outcomes for everyone.

Dr. Goldberg noted that seeking out the most effective doctors available in geographic locations is another critical best practice. That requires collecting data on physician performance, patient satisfaction and medical outcomes, so payers and networks can identify and incentivize them accordingly.

“This way, you are getting an alignment of incentives with all parties,” Dr. Goldberg said, adding that it also means removing outlier physicians, those whose tendencies are to over-treat, dispense drugs from their office or order unnecessary durable medical equipment, for example.

SponsoredContent_HES“Visibility and transparency will help with facilitating a truly effective treatment plan. Predictive analytics are necessary tools for proactive monitoring and detection of trends as well as early identification of cases for intervention.”
– Silvia Sacalis, PharmD, Vice President of Clinical Services, Healthesystems

“Most of all, payers need to adopt a more collaborative approach in their relationships with physicians, employers and patients, as well as networks involved,” he said. “It will result in getting people back to work through appropriate medical care and moving the case along to a prompt closure.”

Dr. Sacalis added that from a pharmacy perspective, another best practice is becoming more patient-centric, using a customized and flexible approach to help payers optimize outcomes for each patient.

“Focus on patient safety first, and that will naturally drive cost containment,” she said. “Focusing on cost alone can actually drive results in the wrong direction.”

Additional Insights 

Dr. Goldberg explains how consolidation in the health care and WC markets can impact the landscape and quality of care.

Dr. Goldberg and Silvia Sacalis discuss if injured workers today are getting better treatment than they were twenty years ago.



This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthesystems. The editorial staff of Risk & Insurance had no role in its preparation.

Healthesystems is a leading provider of Pharmacy Benefit Management (PBM) & Ancillary Benefits Management programs for the workers' compensation industry.
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