Arguing that reinsurance companies are obsolete and that their importance to the world's primary insurance markets can be discounted is a little bit like arguing that most major league rosters would be better off without that 35-year-old veteran left-hander they re-signed last year.
Sure, his fastball isn't as fast as that hurled by some of the younger players on the team. But he combines a strong arm with enough of a variety of off-speed pitches to keep his team in most games. And when the chips are down, his maturity and patience can have a positive effect on some of the younger, more volatile players.
In much the same vein, though critics of reinsurance are loathe to admit, primary carriers large and small depend on the creativity and wisdom their reinsurance companies bring to the mix.
True, in the area of professional liability, to cite just one example, primary insurers are buying less reinsurance these days than ever. As a group, the top 10 writers of professional liability insurance now buy 60 percent less reinsurance than they did three years ago, according to a 2007 reinsurance market report by Guy Carpenter. But as it appears that a number of U.S.-based primary insurers are tripping over the subprime mortgage debacle this year, most notably in the dubious investing wisdom of AIG, what do we see when we look at the financial health of the mostly European-based reinsurers?
What we see is, certainly, they, like many other insurance industry sectors, have been buffered by the lack of large catastrophic losses like the hurricanes that devoured so much capital in 2004 and 2005. They also displayed a lot more maturity and self-control than did the U.S.-based primary insurers when it came to investing in residential mortgages. As Guy Carpenter president and CEO David Spiller gently and accurately notes in the company's 2007 reinsurance market review, "Conservative investment behavior insulated most reinsurers from the crisis." Reinsurers also displayed a high level of creativity in attracting more capital despite the softening prices. And what do we see when we follow the money? Leading reinsurers as a group are generating strong profits, with a combined ratio for the top 10 reinsurers dropping below 90 percent in 2007.
With such capital market innovations as insurance-linked securities, which allow for the direct transfer of risk to investors without a reinsurer's intermediating, reinsurers have innovated to attract and deploy more capital.
Last year was a record year for the catastrophe bond market, according to Guy Carpenter, and most of those transactions in 2007 were sponsored by reinsurers. The $7 billion that that market attracted in 2007 marks a 49 percent increase over the $4.7 billion in catastrophe bonds that were issued in 2006.
The reinsurance industry's global capacity also increased to $129 billion for the last quarter of 2007, up from $124.5 billion in the last quarter of 2006.
You want to talk domiciles? The Guy Carpenter Bermuda Composite, far from representing an island that is slowly sinking into the sea, as some would characterize it, has seen two straight years of record profits. The market had a combined ratio of 86.4 percent in 2006 and one of 85.5 percent in the first nine months of 2007: not too shabby.
Reinsurance companies continue to display innovation and creativity, by now seeking out Dublin as a locale with favorable tax laws and a qualified, competent, English-speaking labor pool. Axis, XL Re and Partner Re are now domiciled there. And let's not forget that reinsurers in 2007 also dished out $3.6 billion to investors in the form of buybacks and dividends, and still saw their total capital reach $88 billion by the end of the third quarter of last year, up 7.31 percent from year-end 2006. Does any of this strike you as evidence that reinsurance companies are outdated, not forward-looking or increasingly irrelevant?
I didn't think so.
DAN REYNOLDS is senior editor of Risk & Insurance®.
August 1, 2008
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