Newsletter Sign-up

By GRAHAM BUCK, who covers European risk management issues

MONTE CARLO---On Day Three of this year's Les Rendez-Vous de Septembre in Monte Carlo, the general tone of the annual reinsurance gathering is similar to that of three years ago, with a particular focus on the industry's excess of capacity and how best to utilize it.

At a press conference hosted by Swiss Re, CEO Stefan Lippe said that his group had only just seen the proposals and had not yet had an opportunity to study the details. However, he was not convinced that demand for such a product from the oil industry was necessarily guaranteed.

"It always takes two to tango, and a number of oil companies have cancelled policies," he observed.

"This was not because there was no access to cover; it was because they felt they were making billions and could carry the risk themselves," he said. "So you have to ask, will the clients pay for such capacity when they didn't when it really was not expensive?"

Hannover Re's chief executive, Ulrich Wallin, also cast some doubt over whether Munich Re's proposed total limit of between $10 billion and $20 billion for the facility was achievable. It was a "very ambitious" limit, he declared, and although he would not be drawn on exactly how much capacity his group would be prepared to offer, he confirmed it would be less than the $2 billion contribution offered by Munich Re.

Munich Re had announced it was ready to allocate $2 billion toward getting the venture underway and anticipated that other market players would contribute the remainder once the U.S. government had given the green light for the concept. This capacity would be available through three alternative options; firstly, traditional insurance for each drilling operation on a co-insurance or co-reinsurance basis; secondly, an insurance consortium of reinsurers offering fixed capacities and uniform prices, terms and conditions; or thirdly, through a pooled arrangement for all major drilling operations, which would pay in according to the market share with losses paid out on a proportional basis.

UP OR DOWN?

Elsewhere, a notable feature of this year's Rendez-Vous is the marked disparity between the upbeat and downbeat reports from some of the industry's main players and ratings agencies.

One industry figure expressing reservations--in contrast to his more upbeat mood at last year's gathering--was Richard Ward, chief executive of Lloyd's of London. He admitted at a breakfast briefing that a series of major losses since the start of the year would severely dent the reinsurance industry's profitability in 2010, while an excess of capital in the market continued to exert downward pressure on rates. Not to mention, the future in Europe was further clouded by economic and political uncertainty.

He also addressed one of the issues that features with increasing regularity in discussions; the introduction of the Solvency II directive on capital adequacy. Some have suggested that the timetable for implementation by the end of 2012 won't be met by many companies, while others retort that a further extension, which would be on top of previous delays, would strip the directive of all credibility.

"Personally, I wouldn't like to see a longer transition process with Solvency II," Ward said. "Extending the implementation will just be an extra cost ... and I don't want to be talking about Solvency II in 2014."

Ward's observation that neither last February's earthquake in Chile, nor this month's losses from the quake in New Zealand, were of sufficient magnitude to constitute "market moving events," raises the question of how big a catastrophe loss it would take for a steadily softening market to reverse direction.

The ballpark figure that appears to be popular is a loss in the region of $40 billion to $60 billion. In the absence of another Hurricane Katrina--or even an Ike--over the next few weeks, reinsurance rates for the upcoming January 1 renewals are likely to remain flat or even soften further.

Hannover Re's CEO ventured to give a figure, estimating rate decreases of between 2 percent and 5 percent.

According to Chris Klein, global head of reinsurance markets at Guy Carpenter, the support to earnings provided from prior-year-reserve releases is now likely to start waning so "innovation and lateral thinking" is now needed to develop new business and maintain growth.

"It's easy to criticize the industry for simply giving back capital or undertaking share buybacks rather than being innovatory," he said. "But the major reinsurers are continually thinking of new ways to address the new risks of the future."

Areas such as climate change and the increasing severity and frequency of severe weather events, cybercrime and nanotechnology are among the areas ripe for new products and services to be developed, he said. He agrees with a general view here that renewed food shortages around the world also underline a need for new insurance products in the agricultural sector.

And if another major event does occur in the near future, will new capital again be attracted into the market?

"Yes, but probably not in the same way as you had in the Classes of 2001 and 2005," he said.

Instead, the special-purpose vehicles dubbed "sidecars" are likely to revive strongly, he explained, with capital instantly available but investors not willing to tie up their money for a prolonged period.

ADEQUATE PRICING

At a breakfast briefing given by Hannover Re, Chairman of the Executive Board Ulrich Wallin suggested that pricing for most classes of nonlife reinsurance was still adequate despite a softening trend over the period since 2004. This had been masked by a temporary hardening of rates just after the triple whammy of hurricanes the following year and, again, by the financial crisis of 2008 that also caused rates to harden. But in both cases the spike was only temporary.

He observed that market reaction to overcapacity was very different from that of the late 80s and early 90s.

"There is much better underwriting discipline than in previous soft markets; underwriters have become more sophisticated and will no longer write unprofitable business," he said. "The environment of low interest rates also means that companies can no longer rely on investment income to offset the results of poor underwriting."

The mood was considerably more downbeat at the presentation of ratings agency Moody's, which commented that credit fundamentals are more likely to weaken than to improve over the next 12 to 18 months, with the overall reinsurance sector still hampered by a combination of excess capacity, restrained demand, pressures on profitability and weak equity valuations. The latter reflects the fact that the industry has traded below book value for nearly two years, with average price to book approximately 85 percent.

James Eck, assistant vice president of Moody's Investors Service and the author of this year's global reinsurance outlook, added that investors are becoming increasingly discriminating, so will favor the firms best positioned to benefit when rates eventually start rising again and shun those with outsized losses.

September 14, 2010

Copyright 2010© LRP Publications