GR Nov-Dec 2011

Tom Bolt shares the decision-making, but the buck stops with him as the market’s ‘critical friend’ at Lloyd’s

• Space insurers covering the industry’s fi nal frontier p30

• Special report: the future of Latin America p24

• The facts, fi gures, heroes and villains of the year p14

No man is an island

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Who will help you deliver if the weather doesn’t?

When does a broken link mean a broken chain? Sometimes the best laid plans are never enough, and this is especially the case in a world where the margins are wafer thin. Globalization and rising demand have placed enormous pressure on the transport sector. As margins are squeezed, cargo values are increasing whilst transit times are decreasing in hyper-efficient supply chains — representing a challenge for transport insurers to think bigger and think beyond. Thus it pays to know a reinsurer that truly grasps every conceivable risk — whether before, after or during shipping.

To find out how to keep business delivering whatever the weather,check out our website at www.munichre.com

NOT IF, BUT HOW

Untitled-2 1 16/11/2011 16:32

Leader

GLOBAL REINSURANCE NOVEMBER/DECEMBER 2011 1

Flagstone Re is going back to basics. Having expanded out

rapidly into insurance and the Lloyd’s market, the company has, following a string of catastrophe losses this year, decided to sell its Lloyd’s, Caribbean and South African operations.

The company will now focus on the lines of business where it made a name for itself in its formative years: property, property-catastrophe and specialty reinsurance. The move makes a lot of sense. Far better to acknowledge that it had overstretched itself, take corrective action and move forward, than struggle on and risk disaster.

The company’s travails are also a lesson that diversifi cation is not always a good thing. Investment portfolio theory teaches us that it is best to have a good mix of assets so that any losses in one area can be covered by profi ts in others.

But this only works if all areas are going at full strength. If you expend your efforts branching out in several areas and the unexpected hits while you are still building up certain elements,

the benefi ts are not there to cushion you.

Some analysts and observers have accused reinsurers of diversifying for its own sake – simply because this conforms to the most prevalent business model in the industry. It is perfectly possible and acceptable to be a successful property-catastrophe writer without having a presence at Lloyd’s, without a string of international offi ces and without any offsetting lines of business such as casualty. Of course, there will always be a place for large, one-stop-shop reinsurers such as Munich Re and Swiss Re on buyers’ panels. For some risks, no one else will fi t the bill.

But cedants and brokers also revere companies that write a small selection of products extremely well. While handy, the corkscrew on a Swiss army knife is no match for a dedicated tool.

Ben DysonAssistant editorGlobal Reinsurance

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GR_01 Leader.indd 1 18/11/2011 17:26

G L O B A L R E I N S U R A N C E . C O M

NOVEMBER/DECEMBER 2011 GLOBAL REINSURANCE2

News1 Leader

4 News

8 News analysis How the market is “like a crème brûlée”;

the complexities of offshore energy operations cover; and

why US Rep Richard Neal is in insurance buyers’ bad books

14 News agenda We take an info-packed look back over the

past year: the heroes, the villains, the haves and have-nots

People & Opinion20 Tom Bolt Lloyd’s entry is strict, but not impenetrable

Special Report24 Latin America The future of this emerging market

Cedants28 Q&A Länsförsäkringar’s reinsurance general manager

Tor Mellbye believes a slow and steady approach is the best

way to tackle the market

Claims30 Final frontier Outer space is next on the agenda for

mankind’s exploration, but with that comes a whole new

world of reinsurance challenges

Country Focus33 Out of the shadows For years the industry’s

reinsurance darling, Bermuda has lost some of its gloss of

late. Can it regain its shine in an uncertain market and in the

face of challenging new regulations?

The year in review, page 14 Tor Mellbye talks strategy, page 28 Entering the space race, page 30

Editor-in-chief Ellen Bennett

Tel +44 (0)20 7618 3494

Email [email protected]

Assistant editor Ben Dyson

Tel +44 (0)20 7618 3480


Markets editor Lauren Gow

Tel +44 (0)20 7618 3454


Group production editor Áine Kelly

Deputy chief sub-editor Laura Sharp

Senior sub-editor Graeme Osborn

Art editor (group) Clayton Crabtree

Publisher William Sanders

Tel +44 (0)20 7618 3452


Business development manager Donna Penfold

Tel +44 (0)20 7618 3426


Senior Sales Executive Tomas Imrich

Tel +44 (0)20 7618 3432


Group sales director Tom Sinclair

Tel +44(0) 7618 3429


Managing director Tim Whitehouse

Group production manager Tricia McBride

Senior production controller Gareth Kime

Digital content manager Michael Sharp

Head of events Debbie Kidman

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Nov/Dec

GR_2 Contents.indd 2 18/11/2011 17:14

GR_Ad_Page.indd 1 18/11/2011 09:57


News

Thailand’s fl oods

Catastrophe models ‘not fi t for purpose’● Underwriters slam modelling fi rms for ‘inaccurate’ and ‘wrong’ information● RMS, EQECAT and AIR Worldwide dominating ‘unhealthy market’

Catastrophe models are suffering from a “paucity of data” that renders them inaccurate, speakers at the International Underwriting Association’s fourth annual catastrophe modelling conference claimed.

Moreover, they said thatunreliable information was creating high levels of uncertainty in models and their outputs.

Karen Clark, president and chief executive of Karen Clark & Company, said it was a myth that cat models were objective tools. “They are not, because there is such little objective data,” she said. “All the models are wrong – but the question is, how wrong?”

Clark said that the release of RMS version 11 had been a “wake-up call” for the industry.

She said: “Where did we have the most data and the best accuracy? Florida, from 63 landfalling storms since 1900 and lots of claims data. If we have anywhere fi gured out, it is Florida. But if Florida changes by 100%, what does that tell you about other places?”

She continued: “What I believe is more important than the models is that the market has reliable information and this comes from multiple sources.

“The models are based on historical data, and we don’t have enough of that. What do we know about the New Madrid earthquakes in Missouri? We know something happened in 1811 or 1812, but we don’t know the magnitude or the return period.”

Clark, former chief executive of AIR Worldwide, dismissed the idea that an updated model was a better model. If that was the case, she asked, why did a “piddly little storm” such as August’s Hurricane Irene cause such a wide range of loss

estimates from the cat modelling fi rms?

Financial Services Knowledge Transfer Network director Dickie Whitaker described the current crop of cat models as “fundamentally not fi t for purpose”, owing to their lack of compliance with Solvency II.

“You need to know that there are limitations, and you need to be aware of what these are,” he said.

Listing the limitations to the current catastrophe models, Whitaker said that there was unknown sensitivity to the impact of individuals, functions and variables, while key risks and uncertainties were unmodelled, as only the major perils and economies were included at present.

He also claimed that the three major modelling fi rms – RMS, EQECAT and AIR Worldwide – had dominance over an “unhealthy market”. He said they had “virtually excluded academia” from providing input and running models, which meant the sector was losing the potential for innovation.

Whitaker’s comments prompted angry words from

some of the delegates at the conference. AIR Worldwide senior vice-president and managing director Milan Simic defended the models, claiming they had progressed over time to make it easier for users to comprehend their results, and that the market was healthy.

He added: “They are not perfect, but they are fi t for purpose. The models are completely different from the black boxes they were 10 or 15 years ago.”

● With only three major modelling fi rms in the market, there is a risk that smaller, newer players will fi nd it tough to make their mark. ● Catastrophe models are not an exact science, and contain various assumptions. Having faced calls for more transparency about these assumptions, modellers are now providing more detailed documentation.● While criticisms of models are valid, reinsurers should ensure they use model output intelligently and avoid seeking a single, defi nitive exposure number from them.

We say ...

FIND OUTMORE ONLINE

goo.gl/4fw4x

FEEL THE HEAT AT THE RENDEZ-VOUS

Going global: Peo

2

5

3

Sydney Global broking fi rm Guy Carpenter expanded its risk management arm in the Asia-Pacifi c area, to be headed by Christian Schirmer.

London Lloyd’s broker RFIB’s chief executive Marshall King left the company suddenly, and chief fi nancial offi cer Jonathan Turnbull has taken the reins.

Bermuda Bermuda-based (re)insurer Endurance promoted Rene Lamer to senior vice-president and head of US property-catastrophe treaty business.

1

3

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Vendor model uncertainty bands175,000

Mod

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loss

500

Return period

100 150 200 250

25,000

0

50,000

75,000

100,000

125,000

150,000

Model 1Model 1 range



DATA: GUY CARPENTER

GR_4-5 news.indd 4 18/11/2011 16:14


News

ds: Insurers face $2.5bn bill

SWEPT AWAYJapan’s casualty insurers are facing a bill of around ¥190bn ($2.5bn) in net payouts to cover damages from Thailand’s fl oods, according to analysts at Deutsche Bank. Japanese property and casualty insurers have underwritten as much as 70% of seven fl ooded industrial estates in Thailand that are facing around $13bn in damages. Residential insured losses are set to be small, as less than 1% of Thai households have fl ood insurance.

Canopius left out in the cold● Omega pursues deal with Bermuda’s Haverford● Canopius now seeking more acquisition targets

Weblogglobalreinsurance.com

Lloyd’s insurer Omega will focus on completing a transaction with Bermudian investment fi rm Haverford after reviewing bids from three suitors.

The announcement was made after Invesco, Omega’s biggest shareholder, indicated a preference for Haverford’s offer.

Following Omega’s announcement, suitor Canopius said in a statement: “In view of its inability to secure a recommendation from the board of Omega and the support of its largest shareholder for its offer, Canopius is withdrawing from the process.” It said that it was

disappointed by the latest developments, but hinted that it would seek more acquisition targets following the collapse of the Omega bid.

Canopius put in an offer for the entire share capital of Omega on 13 October, after making an “indicative proposal” in September to buy the fi rm for 83p a share. Haverford has offered up to 83p a share for 25% of the fi rm.

While Canopius’s indicative proposal was in line with Haverford’s offer, Canopius chairman Michael Watson said that his fi rm’s revised offer was a “higher price than the Haverford offer”.

eople moves Online top fi ve

No one would have predicted this one. By far the most popular story of the month was the shock departure of Willis UK and Ireland chief executive Brendan McManus, as well as international chief executive David Margrett. Some speculators claim the departures were related to the broker’s record £6.9m fi ne in July for failings in its anti-bribery systems and controls between January 2005 and December 2009. Others suggest a personality clash with group chief executive Joe Plumeri.

Taking second place this month, the ongoing Transatlantic merger saga hit the headlines again as the US-based reinsurer revealed it had entered a confi dentiality agreement and takeover talks with another anonymous third party. The latest suitor is in addition to the anonymous third party revealed late September, believed to be former Gen Re chief executive Joe Brandon.

In third spot, US-based Liberty Mutual Reinsurance’s appointment of two senior managers, Richard Mairano and Thomas Greene, for its Connecticut operations proved once again that it is the people that make this business tick.

Anyone bold enough to make a prediction is sure to capture the market’s attention. Endurance’s chief underwriting offi cer for Europe and Asia, Hans-Joachim Guenther, spoke to Global Reinsurance in Baden-Baden and declared: “I believe the pro-rata business will stay intact.” Take that, naysayers.

And fi nally, the market showed a keen appetite for facultative reinsurance in a Global Reinsurance special report. If only we could always look at things one risk at a time.

1. MCMANUS IN SHOCK EXIT FROM WILLISWillis International chief

David Margrett also leaves

2. TRANSATLANTIC REVEALS NEW SUITORThe company is in

takeover talks with another

anonymous third party

3. LIBERTY MUTUAL RE HIRES TWO IN TREATY ROLESRichard Mairano and

Thomas Greene join

4. DEATH OF PROPORTIONAL REINSURANCE IS EXAGGERATEDEndurance believes pro-

rata business will stay intact

5. SPECIAL REPORT: FACULTATIVE IN FOCUSNatural disasters and

improved risk modelling are

making the benefi ts of fac

more apparent

To contribute to the website,

email Lauren Gow at

[email protected]

T

4

1

Singapore Guy Carpenter has appointed three senior brokers to the fi rm’s Singapore offi ce from January 2012. Lucinda Coleman joins from rival JLT Re Asia, Brendan Plessis will join as head of multinational and retrocessional practice from Willis Re, and Richard Hawkes joins as head of marine and energy from London broker Cooper Gay.

New York Marsh promoted David Batchelor to head of the international division, fi lling Alex Moczarski’s old role.

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GR_4-5 news.indd 5 18/11/2011 16:14


News

Flagstone units attract ‘top class’ potential buyers● Sale of operations outside core focus will slash general expenses by $40m ● Executive vice-president Guy Swayne insists ‘this is not a fi re sale’

Flagstone is close to fi nding buyers for the operations it is selling as part of its restructuring, according to executive vice-president Guy Swayne.

The Luxembourg-domiciled reinsurer revealed on 24 October that it would divest its Lloyd’s managing agency, its Island Heritage Caribbean primary insurance unit and its Johannesburg offi ce, in a bid to focus on property, property-catastrophe and specialty reinsurance.

The company estimates that the Lloyd’s and Island Heritage sales will cut annual gross written premium by $300m. In its third-quarter results, Flagstone estimated that the restructuring as a whole will reduce annual general and administrative expenses by

$40m, starting in 2013. Flagstone said the sales

would be completed in Q1 2012, and Swayne added the current target was mid-February to coincide with the release of the company’s full-year earnings.

“We are pleased but not surprised that the level of interest is signifi cant, and the quality of the interested parties is top class,” Swayne told Global Reinsurance.

The decision followed a review that was sparked by heavy catastrophe losses in the fi rst half of the year. The company had already begun reviewing operations 18 months ago, and had closed its Dubai and Puerto Rico offi ces. Flagstone made a net loss of $241m in the fi rst nine months of 2011.

But Swayne stressed that the sales were orderly. “This is

● Flagstone had clearly overstretched itself when it expanded rapidly away from its core business into new territories and business lines. ● While the restructure looks like a backward step, it will help Flagstone move forward on more stable footing.● A leaner, cleaner, smaller operation is likely to attract buyers, though Swayne insists that was not the reason for the changes.

We say ...

US snowstorms: Up to $3bn in damages

IN A FLURRYA severe snowstorm battered the US north-east in late October, causing between $1bn and $3bn in insured and uninsured damage according to risk modelling fi rm Kinetic Analysis Corp. The New York-based Insurance Information Institute said the storm is likely to generate thousands of insurance claims. At least 11 people died and more than two million homes and businesses were without power.

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The big ...Withdrawal Canopius

chairman Michael Watson has pulled its offer for fellow

Lloyd’s insurer Omega “in view of its inability to secure a

recommendation from the board of Omega and the support of its largest shareholder for its offer”,

he said. Canopius says it is continuing to look for strategic opportunities to boost growth.

Cat Munich Re purchased a new $100m catastrophe bond,

covering US hurricane and European windstorm

risks. The German reinsurer acquired the coverage from

special purpose vehicle Queen St IV Capital, which placed the

cat bond into the capital markets in October.

Surge Investors fl ocked to insurance stocks following the

announcement of another Greek debt bailout plan. AXA’s share price soared 14%, while Aviva rose 8.5% and Allianz 6%. Despite the large market

gains, some commentators are warning that the measures are only a stop-gap, especially if

market confi dence in Italy and Spain continues to deteriorate.

‘This year’s hero? Warren Buffett, saving Bank of

America. Villain? Richard Neal …’

>>> see News Agenda, page 14

not a fi re sale by any stretch,” he commented.

He added that the decision was driven by management, not rating agencies, though management had sought rating agency endorsement after making its decision.

GR_6 news.indd 6 18/11/2011 16:51

Untitled-2 1 16/11/2011 16:34


News analysis

Markets

Finding a balanceAgainst the odds, some reinsurers are set to make a profi t in this, their worst ever year,

and yet Ben Dyson fi nds the market remains balanced on a knife edge

“The market is like a crème brûlée – hard on the outside but soft in the middle.” This is how general manager of the reinsurance department at Swedish mutual insurer Länsförsäkringar Tor

Mellbye describes the current reinsurance pricing environment.His analysis echoes the talk in the hotel lobbies of the small German

spa town of Baden-Baden in late October, where European cedants, reinsurers and brokers gather to start 1 January renewals discussions in earnest.

The general sense is that rates are hardening where there have been big catastrophe losses, such as New Zealand, Australia and, to a lesser extent, the USA. Despite fl ooding in Denmark in July, Europe got off relatively lightly.

As such, many believe it is inappropriate to talk of a single reinsurance market. “It is the time of micro-cycles,” says Endurance Europe and Asia chief underwriting offi cer Hans-Joachim Guenther. “Markets are moving sideways in Europe, and we don’t see too much movement in pricing. But we see improvements in terms and conditions in countries that have been affected severely by large events.”

Forces in both directionsThe problem is that although a number of market challenges are exerting upward pressure on reinsurance rates, the industry’s still-robust capital buffers and the resulting abundant levels of capacity are pushing back the other way.

On top of the catastrophe losses, low interest rates are depressing investment returns, eating into profi tability. Economic pressures mean reduced insurance spend, and by extension reinsurance spend, making growth diffi cult to come by.

“You have got very anaemic growth in mature markets and growth has even started to slow down in some of the emerging markets,” PartnerRe Global chief executive Emmanuel Clarke says.

But several global reinsurers remain profi table despite the numerous pressures of the year, prompting some to question the need for further rate rises. For Cooper Gay reinsurance chairman Seymour Matthews, the fact that private equity investors are interested in getting into the reinsurance sector, as evidenced by the recent launch of Third Point Re, shows that the sector has profi t potential and is therefore attracting adequate rates. “At the time of Baden-Baden, reinsurers were talking about making profi ts in the worst ever year in their history. Why would prices go up? Why should they?” Matthews says. “There is plenty of capital out there. The capital has nowhere else as attractive to go as far as I can see.”

Even where there are losses, some are expecting measured responses. “We are expecting quite a soft renewal other than whether there have been actual losses on the treaties we placed in the markets.

And we expect the market to react calmly to those losses – we are not really expecting a knee-jerk reaction,” says UIB treaty reinsurance divisional director Kenrich Aldrich.

While rates may not be hardening in loss-benign territories such as Europe, cedants should not expect large reductions either. While capacity is still plentiful, reinsurers are still keen to ensure they are paid adequately for it. “There is certainly no capacity drought,” PartnerRe’s Clarke says. “But I believe people will be a lot more careful about how and where they deploy that capacity and at what price.”

Exercising cautionOn the fl ip side, it seems that reinsurers are also wary of putting up rates too much. There are rumours of private equity capital waiting in the wings to buy into the reinsurance market if and when rates start

to go up, and reinsurers may want to avoid a situation where fresh competition enters the market, depressing prices again.

“An aviation underwriter told me that they wouldn’t be upset if there was a large loss, but at the same time if there was one they would rather it caused a 5% rise than a 10% rise, because then everybody would throw their capacity into the market and the market would go down within a couple of quarters,” Aldrich says. “They want to keep rises steady because everybody is worried about the fact that capacity is so easily and quickly transferable.”

The current market conditions are not all bad news for reinsurers. While ceding companies may be under pressure to cut costs – including their reinsurance spend – their increased retentions have hit them hard in the past year, as there have been a number of smaller losses that have fallen below the threshold of their reinsurance programmes.

But while losses have not been heavy enough to prompt rate rises so far in Europe, danger still lurks in several business lines. On the natural catastrophe front, Eastern Turkey was hit by a devastating earthquake in October. The losses from the Thailand fl oods are highly uncertain, with estimates varying wildly. And some believe certain liability lines are an accident waiting to happen.

“Primary prices should rise dramatically in fi nancial institutions business,” says Cooper Gay’s Matthews. “Directors and offi cers liability losses will come through. There will be problematic areas there around the world. Those prices are still very competitive if not in certain cases going down in much of the world.”

The industry is balanced on the edge, and it may not take much more to push it over. GR IL

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News analysis

The $4bn payment from Anadarko Petroleum to BP that settled claims relating to the Macondo oil spill last year underlines the diffi culties underwriters face in assessing liability of

offshore drilling platforms.The settlement ends a long dispute between BP, which operated

the well in the Gulf of Mexico, and Anadarko, which had a 25% stake, about accepting responsibility for one of the worst oil spills in US history.

But, while the settlement was a fi llip for BP, it is still at loggerheads with two other contractors: Transocean, which operated the rig, and Halliburton, which was responsible forcement work.

Marsh managing director and US upstream energy practice leader Andrew Steptoe says: “What we have seen since Deepwater Horizon is that the drill operators and suppliers are seeing signifi cant changes in how their programmes are structured. Underwriters are requiring more information and there is a lot of focus on the operations. Underwriters have woken up to the fact that in drilling there are many companies involved in any one project.

“One of the interesting things is that the whole contractual relationship between the parties involved in the drilling of a well is changing, with everyone trying to limit their own liability and pass it on to the operator. It is a little early to say how that will impact the insurance market,” Steptoe adds.

Regulation changesThe Deepwater Horizon explosion in April last year was a landmark in many respects and it has altered the industry in the USA.

Lloyd & Partners energy and marine team senior partner John Cooper says: “One of the biggest changes was in the oil industry itself and that was regulation. A lot of our clients in the UK, Australia and Norway, etc, said the Macondo loss would not have happened in their countries because the regulation is completely different. The US rules regarding deepwater drilling have now changed signifi cantly.”

Deepwater Horizon was just one of several headline-grabbing losses that have hit the offshore energy and marine markets over the last couple of years. Cooper says: “Of course, Deepwater Horizon would have been a horrendous loss to the market if BP were a buyer of insurance. Maersk Gryphon and other sizeable losses should be absorbed by reinsurers or were retained by the front-end market but have not resulted in any signifi cant withdrawals of capacity, so this will limit underwriters’ attempts to raise prices.

“Despite signifi cant losses, there’s been no reduction in capacity, other than in the liability area, and for most insurance buyers there is ample capacity for the limits they want to buy and until that withdraws, pricing is not going to increase signifi cantly. We are seeing rises of 10% here and there, but that’s it.”

The nature of the losses has also changed, with insured losses from two of this year’s largest energy claims, the storm-damaged Maersk Gryphon and the Alberta Horizon oil sands fi re, increasing due to business interruption (BI) claims.

“BI claims were a big piece of the Maersk Gryphon [loss],” Steptoe says. “From that the lesson is: should you be writing BI?”

The situation has got to the point where Lloyd’s performance management director Tom Bolt felt it necessary to write an open letter warning the market. He said: “Aggregations [in the offshore energy book] are diffi cult to assess and manage owing to the lack of transparency associated with package policies. This approach is not

sustainable; there is a material imbalance between premiums charged and exposures assumed.

Modest returns“The economics simply don’t work. It is not only underwriters who have been left disappointed by the offshore energy class, as capital providers have received only modest returns for what is a very capital

intensive line of business. Could better returns have been made had capital been deployed elsewhere?”

Bolt set out a number of best practice guidelines and pre-conditions and warned syndicates that if they were not followed, next year’s business plans would be subject to veto.

Key among these was the demand that OEE (operators’ extra expense), which includes well control, drilling and pollution and is known as blowout insurance, is written into the liability policy rather than classifi ed as physical damage and that liability risks are underwritten on a standalone basis not in packaged policies.

“OEE has not been the problem in our view and underwriters have been writing it for many years without any signifi cant problems. Our view is that the market will fi nd its correct price for a product and what it covers should be for individual underwriters and the market as a whole to determine,” Cooper says.

Steptoe adds: “Bolt’s concern is with the energy liability market and he feels there has been a lack of discipline in how that market has been underwritten. Bolt needs to be aware that this is a supply and demand market and Lloyd’s is just one of many markets around the world.” GR

Liability

Picking up the tabAccidents like the Deepwater Horizon oil spill have woken underwriters up to the fact that

offshore energy operations require much more complex cover. Tim Evershed reports

Top Individual Offshore Energy Losses $2.5bn$2bn$1.5bn$1bn$0.5bn

Deepwater Horizon

Piper Alpha

Maersk Gryphon

Riots Escravos Nigeria

Explosion& FireGOM

P36 Brazil

Montara-West Atlas

Ekofi sk collision

Operators extra expenseProperty damageBusiness interuption

DATA: WILLIS ENERGY LOSS DATABASE

GR_10 NewsAn Liability GO.indd 10 18/11/2011 10:42

Untitled-2 1 16/11/2011 16:35


News analysis

USA

Closing the loopholeA change to US legislation aims to end an unintended tax subsidy for foreign-owned insurers, and stem the fl ow of capital out of the country. But with the likelihood that rates will rise and

capacity will fall as a result, insurance buyers are not happy. Lauren Gow reports

President Obama is in hot water with insurers. His full-year 2012 budget includes a provision that threatens to drastically increase rates across the USA, with some critics saying that the changes

will make insurance less available and more expensive for US customers. Obama’s provision is based on bills HR 3424 and S 1693, which

were introduced in Congress by US representative Richard Neal and senator Robert Menendez in October. The legislation aims to close what Neal calls an ”unintended tax loophole” that gives foreign-owned insurers commercial advantage over their US competitors serving the domestic market.

Under the current “loophole”, foreign-owned insurers are able to declare in so-called tax havens income that was generated in the USA by reinsuring their US business with foreign affi liates.

The new bill will effectively eliminate the competitive advantage for foreign-owned insurers and defer the deduction for any reinsurance premiums paid to a foreign affi liate (if the premium is not subject to US tax).

In addition, to ensure foreign-based insurers cannot be disadvantaged relative to domestic insurers, the legislation allows foreign-based groups an election to avoid the deduction deferral rule and be taxed similarly to a US company on the income from these affi liate reinsurance transactions. A foreign tax credit is provided for any foreign taxes paid on such income.

In introducing the legislation, congressman Neal said: “Ending this unintended tax subsidy for foreign insurance companies will stop the capital fl ight at the expense of American taxpayers and restore competitive balance for domestic companies. Closing this loophole does not impose a new tax. It merely ensures that foreign-owned companies pay the same tax as American companies on their earnings from doing business here in the USA.”

“The increasing trend of foreign insurance companies moving profi ts made in America offshore and sticking Americans with the bill is incredibly troubling,” Menendez added. “This legislation will staunch the fl ow of capital overseas, protect American jobs, and reduce defi cits by shutting down a tax loophole that provides a huge unintended subsidy to foreign companies at the expense of both their US competitors and American taxpayers.”

The US Joint Tax Committee estimates that this legislation would help to reduce the defi cit by nearly $12bn over 10 years.

‘A serious threat’However, according to insurance advocacy group Coalition for Competitive Insurance Rates (CCIR), more than 100 insurers, independent experts, state government offi cials, business owners

and associations have publicly fi led opposition letters against this tax proposal. A 2009 study by researchers at the Massachusetts-based economic consulting fi rm Brattle Group demonstrated that the proposed legislation would cost consumers between $10bn and $12bn per year to maintain their current coverage and would reduce US reinsurance capacity by 20%.

CCIR says the effects of these cost increases would be felt most in disaster-prone states like California, Florida, Louisiana and Texas. Other states are also hitting back. North Carolina Insurance Commissioner Wayne Goodwin says: “On the heels of Hurricane Irene’s devastation in my state, anything that has the impact of driving up insurance rates and reducing reinsurance capacity for hurricane-prone states is unacceptable. I must raise my objection

to congressmen Neal’s legislation. “Ultimately, anyone in favour of consumer

protection must oppose this measure.”The Risk and Insurance Management

Society (RIMS) has also spoken out against the legislation, calling it a “serious threat” to small and large businesses, universities, hospitals and public entities, all of which purchase signifi cant amounts of commercial property/casualty insurance.

RIMS External Affairs Committee board liaison John Phelps says in a statement: “By disallowing the tax deduction for reinsurance premiums ceded by US insurers to offshore affi liates, the legislation will inevitably dismantle a legitimate practice in risk management, which facilitates the shifting and pooling of a variety of risks from a domestic insurer to an affi liate reinsurer.”

“During this period of consumer uncertainty and economic fragility, now is not the time for tinkering with this provision

of the tax code, especially when economists forecast that a change could cost individual and commercial consumers over $10bn a year,” Phelps adds.

Searching for a resolutionIronically, some of those companies that are supportive of the legislation in the USA have been fi ghting against almost identical rules in Brazil called Resolution 224 and Resolution 232.

The Resolutions were formulated to stop a proportion of premium earned by local reinsurers from leaving the country, as well as forcing local reinsurers that are a division of a multinational group to invest more capital in Brazil.

The US bill has now been read in the Senate and in the House of Representatives, and has been referred to the Committee on Finance, where hearings will be held and amendments possibly made before the bill is passed. If the industry has any objections to the bill, the time to speak is now.

Timeline1984: Congress provides authority to the Treasury to make adjustments in reinsurance transactions to prevent tax avoidance or evasion.2003: Bush Treasury Department testifi es before Congress that existing mechanisms were not suffi cient.2004: Congress amends Tax Code to expand the authority of Treasury to make adjustments to reinsurance agreements.July 2009: Congressman Richard Neal introduces bill to close the reinsurance tax loophole.Feb 2011: President Obama’s 2012 budget includes tax deductions proposals for certain reinsurance premiums. Oct 2011: Bills HR 3424 and S 1693 are reintroduced in Congress by US representative Richard Neal and senator Robert Menendez.

GR_12 NewsAn US.indd 12 18/11/2011 16:18

Ad_Master_Fullpg.indd 1 19/2/10 12:11:24

2011Catastrophes, disasters and scandals; this year has been nothing if not tumultuous. How has the industry weathered the storm? Lauren Gow refl ects

This has been a year of haves and have-nots: those who have bought or been bought, and those who

have not. Those who have been hit hard by natural catastrophes and those who have not. Those who have predicted widespread rate rises and those who have (correctly) not. But it’s also been all about the people who make the industry what it is.

From the shock simultaneous departures of chief executives Brendan McManus and David Margrett from Willis, to a sad farewell for Ken LeStrange, who stepped down as Endurance chairman. From the Guy Carpenter management reshuffl e that saw Peter Zaffi no trade reinsurance for insurance, to the appointment of Hammerson’s John Nelson as Lloyd’s chairman, it has been a year of big, bold and shocking moves.

It seems fi tting, then, to honour a few of the industry’s fi nest in our inaugural Monty Awards. And the winners are:

Scarlet Pimpernel AwardJohn Berger may be planning a comeback with Third Point, but he has been a noticeable absence from this year’s festivities.

Battering Ram AwardPat Ryan, for running the only broker to break down Lloyd’s defences by buying Jubilee.

Blast from the Past AwardAfter disappearing off the radar in 2009 following the IPC sale to Validus, Jim Bryce has resurfaced out of the blue with a new venture, Aliseo Re.

A look back

HEROES & VILLAINS

Hero: Warren BuffettChief executive, Berkshire HathawayFeat: Buffett saved Bank of America

with a $5bn investment from his bathtub

Hero: Stefan Lippe Chief executive, Swiss ReFeat: Lippe won back his

company’s AA- rating

Villain: Richard NealUS representative

Misdeed: Neal reintroduced the HR 3424 bill, aimed at closing a tax loophole and forcing foreign reinsurers to pay more US tax

Hero: Torsten OletzkyChief executive, Ergo

Feat: He arranged for a donation of €83,000 ($113,000) on behalf of Ergo to a women’s shelter to make up for

the orgy scandal

Villain: Ed NoonanChief executive, Validus

Misdeed: He can attempt to scuttle a deal at the last minute

– and succeed

Villain: Michel BarnierEuropean commissioner for

internal marketsMisdeed: He is responsible for the

implementation of Solvency II and for it being pushed back even further

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News Agenda

GR_14-17 Agenda.indd 14 18/11/2011 16:54

Transatlantic’s share price3 JAN - 1 NOV 2011

RESULTS ROUND-UP

The comebacks and the climb downs

The world’s biggest insurers have remained profi table despite taking a beating from natural catastrophes in

the fi rst nine months of 2011. But not all performed equally well, and results were a decidedly mixed bag.

The message coming from Swiss Re’s results is that it is fi rmly back on track. After making heavy losses in 2009 from its investment portfolio, the company, under the guidance of chief executive Stefan Lippe, has gradually got its strength back.

Swiss Re made a $1.64bn profi t for the fi rst nine months of 2011, which, while only 3% higher than the $1.59bn it reported in the same period last year, came after a multibillion-dollar catastrophe bill for the fi rm. Swiss Re’s natural catastrophe losses at the fi rst half of 2011 were $2.47bn.

What’s more, the company regained its coveted AA- rating from Standard & Poor’s, which it lost in early 2010 after the full extent of the 2009 horrors was revealed.

For the third quarter alone, which had a lighter catastrophe burden than the fi rst half, Swiss Re made a profi t of $1.3bn, up 118% on the $618m profi t it made in 2010.

Munich Re’s results, on the other hand, were less positive. The world’s largest reinsurer’s nine-month 2011 profi t dropped 96% to €80m ($108m) from €2.1bn in the same period last year. The company also reported a 62% decline in its third-quarter profi t, to €290m from €761m.

Munich Re sustained the bulk of its catastrophe losses in the fi rst quarter, when it made a €948m loss. The subsequent profi ts in the second and third

quarters have barely made a dent in this, however. Its total major loss bill for the fi rst nine months of 2011 was €4bn.

As a result, Munich Re’s expectations for 2011 are modest. The company acknowledges it will miss its long-term target of a 15% return on risk-adjusted capital and believes that, while it will end the year in profi t, there is little hope of getting close to the €1.4bn profi t it made in 2010.

Fellow German reinsurer Hannover Re fared much better, though its performance is still down compared with 2010. The company made a net profi t of €381.7m in the fi rst nine months of 2011, down 34.4% on the €582m it made in the same period last year. The dip in profi tability comes after a €743.2m natural catastrophe bill for the 2011 year to date.

Despite the dip in profi tability, Hannover Re said it is still on track to hit its €500m profi t target for the full year.

Although the three reinsurance groups all remained profi table, the impact of the catastrophes was plain to see in their non-life reinsurance combined ratios. Munich Re’s was 117.9% (nine-month 2010: 102.1%), Swiss Re’s 104.6% (nine-month 2010: 95.8%) and Hannover Re’s 105% (nine-month 2010: 99%).

While the largest reinsurers expect to emerge from one of the toughest years on record profi tably, plenty of challenges await them in 2012.

$54

$52

$50

$48

$46

$44

$42

19 SEPTransatlantic receives letter from National Indemnity reinstating $52-per-share all-cash proposal to acquire the company.

3 NOVTransatlantic confi rms receipt of revised Validus exchange offer with current market value of $53.35.

10 JUNInvestors frustrated about whispers of Allied World merger but no announcement.

13 JULTransatlantic confi rms receipt of unsolicited proposal from Validus.

$53.35

The nine-month numbers

Jan-Sep ’11Munich

ReSwiss

ReHannover

Re Gross written premiums $50.53bn $22.77bn $12.33bn

Net claims and claim expenses $42.02bn $13.68bn $8.08bn

Underwriting result -$405.2m n/a -$562m

Investment income $4.82bn $4.21bn $1.29bn

Profi t $108.8m $1.64bn $519m

Shareholders’equity $30.21bn $27.77bn $63.75bn

Non-life combined ratio 117.9% 104.6% 105.0%

MUNICH RE AND HANNOVER RE’S RESULTS WERE CONVERTED

TO DOLLARS AT THE EXCHANGE RATE ON 30/9/2011


News Agenda

GR_14-17 Agenda.indd 15 18/11/2011 16:54

2011: The fi ve costliest

disasters

The costliest earthquakes in historyMar ’11 Japan $30bnJan ’94 USA $21bn Feb ’11 New Zealand $9bn-$12bnFeb ’10 Chile $8bnSep ’10 New Zealand $4.4bn

Ten US disasters costing more than $1bn in 2011

The cost of US windstorm damage in the fi rst six months was over twicethat of the previous year

2011 (H1)$12bn2010$5bn

04 APR-05 APR Tornadoes

$1.6bn (insured)


$1.5bn (insured)

27 AUG-28 AUG Hurricane

$5.5bn (insured)


$6.6bn (insured)


$1.4bn (insured)

SUMMERFlooding

$2bn (economic)

29 JAN-03 FEB Blizzard

$1.1bn (insured)

SPRING-SUMMER Flooding

$2bn-$4bn (economic)

SPRING-SUMMERDrought, heatwave & wildfi re

$5bn (economic)

22 MAY-27 MAY Tornadoes

$5.9bn (insured)

27 AUG ’11

Atlantic hurricane$2.25bn-$5.5bn

20 MAY ’11

US tornadoesand storms

$5.9bn

Top 10 reinsurers’ H1 losses

2011 major Lloyd’s market losses

25 APR ’11

US tornadoesand storms

$6.6bn$ Munich Re $30.52bn $4.77bn 145.9%Swiss Re $25.34bn $2.47bn 9.7%Hathaway Re N/A $1.2bn N/AHannover Re $6.39bn $952.4m 14.9%Lloyd’s $29.58bn $4.5bn 146.1%SCOR $6.16bn $594.1m 9.6%Everest Re $6.28bn $620m 9.9%Partner Re $7.21bn $1.6bn 22.2%Transatlantic $4.28bn $398m 9.3%ACE $22.97bn $543m 2.4%

2

3 4

1

5

25 APR ’11

Japan earthquake and tsunami$9bn-$12bn

2010 shareholders

equityReported

losses at H1

Losses as a % of 2010

shareholders’ equityReinsurer

25 APR ’11

New Zealand earthquake$9bn-$12bn

DATA: SWISS RE, RMS, LLOYD’S, NATIONAL CLIMATIC DATA CENTER, NOAA, COMPANY REPORTS

Japan earthquake and tsunami $1.9bn New Zealand earthquake $1.4bn US tornadoes $600m Australian fl oods $300m Hurricane Irene $300m-$600m

CATASTROPHE LOSS

Apocalypse now * Well, based on 2011’s fi gures so far, it’s certainly shaping up that way* 2011

Half-year$70bn

’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10

$100bn$90bn$80bn$70bn$60bn$50bn$40bn$30bn$20bn$10bn

Insured catastrophe losses 1991-H1 2011

Natural catastrophes in 2011 have mounted up, with H1 losses of $70bn already reaching more than half of 2005’s all-time annual high of $119bn.

After six years of softening rates, one more costly disaster could prove to be a tipping point that fi nally forces the market to raise its prices.

All-time high of $119bn


News Agenda

GR_14-17 Agenda.indd 16 21/11/2011 10:01

M&A

The tangled web of Transatlantic/OmegaCheck out who’s connected to whom in our map of

this year’s two biggest acquisition stories

Omega Transatlantic

Mergers and acquisitions in 2011 are best

summed up as ‘two’s company, three’s a crowd’. But take a closer look and you’ll fi nd that some transactions bring together a whole host of players.

Global Reinsurance has dug beneath the surface of this year’s most newsworthy targets – US reinsurer Transatlantic Re and Lloyd’s insurer Omega – and found that the various ties that bind these companies speak volumes about the deals themselves.

While there are some obvious connections between companies and people, there are a few surprises. Allied World chief executive Scott Carmilani’s appetite for acquisition did not begin with his bid for Transatlantic, for example.

In fact, he was AIG’s president for the mergers and acquisitions insurance division earlier in his career. No guesses, then, how it felt for Carmilani to take reinsurance powerhouse and fellow suitor Warren Buffett out of the running for Transatlantic.

Perhaps the best example of the interconnected nature of these deals is the Byrnes. Insurance elder Jack Byrne is the founder of White Mountains, board member of son Mark’s company, Haverford, and former chief executive of Buffett’s GEICO. Mark is founder and board member of Haverford and Flagstone Re and former board member of Jack’s White Mountains. Still with us?

Once these Byrne connections are tied together, the two seemingly separate acquisition targets of Omega and Transatlantic become quite intriguingly interlinked.

Haverford

AIG

Aliseo Re

IPC

Flagstone Re Max Capital Harbor Point

Alterra

Berkshire Hathaway

GEICO

GenRe

White Mountains

Michael Watson

Marty Becker Scott Carmilani

Joe Brandon

Jack Byrne Mark Byrne

Flagstone Re

Company

PersonMark Byrne

Jim Bryce

National Indemnity

Allied World

Validus

Barbican

Canopius

Other business relationship

Merger or attempted merger

Subsidiary

Founder

Current chief exec/executive/board member

Former chief exec/executive/board member

Trenwick

Acquisition target

Merger suitor

Omega

Barbican


News Agenda

GR_14-17 Agenda.indd 17 21/11/2011 10:02

Join us at the next middle east reinsurance rendezvous in doha and discover the perfect place to do business

WHAT IS MULTAQA QATAR?Hosted by the Qatar Financial Centre Authority and organised by Global Reinsurance, Multaqa Qatar is the Middle East’s leading insurance and reinsurance event.

Now in its sixth year, Multaqa Qatar promotes thought leadership in (re)insurance, providing a real and important platform for local, regional and international decision-makers to come together and shape the direction of the industry.

Combining a world-class business programme, structured networking, leisure activities and a truly international audience, Multaqa Qatar is the perfect place to do business.

WHAT DOES IT COST TO ATTEND?There is no cost to attend and interested professionals should register their request for an offi cial invitatation online at www.multaqa.com.qa

WHO SHOULD APPLY TO ATTEND?Senior executives at reinsurers, insurers and brokers.

HOSTED BY ORGANISED BY

DATE

11TH-13TH MARCH 2012

PLACE

DOHA

VENUE

RITZ CARLTON, DOHA

APPLY NOW FOR YOUR INVITATION TO ATTENDOnline at www.multaqa.com.qaIf you would like more details about the event, please contact Debbie Kidman | [email protected]

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QatarVI_GR_DPS_ND11.indd 2 18/11/2011 10:53

JUST SOME OF THE EXPERTS AND COMPANIES THAT YOU WILL MEET AT MULTAQA QATAR 2012

ACEACRAspen ReADNICAl Fajer ReAlpha Lloyds Insurance Brokers LLC AM Best Amlin Re Europe Aon Benfi eld InternationalAPEX InsuranceARBARIGAsia Capital Reinsurance GroupAUL Underwriting Agency LtdBerkshire Hathaway

Besso LtdBoubyan Takaful Insurance CompanyClyde & CoCunningham Lindsey InternationalDamanErnst & YoungEcho ReFinancial Supervisory Commission, TaiwanGIC of IndiaGulf ReHanover ReHiscoxHowden Insurance BrokersJLT

Lloyd’s of LondonLocktonLondon Marine Insurance Services LtdMalakut Insurance BrokersMassoun Insurance Services LLCMisr Insurance BrokingMNK Re LtdMunich ReNoor Takaful PJSCPartnerRe Global Pioneer Insurance and Reinsurance BrokerProtection Insurance Services W.L.LQatar Financial Centre Regulatory Authority

Q-Re LLC Qatarlyst SEIB Insurance Co Sirius International Ins. Corp. LtdSociete de Courtage en Reassurances SA Swiss Re Tokio Marine Middle East Ltd Transibb Re Underwriting Risk Services (Middle East) Ltd WIASS Insurance Broker Willis Energy Willis Re XL Re Europe

JOSE RIBEIRODirector – International Markets, Lloyd’s of London

HEATHER GOODHEW Managing Director, Aspen Re

GEOFF BROMLEYPresident, International, Aon Benfi eld

AJMAL BHATTYPresident and Chief Executive, Tokio Marine Middle East Ltd

DR ROBERT P. HARTWIG, IIIPresident and Chief Economist, Insurance Information Institute

LUKAS MÜLLERDirector – Head Market Underwriter, Middle East and Africa Division, Swiss Re

ANDREAS POLLMANNHead of Middle East and North Africa,Munich Re

MANFRED SEITZManaging Director, Berkshire Hathaway

EMMANUEL CLARKE President and Chief Executive, PartnerRe Global

CHARLES DUPPLINChief Executive, Hiscox Bermuda

QatarVI_GR_DPS_ND11.indd 3 18/11/2011 10:53


‘‘Profi le

‘‘There is hardly any seat you can sit in and get to see what you do in this job By virtue of his job title alone, Lloyd’s performance management director Tom Bolt is a formidable character. But as Ben Dyson fi nds, there’s no reason for the industry to fear him … too much

GR_20-22 Profile.indd 20 18/11/2011 15:44


Profi le

GR_20-22 Profile.indd 21 18/11/2011 15:44


Profi le

Perhaps Tom Bolt has better things to be doing. During his conversation with Global Reinsurance in the crowded lounge

area of the lavish Brenner’s Park Hotel in Baden-Baden, the Lloyd’s performance management director is constantly looking around and checking his Blackberry.

At one point he spies his lunch appointment out of the corner of his eye and breaks off the interview to wonder why he is wandering around. All this activity gives the initial impression of a lack of interest and a strong desire to be elsewhere. But it soon becomes apparent that he simply has a highly active, inquisitive mind, and is on a constant lookout for stimulus and input.

As if confi rming this, when we ask Bolt what he likes about his job as gatekeeper to the world’s most famous insurance market, he says: “Some people say I have the attention defi cit disorder answer to an insurance job. If you have that personality trait, this is God’s gift to you as a job.”

Just as his eye is constantly drawn by the bustle in Brenner’s, Bolt admits that the variety of business he gets to see in his current role remains fascinating. “There is hardly any seat you can sit in and get to see what you can see in this job. That is a key attraction. It wasn’t a life-long lust to be a referee.”

It would be easy to assume that someone with as powerful a job as Bolt’s could be rude and dismissive. On his word, a syndicate business plan can be torn up or entry into the market refused. He has also worked in the upper echelons of the reinsurance industry, having spent 25 years at the aloof and secretive Berkshire Hathaway Group. Most recently, he was managing director of Lloyd’s underwriter Marlborough Managing Agency, which Berkshire bought from what is now Aviva in 2000 and subsequently sold to Flagstone Re.

But nothing could be further from the truth. While never saying more than he has to, he is affable and jocular, occasionally spicing up chat about keeping syndicates in check with amusing off-record anecdotes.

He is also a straight talker, preferring plain, direct language to jargon and waffl e. His approach is as straightforward as his language. “If you show up at my doorstep and tell me you have a problem, we’ll bust a gut to try to help you with it,” he says. “If we show up on your doorstep to tell you that you have a problem, that’s a different discussion.”

Core communicationHe is also humble enough to listen to and accept others’ opinions. When asked what he has brought to the market, he immediately refers to his predecessor Rolf Tolle’s achievements. “Rolf was pretty good,” he says. “It’s hard to fi nd much that he wasn’t already doing.”

Bolt regularly seeks the counsel of the rest of the franchise board, on which he sits. “I don’t want to be doing this all on my own,” he says. “I want to be responsible for it but I don’t

expect to be making every decision all by myself. Over time we are going to have some tough issues and you would like to have as much thought as you can in coming up with the right answer to those.”

Nor does he revel in rubbishing others’ business plans or being a fi gure of fear in the market – which he claims he is not. Rather than fi ghting against syndicates, Bolt contends he is working with them.

“I work for the market. I am here trying to support the market in its endeavours,” he says. “We try to take the role of a critical friend, with equal emphasis on both words. We want to take a critical eye to business ideas and business plans, but the way that we approach that is that we are hoping and pushing for success for the people that we are working with.”

Bolt is going to need all his faculties and market support to cope with the challenges ahead. Unlike Tolle, who presided over syndicates’ business plans from 2003 until Bolt’s arrival in 2009, when market conditions were largely favourable, Bolt is in charge of market performance amid challenging times.

Catastrophe rates are hardening where large losses have occurred but rates elsewhere are stubbornly soft. This is when the Lloyd’s performance manager has to get tough, and therefore more unpopular, with market practitioners.

The market is awash with tales of the increasingly strict access policy at Lloyd’s as a result of the soft market. Several companies have tried to launch new Lloyd’s underwriting operations to no avail.

One such fi rm, Lloyd’s reinsurance broker BMS, set up a new MGA, Pioneer, after being snubbed by Lloyd’s. It was understood to be one of eight companies that were turned away at the time. One source described it as Lloyd’s bringing the shutters down.

Several other brokers have reportedly abandoned plans to set up Lloyd’s underwriting operations, including Aon.

In addition, run-off purchasing fi rm Randall & Quilter, which has recently made the move into acting as a turnkey syndicate manager for start-ups, said at its annual general meeting in June that its turnkey operations had grown more slowly than expected.

Then there is the persistent accusation that the increasingly intrusive performance management at Lloyd’s is stifl ing the market’s legendary creativity.

Bolt gives short shrift to the criticism. He denies that he and his department have become more stringent in today’s diffi cult climate. “We kept using the same standards, but the market got soft, so those same standards began to bite a little earlier,” he says. “I don’t think we changed our standards at all. It is just that in a soft market we will tend to discourage more activities.”

Methodical measuresTo those that feel Lloyd’s abruptly started turning away new syndicates, Bolt points out

Age: 55Hometown: Kansas City, Kansas. Currently lives in LondonFirst insurance employer: Berkshire HathawayInterests: Running marathons, Chelsea football teamIn his own words: ‘Some people say I have the attention defi cit disorder answer to an insurance job. If you have that personality trait, this is God’s gift to you as a job’

Gross written premium (H1 2011): £13.5bn ($21.3bn)Employees: 896 (Corporation of LLoyd’s)Market view: Since Reconstruction and Renewal closed in 1997, LLoyd’s has gone from strength to strength and taken the world’s biggest disasters, such as the September 11 terrorist attacks and Hurricane Katrina, in its stride.

THE MAN

THE COMPANY

GR_20-23 Profile.indd 22 18/11/2011 16:20

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Profi le

FIND OUTMORE ONLINE

goo.gl/GUv7q

BERKLEY RE UK ON TRACK TO START WRITING AT 1/1

that there have been a handful of new entrants over the past year, the most recent being Sirius’s Syndicate 1945, revealed in May.

“Sirius had a very attractive accident and health book, with a loss ratio better than the Lloyd’s average over the last seven years,” he says. “It’s hard to say no to somebody bringing in good business and doing good things.”

Those that were turned away may simply have not had the appropriate business plans. “In such a market, the only way you can typically build your business – unless you already have some business under your wing – is to be more aggressive on price, more generous on terms or more generous on brokerage – all of which would take you over the potential break-even mark,” Bolt says. “In which case, I’m not supposed to approve your business plan. It becomes an easy discussion for me: ‘I’d love to help you out but why don’t you come back when you have a business plan that I can say yes to.’”

Despite the number of brokers that have apparently been refused entry to Lloyd’s, Bolt insists there is no blanket ban on intermediary-run managing agents. “I don’t have a religious opposition to a broker setting something up as long as he has a business plan that is expected to make a profi t,” he says.

When asked if the brokers who tried to enter Lloyd’s had unprofi table business plans, Bolt simply smiles, and says nothing.

But he does indicate that having a single intermediary source, as a broker-controlled managing agency would be likely to have, is not the ideal model for a Lloyd’s syndicate. He points to the attempts to establish Lloyd’s as a captive domicile in the late 1990s. “It wasn’t disastrous but it doesn’t exactly set things up the way I think a robust business should be. If you are going to build a business that is going to last 25 years, you’re going to have a variety of sources of risk and a variety of providers of that risk.”

His rule of thumb is that no syndicate owner should be responsible for supplying more than 20% of its business. “That rule seems to be a sensible one to impose that shouldn’t stop good underwriting businesses from making something happen,” he says.

On the accusations about tight Lloyd’s controls stifl ing creativity, Bolt replies simply: “Telling us what you’re doing shouldn’t stifl e your creativity if you truly have some.”

Despite the robust set of guidelines, Lloyd’s faces performance-related challenges. One is UK motor business. For the past two years, the UK motor market as a whole has reported a combined ratio of 120%. In its 2010 results, Lloyd’s revealed that its UK motor combined ratio was 151.5%. “We have been working very closely with the folks who have trouble, as we do with anybody who has a particularly loss-making year,” Bolt says.

And while fi nancial institutions business is arguably lower risk following the lessons the market learned by the collapses of Enron and Worldcom in 2002, some still talk of a D&O disaster waiting to happen. “To the extent that we might have some exposures in Europe on a fi nancial institutions E&O or D&O basis, we have been checking the markets’ pulse to see how they are doing, which I think you would expect given the nature of it,” Bolt says.

The market may be fl at in rating terms, but there’s plenty to keep Bolt occupied. GR

GR_20-22 Profile.indd 23 18/11/2011 15:44


Special Report: Latin America

Despite being the most expensive insured event ever to hit Latin America (at around $8.5bn), last

year’s Chile earthquake only led to localised increases in reinsurance pricing. Elsewhere, rates continued on their downward trajectory.

But now there is a glimmer of hope. The spate of expensive catastrophes worldwide in 2011 – including the Japanese earthquake and tsunami, Christchurch earthquake and severe weather in Australia and the USA – have had a perceptible and widespread impact on rates at the mid-year renewals.

“We experienced increases of between 0% and 10% at 1 July,” says Guy Carpenter’s chief executive of Latin America and Caribbean operations, Aidan Pope. “The variation depended on exposure to wind, how buyers had behaved in previous renewals and their previous loss history.”

Estimated to have cost reinsurers $70bn in the fi rst half of the year, the nat cat losses have burnt off much of the excess capital in the market globally and some reinsurance carriers have felt the pain more than others.

“$70bn is the largest half-year cat loss fi gure on record,” says managing director and head of EMEA insurance at Fitch Ratings Chris Waterman. “It exposes the industry to further cat losses this year.

“The expectation is that if we had a material hurricane that resulted in large insurance losses, that probably would start to put upward pressure on premium rates,” Waterman continues.

“At the moment, the comment tends to be that fi rst-half losses are an earnings issue rather than a capital issue, because underlying profi tability

have already stopped this year,” he reveals. “Especially in the July renewals, which is when most of the Latin American treaties are renewed, we saw some increases in rates.”

With the exception of Argentina and Brazil, Latin America is highly exposed to natural catastrophes, and property catastrophe insurance is by far the biggest line of business, with high cession rates to global reinsurers. This means the market is highly infl uenced by trends in the wider property catastrophe business.

The potential for sizable losses in Chile – which has the highest insurance penetration of all countries in the region – was demonstrated by last year’s Maule earthquake. But there are growing exposures in other countries too, thanks to economic development and continuing insurance take-up.

Before the Maule quake, Hurricane Wilma was the region’s most expensive catastrophe after it caused severe damage to Mexico’s Cancun region, costing between $1.5bn and $2bn.

Even those regions typically not associated with catastrophe losses are being re-evaluated. In April 2010, heavy rains inundated northeast Peru and in Brazil the country’s heaviest rainfall in 48 years led to severe fl ooding, killing 256 people and causing an estimated economic loss of $207m, according to reinsurance broker Aon Benfi eld.

“Brazil is a unique market in the region because it doesn’t have exposure to earthquakes or hurricanes like Mexico,” Futterknecht says. “But fl ood risks are becoming an issue for the insurance industry.”

Touching groundSigns that reinsurance rates are fl attening in Latin America are welcomed by those who have seen the market get softer and softer. But are this year’s low interest rates enough to offset the market’s excess?

is quite strong despite the low interest rate environment.”

While the hurricane season is not yet over, it is drawing to a close. Hurricane Jova, which made landfall along a sparsely populated stretch of Mexico’s Pacifi c coast on 11 October as a weak category 2 storm, will cost insurers less than $52m, according to AIR Worldwide.

The event that could have defi nitively turned the market – Hurricane Irene

– which travelled up the Eastern Seaboard of the USA in late August, weakened as it made landfall in New Jersey and New York, with likely insured losses reaching no more than $4bn.

Hardening upBut it is the tough global economy and not just the catastrophe losses this year that are having an impact on rates across Central and South America, thinks Oliver Futterknecht, Swiss Re’s economist dedicated to Latin America.

He believes the low interest rates are eroding the investment result of the industry, increasing the pressure on technical results.

“We are seeing that softening rates

LATIN AMERICA SPECIAL REPORT

PRESENTED IN ASSOCIATION WITH:

‘Softening rates have already stopped this

year. Especially in the July renewals’

Oliver Futterknecht Swiss Re

GR_24-27 SpecialRep.indd 24 18/11/2011 11:40


Special Report: Latin AmericaYet, despite the increasingly heavy cat

burden in the region and elsewhere, rates continued to soften in recent years as reinsurance capacity went on fl ooding the market.

Nowhere is this more apparent than Brazil, where the reinsurance market was opened to competition in 2008. Global players fl ocked there, seeking licences to write business in the world’s fi fth-largest country with its impressive growth rates and BRIC economy status.

“What we’ve seen since liberalisation of the reinsurance market is a lot more capital and capacity, which has pushed rates down,” Futterknecht says. “Now, with a stricter regulatory environment, one can expect rates to start going up. Still, the situation is not that easy as competition remains very strong and [the international companies] are trying to exploit profi table growth.”

Competitive marketThis interest in Latin America is a factor that keeps depressing rates year after year. While Latin America only represents around 1.5% of global reinsurance premium, with ongoing regulatory and rating agency pressure to diversify their business platforms international reinsurers continue to see Latin America as a market of potential growth and one that may earn them some diversifi cation credit.

In May, Swiss Re announced it was opening an offi ce in Miami to service the Latin American and Caribbean market, joining Odyssey Re, Transatlantic Re and White Mountains – which have had Miami offi ces for some time – and other newcomers including Aspen, Catlin, Endurance and Validus.

Many of the larger brokers also have offi ces in Miami. The increasing involvement of brokers and risk managers in the market has also led to more vigorous price negotiation in recent years.

“We’ve been in this soft cycle for a long time and for the last three years, every year we say we’ve fi nally touched ground and prices will go up,” says director-general and chief executive of Mexico-based Patria Re Manuel Escobedo.

“And then more capital comes in and more reinsurers remember Latin America is the region of tomorrow. They forget that it has been the region of tomorrow for the last 50 years.

“There were some shortfalls at the last renewal, which is generally considered a good indication that the market is turning,” he adds. “But I’m

not seeing the facultative market going up in Mexico, for instance. There’s a glimmer at the end of the tunnel that gives us hope but it still seems to be quite far away.”

Escobedo blames new solvency regimes in part for fl ooding the market with capacity and in some cases leading to undisciplined underwriting. Under the internal models developed for Solvency II by many international reinsurers and insurers, there is a capital credit for geographical diversifi cation.

“There is a big suspicion that if you get a lot of credit on your capital for writing business in emerging markets

like Latin America then it all of a sudden becomes good business to lose money.”

“In some cases, they hire underwriters with previous experience in Latin America but in other cases you have new reinsurers with no experience,” he continues. “You fi nd underwriters from Asia writing business in Latin America from Paris or London, when they have never visited the place. They usually write very small shares but it’s a contribution to a generally messy market.”

Growing attractionWhile economic growth has slowed in Latin America since the fi nancial crisis, it is picking up again, aided by government stimulus programmes. The growing middle class in Brazil and other economies is expected to spark a steady rise in demand for insurance, particularly compulsory covers.

“Latin America may be relatively small, but the recent growth in catastrophe exposures and the potential of countries like Brazil and Colombia are attractive to reinsurers,” Guy Carpenter’s Pope says.

“Add to that economic and political stability – plus reinsurers’ interest in tapping into the opportunities that arise from

products associated with the burgeoning new middle class – and it becomes quite an interesting combination.”

He thinks prospects will come from the growth and increasing complexity of insurance products in all areas, particularly in personal lines business. Finding solutions for the large cat exposures that will arise from this is a key challenge. There will be a role for public-private partnerships to provide disaster risk fi nancing on both a macro and microinsurance basis.

While still only a small slice of the premium pie, casualty business is also set to grow across the region. Companies exporting goods to highly regulated markets such as the USA and Europe buy more product liability insurance as international corporations insure their Latin American operations.

Economic growth could provide new opportunities for reinsurers if they are able to branch out from the more traditional property cat placements. “The market has started to develop in other directions,” Swiss Re’s Futterknecht says.

“Specialty lines like engineering and surety are benefi ting from investment in infrastructure across the region, but you also see solutions for governments or development banks. The reinsurers that are more able to tap these non-commoditised markets will benefi t the most.”

As this year’s cat losses have shown, Latin America is not isolated from global events. Many economic experts predict a shift in the global economy from the West to the East, as developed economies stagnate. While such a change would ultimately benefi t a developing region like Latin America, it also exposes it to further economic slowdowns.

“Will the USA and Europe go broke and therefore become smaller while emerging markets become more important?” Escobedo asks. “That’s not impossible to imagine. But the size of that crisis would imply that the whole world would come to a standstill for a while, or that we should really be thinking about a new world, since this one would have come to an end.” GR



‘Reinsurers then remember Latin America is the region

of tomorrow. They forget that it has been the region

of tomorrow for the last 50 years’ Manuel Escobedo Patria Re




Sitting along the Pacifi c Rim’s ‘ring of fi re’, where multiple tectonic plates converge, Chile is one of the

most exposed countries in the world to seismic activity. Last year’s Maule earthquake occurred at the boundary between the Nazca and South American plates at a depth of 35km, triggering a series of aftershocks and a tsunami that caused signifi cant damage.

There was previously a magnitude 8.0 event in 1985 off the coast of Valparaiso and the 1960 Valdivia earthquake, which is still the most powerful recorded at magnitude 9.5. But due to its history of large earthquakes and volcanic eruptions, Chile has the highest insurance penetration in Latin America (at 6%), with a large proportion of property cat treaties ceded to international reinsurers.

More than 75% of larger industrial and commercial operations buy fi re and earthquake cover, although only 24% of the country’s homes have earthquake cover. “It’s very well known that Chile is an earthquake-exposed market and as such reinsurance rates refl ect the exposure to earthquakes – it is part of the business – you have earthquakes some years and then you have loss-free years,” says Oliver Futterknecht, Swiss Re economist dedicated to Latin America.

It is due to the high penetration that last year’s earthquake became the region’s biggest-ever insurance loss at $8.5bn, according to Aon Benfi eld, with an economic loss of $30bn. Up to 95% of the loss fell to reinsurers – the average is 50% for US events – and there was a 60:40 split between facultative and treaty losses. This is a result of limited appetite among domestic carriers to retain earthquake risk, coupled with strict regulatory requirements.

“The legacy of the Chile earthquake was to remind the international

last 10 years is probably Chile,” says Patria Re’s director-general and chief executive Manuel Escobedo. “What happened because of Chile in the reinsurance rating market? Nothing. Why? Because Latin American represents about 1.5% of the premium.”

Lessons from ChileWhile the country was well-prepared for a major earthquake, there are a number of lessons insurers and reinsurers have taken from the event. The complexity of claims and diffi culty in getting loss adjusters to damaged sites across a wide area was one element of diffi culty. The preference for local claims adjusters added to the bottleneck.

The number of claims after the earthquake corresponded to the fi gure of nine regular years, says Futterknecht. “Reinsurers supported insurers in handling these claims and they have introduced some changes in underwriting and claims handling so they are more prepared for future events.”

Another lesson was the level of damage from the tsunami and the very large losses that arose from business interruption and commercial claims.

The industry’s catastrophe models must take into account non-modelled perils like tsunami and the impact of business interruption on overall losses in future in order to better refl ect the likely damage following a massive earthquake. As Aon Benfi eld states: “Improving tools to reduce the gap between estimated and actual losses will build insurers’ confi dence in using models as a risk assessment tool.”

The ring of fi reThe magnitude 8.8 earthquake that struck the Maule region of Chile on 27 February 2010 was a test of the country’s resilience, its strong adherence to building codes and its high take-up of insurance and reinsurance

reinsurance community that Latin America has come of age,” says Guy Carpenter chief executive of Latin America and Caribbean operations Aidan Pope. “It is also interesting to note that the insured loss was around a quarter of the economic loss, which is a high fraction even by developing country standards. GDP growth is now higher than it was before the earthquake.”

While reinsurance rates rose by an average of 40%-60% in the aftermath of the event, in the rest of the region and in other property catastrophe markets there was little reaction to this major event, even though at the time it was the costliest earthquake since Northridge in 1994. The earthquake only provided “a respite in sliding rates” for earthquake cover across Latin America, and did not impact rates globally, said Aon Benfi eld.

Excess capacity in the market offset any upward pressure on rates elsewhere and the fact the loss did not come out of one of the more developed reinsurance markets also played a part. “The largest loss coming out of Latin America in the



Many comparisons have been drawn between the

Maule earthquake, which caused over 500 deaths,

and the Haiti disaster. In Haiti, a country where there

was no earthquake preparedness and lax building

codes, the weaker 7.0 temblor became

a humanitarian disaster, killing over 200,000

people. By contrast, few of the buildings in Chilean

cities such as Santiago and Concepción fully

collapsed and so many lives were saved. This

pointed to a strong adherence to building codes.

“Overall, Chile’s building stock performed well,”

says AIR principal engineers Dr Guillermo Franco

and Dr Tao Lai, and AIR senior research engineer

Guillermo Leiva in a post-disaster briefi ng. “Only

one modern reinforced concrete building in Chile

suffered a complete collapse, and perhaps 100

other modern engineered buildings will have to be

demolished due to severe damage.”

Earthquakes don’t kill people, buildings do

‘The Chile earthquake reminded the international

reinsurance community that Latin America has

come of age’ Aidan Pope Guy Carpenter




In the fi rst quarter of the year, the industry was hit by signifi cant catastrophic losses. Q1 losses

including the Japanese earthquake add up to almost $55bn, compared to total 2010 cat event losses of $36bn. Weather-related losses during Q2 represent an additional $15.3bn bringing the total catastrophe claims to $70bn for the fi rst half of the year. Given that earthquake losses take time to develop, the current estimation of the Japanese loss will probably increase further.

As a consequence of these losses, the industry as at June 2011 is suffering a negative net result and a reduction in equity compared to year-end 2010. In the worst cases, this represents a variation of up to 20%, though most companies saw changes of between 0% and -10%.

In spite of this, industry shareholder funds have only dropped by about $3bn compared to year-end 2010. Though they are expected to keep falling, dedicated reinsurance capital remains very strong even if the sector’s excess capital position has been signifi cantly diminished.

Interest rates, changes in reserves, infl ation, cashfl ows and Solvency II – among other factors – could bring about an important change in the current situation. But for the time being these factors are actually softening the emerging markets even more. Emerging markets are relatively small compared to developed markets and in the current environment it would seem some players have come to the conclusion that it is good business to lose money.

Global economic shake-upCredit markets and institutions around the world have been seriously affected by the enormous losses provoked by the collapse of the American real estate credit markets, requiring substantial support from their governments to prevent the disruption of the credit system.

This in turn has caused a reaction from governments to take steps to ensure that they will not be required in

capital relief and therefore an additional incentive to write business in developing markets.

Solvency II represents a new and more comprehensive view of risk, where decisions are preferably based on quantitative information and a transparent policy. Responsibility of risk measurement can no longer rest on a third party, as the 2008 confi dence crisis in rating agencies demonstrated.

That is why Solvency II starts by involving the highest authority within the companies – the board of directors – in an active monitoring of risk management and using the independent opinion of actuaries and other experts in making informed business decisions.

In relation to Solvency II regulation, there is a lot of work to do in order to reach agreements between the various stakeholders. Whereas supervisors are seeking to hold the executive board responsible, seek greater solvency and question the validity of risk management, the board is looking for a limitation of their responsibilities, greater capital effi ciency and seeking to show off their company’s ability to manage exposures.

Due to the role of insurers and reinsurers in stabilising economies and fostering a culture of prevention, coupled with the fact that the industry is less susceptible to systemic crises, we are confi dent that this new rational management will be to the overall benefi t of the sector.

Miguel Escobedo is chairman, Masashi Kikuchi is chief control offi cer, Ingrid Carlou is joint managing director and chief operating offi cer and Manuel Escobedo is managing director and chief executive at Patria Re.

The new worldA year of major catastrophes, a continuing global economic crisis and new solvency regulation are just some of the dynamics shaping the future of the Latin American reinsurance market. Patria Re looks at the big picture

the future to use taxpayers’ money to save credit institutions from insolvency. Although a relatively small amount of insurance institutions had to be bailed out by their governments, the fact they are a part of the credit market means they too will be affected by this change.

Many insurers have lost substantial amounts due to investments in subprime debt and the markets in general, which will affect underwriting capacities in years to come. This will make the markets less soft and more profi table.

Overall, the developing world has coped far better than the fi rst world countries with the after-effects of the fi nancial crisis. Today, developing countries that are not experiencing banking crises, that are benefi ting from the export of cheap labour and are attracting direct foreign investment,

have very strong growth potential. The participation of the local insurance sector in the national economies is still very weak in these countries and therefore also has strong growth potential.

In view of the situation of global fi nancial markets, Latin American insurance markets could become more attractive. But our feeling is that the main reinsurance groups are regarding this market as only a service line to diversify their core operations.

Regulation as an after-crisis reaction: Solvency IIIn the context of the internal models developed for Solvency II, the effect of diversifi cation generates an important

Developing countries that are not experiencing banking crises have very

strong growth potential





Cedants

PHOTO: WILLIAM LEACH

As both a writer of inwards reinsurance and a buyer, Swedish mutual insurer

Länsförsäkringar’s Tor Mellbye can appreciate the buying process from both sides of the fence. “I have always had two hats,” he says.

The Norwegian-born executive started his career in Oslo but has lived in Stockholm for almost 25 years. As with many of his peers, he fell into reinsurance buying. “It was coincidence really,” he admits.

With his dual role, Mellbye doesn’t have much time to relax – though he does enjoy running in his spare time. Nevertheless he says he is very happy with his lot. “I enjoy life, my work and my sports. I have many friends inside and outside the business, and I have a nice social life as well.”

Q. How would you evaluate the state of the market?

A. The reinsurers have had a lot of losses, so the results this year are not

‘The reinsurers are trying

to talk up the prices,

especially for the larger risks and catastrophe-type business’

Tor Mellbye

WITHQ A&Swedish mutual insurer Länsförsäkringar’s reinsurance general manager explains why ‘slow and steady’ will win the race in the current market

GR_28-29 Cedants QA.indd 28 17/11/2011 15:12


Cedantsproject. But I don’t think it will be that important for our reinsurance buying.

Q. How much business do you cede to reinsurers?

A. We cede in excess of Skr400m ($60.8m), so it’s not huge amount. We only buy excess-of-loss. The retentions have been pretty stable over the last 10 years. There have been some increases but they are still rather low.

We are slightly different from the stock [non-mutual] companies and so we should buy a bit more reinsurance than they do. So we are buying lower down, and the limits have increased over time, especially for catastrophe. The retentions have also increased a little bit, but nothing dramatic.

Q. What qualities are most important in reinsurers and brokers?

A. For brokers the servicing of the account is very important: the claims service and their negotiating power. That today also includes having the modelling capability and knowledge of the modern tools. It is about being able to handle the business in a good way, place it, and be technically professional. On the cat side, there is a very limited number of brokers you can choose.

For reinsurers it is willingness and ability to pay claims. We determine this not only by the rating but also knowledge we have about whether they are good or bad payers. We are not really that interested in the servicing from companies when it comes to Solvency II. We do that ourselves.

Q. How did you get involved in buying reinsurance?

A. Coincidence really. I started working for a company named Polaris in 1981 and I was both an underwriter and I placed their excess-of-loss programme, so I have always had two hats.

Q. How do you relax?

A. I never relax! I like running, I do a lot of sports. But I don’t have much time to relax. It is a lot of work, a lot of sport and a lot of fun. I enjoy life, my work and my sports. I have many friends inside and outside the business and I have a nice social life as well. I am a very happy man.

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BECAUSE BAD COVER IS WORSE THAN NO COVER

very good. They are trying to talk up the prices, especially for the larger risks and catastrophe-type business. I think prices will go up on the larger programmes, especially where you have had losses, but not everywhere.

On the other hand, as I see it, the amount of capacity is still the same, the players are the same and the market hasn’t changed very much. For some business the price should really go down, because there is plenty of capacity.

It is a mixed picture: some programmes will have increases. A lot of business will be under pressure and might even have some small reductions. We are not talking big changes. I will keep this opinion until I see some changes in market capacity, and I haven’t seen that yet.

It is a fairly disciplined market – there is not silly competition like we had in the past. But as long as the capacity is there, not too much can happen.

Q. How are market conditions affecting your buying strategy?

A. We buy a big pillar of catastrophe protection and the rest of the programme is relatively small limits. I think the catastrophe portion will remain rather stable. There are opportunities to have reductions on the rest of the programme, because there are smaller limits and we have a clean loss record.

With losses, the situation would be slightly different. It really depends on whether you are prepared to keep your existing panel or if you want to make some changes and get in some newcomers. Then it might be possible to achieve some small reductions.

However, we are conservative and not changing that much. There is no need to because we have done that quite a lot in the past to achieve changes in the price, structure and terms and conditions of contracts.

We are careful – we don’t utilise this to the maximum that we could, because we want to be a company that shows continuity. If you use this technique to the extreme you get a bad reputation and, in the long run, you don’t benefi t much from it. You have to fi nd a balance.

The introduction of RMS version 11 could have an impact in some countries, but I don’t think companies really want to use it yet. They want to understand a bit more how it works fi rst. It will have some impact on pricing, but I think a lot of companies will leave it until next year.

‘It is a fairly disciplined

market, there is not silly competition like

we had in the past. But as long as the capacity is there, not too much

can happen’

Q. How do you approach the buying process?

A. Today it is really important to utilise the cat models. We subscribe to RMS and we also get help from our brokers. The fi rst step is to analyse the book to know what you should buy. This involves a lot of data collection. We start the process in May and the data collection takes place during the summer.

The data is compiled in September and October in close co-operation with our brokers – Guy Carpenter and Aon Benfi eld – resulting in a renewal information package. In the meantime, we also have board meetings because limits and retentions are decided by our board. That usually happens in October.

We then approach the market. We get some broad ideas of what we want to do, normally in Monte Carlo and even more in Baden-Baden. The renewal information package is fi nished just after Baden-Baden. We send it out to brokers and then we start discussing pricing and structures with our leading reinsurers.

We normally agree on terms and conditions in early December and then we go out and place it. We use brokers on most of the programme. We deal a little bit direct as well.

Q. How will Solvency II affect the buying process?

A. It doesn’t look like we need to make any changes. For catastrophe we buy up to a one-in-200-year event and as a group we are quite well off capital wise, so I don’t think Solvency II will impact our buying behaviour that much. We are of course preparing ourselves for Solvency II. It is a big

GR_28-29 Cedants QA.indd 29 17/11/2011 15:12


Claims

Space travel is becoming big business. Already, more than 450 people have paid their $20,000

deposits to secure $200,000-a-pop seats on Virgin Galactic, Richard Branson’s commercial spaceship, which is set to start transporting tourists by 2013.

The White Knight Two aircraft will launch from a $209m port in New Mexico and at 45,000ft will release the VVS Enterprise spacecraft into the upper reaches of the Earth’s atmosphere, allowing passengers to experience a few minutes of weightlessness.

The venture has captured the imagination of the public and is likely to prove yet another success for the Virgin empire. It has also fascinated the insurance and reinsurance industries, which see a range of opportunities from passenger to hull cover.

Initial insurance cover “wasn’t particularly diffi cult” to secure, says Will Whitehorn, who was president of Virgin Galactic until the start of the year and is still an adviser. This was despite concerns over the frequency of catastrophes in space travel – estimated at about one in every 64 take-offs when Virgin Galactic started looking for cover in 2006.

A buyer’s marketThis illustrates the extent to which space insurance and reinsurance – though there is an argument that Virgin Galactic technically falls under aviation cover – has an excess of capacity. As a result, prices are tumbling and just a handful of serious incidents can result in a loss-making year for the market.

Munich Re head of space underwriting Ernst Steilen says

that there has been “huge overcapacity” for at least three years. There is $600m of cover available for every risk, but only demand for between $200m and $300m. Only when an Ariane rocket – which might have two spacecraft with a cumulative risk of $700m – launches is the market stretched.

“This is defi nitely a buyer’s market,” Steilen says. “Prices are now less than 50% what they were in 2001. The rates decrease was deserved because of the improved technical performances of vehicles and satellites, but the extent [of the softening] is because of overcapacity.”

One consequence of this is that insurers and reinsurers are often chasing the same work. As a result, reinsurers write primary business and insurers are covering their rivals’ risks.

The prospect of space travel has insurers tingling with excitement – now they just need to get past the problem of overcapacity. Mark Leftly reports

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WATCH THIS SPACE

Final“Space doesn’t have a distinction

between primary insurers and reinsurers as it is such a small market,” Steilen explains. “For example, a launch in Japan would be covered by a local fronter and it would come to the European market as reinsurance [which a primary fi rm might cover], as otherwise they will not be able to write it. Risk is usually written on a syndication or a co-insurance basis.”

With only about 30 carriers regularly teaming up, the bulk of the players in this sector can be hit by any one incident. In 2011, there have been three: in May, one of the two main refl ector antennas of Intelsat’s New Dawn telecommunications satellite failed to deploy; later that month, one of the solar panels of the Telstar 14R satellite did not work; and, in August, Russia’s $265m Express AM4 satellite

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GR_30-31 Claims.indd 30 18/11/2011 15:47


Claimsbriefl y went missing because of problems with the proton rocket that launched it.

The total impact of these losses is $550m. Steilen argues that one more major catastrophe, from the four or fi ve launches that remain in 2011, could make this “a bad year” – read loss-making – for the market. He expects rates to improve slightly next year, but not everyone agrees.

Aon’s International Space Brokers subsidiary space business unit leader Clive Smith argues that compared with other sectors three to four incidents is a small number. This is why demand does not tally with supply of cover, and prices will remain depressed.

“If there are no further incidents, the market will continue to soften,” Smith says. “At the moment, the market is breaking even – no more than that.”

A source in the space division at one of the world’s biggest reinsurers also points out that there is “plenty more capacity coming into the market”, so competition to provide cover will grow even fi ercer and force down prices even further. Although space might not be the most profi table line, it is a global business and can help insurers and reinsurers drive their international growth ambitions.

Bermuda-based underwriter of specialty insurance and reinsurance products Argo Group, for example, added aviation to its international portfolio in October last year. Four months later, the group expanded that burgeoning operation with the hire of Hiscox global risks underwriting director Bruno Ritchie, who was tasked with developing products for space and aviation clients.

Meanwhile, Swiss Re, which insures more than 110 commercial satellites, believes that it has identifi ed one growing risk that could grow the

space insurance market, which is currently worth

$20bn. In a recent study, Space

debris: On collision

course for

insurers?, it said that the amount of orbital debris is double that of the early 1990s and 30% more than just fi ve years ago.

One area, the geostationary orbit that lies directly above the equator, has more than 500 defunct satellites, 200 spent rocket bodies and thousands of smaller pieces of debris.

The result is an increased risk of collision. Should active satellites run into one of them, explosion is all but guaranteed.

The report states: “Space debris is no longer an academic issue. Nor is it merely an ‘environmental’ problem; rather, debris has the potential to damage or destroy high-value, operational satellites with resulting revenue losses in the billions of dollars.”

There are few precedents in national or international law on space debris losses, so it is an area in which liability will be diffi cult to identify. Also, insurers will have to work with those they cover to fi nd ways of encouraging debris mitigation, so that losses do not reach unacceptable levels. Either way, Swiss Re has identifi ed something that could help to harden rates for at least some cover in the space sector.

Rising demandJohn Gurtenne, senior executive for underwriting at the Lloyd’s Market Association (LMA) and secretary to the organisation’s aviation committee, points out that the sector’s customer base is also on the increase, which could eventually raise demand for cover.

“The trend of recent years is that space activities are increasingly moving out of the governmental arena into the commercial arena,” Gurtenne says. “There are now television satellites and weather forecasting satellites that are commercial.”

Then there is Virgin Galactic’s whole new proposition of turning space travel into tourism. With the fi rst fl ight perhaps little more than a year away – though this cannot be taken for granted, as the project has been fraught with delays and 2007-08 was the initial launch target – space insurers and reinsurers are hopeful that a major new client will be up for grabs next year.

But they will face a fi ght for the business from more traditional aviation suppliers. Aon’s Smith says that the fl ight is “not orbital”, so will not end up on his books, while the source at a major reinsurer argues that, by defi nition, Virgin Galactic is “defi nitely” space.

Munich Re’s Steilen puts it best when he chuckles: “Virgin Galactic: it’s not clear where risks will be insured – with space or aviation. The space guys will say it is space, the aviation teams will say it is aviation.”

It seems certain that the “space guys” will fi ght hard for that work. With so much spare capacity, they need all the clients they can get to bring rates up to a decent level. GR

The space insurance market’s

current worth

According to a report by Swiss Re, space

debris has the potential to

destroy high-value satellites with revenue losses in the

billions.

Below, a computer generated

image, supplied by

NASA, shows objects that are currently being tracked in the Earth’s orbit. Around 95% of the

objects in this illustration are orbital debris, in

other words, not functional

satellites

0bn The LMA’s Gurtenne says that the

broader aviation market is seeing

neither major losses nor signifi cant

price increases. “The market does not

command the kind of prices that it would

like to,” he says. “There have been no

major losses [this year] and if there are

no losses customers wonder why they

should pay that much premium. There

are quite a few players in the market and

people can shop around.”

In February, reinsurance intermediary

Guy Carpenter estimated capacity to be

in excess of 200%, which meant that

primary insurance rates were almost

certain to drop in 2011.

As a result, insurers will not pay

big money for reinsurance, dragging

down the secondary market’s prices.

At the Monte Carlo Rendez-Vous in

September, Hannover Re said that the

aviation rate level should remain stable

or decline slightly.

But it did point out that the emerging

BRIC (Brazil, Russia, India, China)

economies could present “attractive

business opportunities” in 2012. As

these countries grow, compensation

for insurance policies such as aviation

increases, resulting in greater demand

for reinsurance to offset the risk.

The recent fall in losses goes against

the broader trend since the onset of

the fi nancial crisis, accentuating the

overcapacity.

Swiss Re head of aviation reinsurance

Alan Beacock has previously pointed out

that, for primary insurers, the sector is “one

of the most volatile classes of business”

and that there have been an increased

number of large claims since 2007.

This is because many claims have

ended up in the US legal system, where

generous compensation claims are

commonplace.

As a result, reinsurance supply has

greatly increased over the past few

years. Beacock said: “The existence of

ample capacity to meet the insurance

requirements for all aviation risks

has resulted in a very competitive

environment.”

Aviation reinsurance

GR_30-31 Claims.indd 31 17/11/2011 17:19

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GR_Ad_Page.indd 1 21/11/2011 09:30


Country Focus

Out of the shadowsLong esteemed for its speedy approval of new companies and low taxes, Bermuda has lately lost some of its gloss. Lauren Gow examines the impact of market instability and asks if it can once again be a (re)insurance shining light

BERMUDACOUNTRY FOCUS

GR_33-35 Country.indd 33 18/11/2011 17:20

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S: G

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Country Focusmoney on the business they have.

Dupplin says: “There is a movement away from fully fl edged class fours and towards more temporary forms of capacity. This is good for the Bermuda market, as the local regulatory and tax environment is structured well for this, and already experienced at it.”

Kading believes the global attention natural catastrophe events in 2011 attracted has piqued investor’s interest in the market and led them to conclude that more capital needs to be put in play.

“I don’t necessarily agree but that is what investors seem to be thinking. My view is the industry still has abundant excess capacity and it is not clear that is there is a need for extra capital coming in.”

Modelling uncertainly remains a major risk for the market. Reinsurers need the ability to add a pricing buffer to allow for any errors or revisions; a particularly important factor if modelled risks severely under-estimate actual damage.

Following the release in February of the controversial new US hurricane model from Risk Management Services (RMS), otherwise known as RMS v11, Bermudian insurers fi red up. Deutsche Bank analyst Joshua Shanker visited the island soon after the RMS release, writing in a research note that said seven out of eight insurers he spoke to have a “visceral contempt” for RMS v11.

Shanker noted Bermudian reinsurers’ backlash against the new RMS model was due to increased capital costs, as well as rejecting “one or multiple conclusions that the model makes”.

The main concern for Bermudian (re)insurers is their exposure to probable maximum loss (PML) estimates in areas of heavy coverage, including the US East Coast and Gulf of Mexico region.

A June report by global broking fi rm Guy Carpenter noted that due to severe catastrophe activity in the fi rst half of 2011, as well as the release of RMS v11, the reinsurance market has been particularly volatile.

But RMS v11 has another positive infl uence, according to Kading. “What I hear people saying is that the RMS model changes have increased PMLs, which is going to drive insurers to buy more cat protection against those higher PMLs. That might be something that is attracting outside attention.”

Into the unknownGiven their typically heavy property-catastrophe focus, coping with the uncertainty of model revisions is a fact of life for Bermudan reinsurers. They have to balance this with charging the correct price for their exposures and

The light shining on the Bermudian reinsurance market has dimmed a little in

recent years. What was once a beacon for new market entrants is now a market with a future that is far from certain.

The burden of unfavourable pricing conditions, new tax regulations, the fi ght to gain Solvency II equivalency, competition from more attractive jurisdictions and the uncertainty of a fragile global economy means Bermudian reinsurers are not sure what to focus on fi rst. But after three years of unpredictability, the market is preparing for a fi ght.

The International Global (Re)insurer’s Underwriting report, conducted by the Association of Bermuda Insurers and Reinsurers (ABIR), shows some positive growth in the market. Gross written premium in the fi rst half of 2011 were $37.1bn, up 3% on the $36.1bn for the same period in 2010.

Full-year 2010 gross written premium also rose 2% to $61.9bn, up from $60.8bn in 2009. While the growth may be marginal, it does show some encouraging signs for Bermudian (re)insurers.

But underwriting results paint a less rosy picture. In the six months to 30 June 2011, reinsurers as a whole made an underwriting loss of $3.24bn, compared with the underwriting profi t of $1.7bn for the same period in 2010. Full-year 2010 fi gures also show an underwriting profi t of $5.2bn, which was down 28% from $7.2bn in 2009.

The market’s 2010 fi gures were undoubtedly better than expected. Despite declining rates in most lines of business and higher-than-normal catastrophe activity in the fi rst half of 2010, the market was gifted a relatively quiet North Atlantic hurricane season, contributing to a strong overall performance for the year.

By comparison, 2011 catastrophes have lost the industry more than $70bn in losses so far. The fi rst half of 2011 gained the salubrious title of the ‘costliest half on record’ according to Swiss Re, following a spate of losses in Australia, New Zealand, Asia and the USA.

According to ABIR fi gures, the losses and loss-adjusted expenses for Bermudian (re)insurers in the fi rst half of 2011 totalled $20.9bn, equalling an unprofi table combined operating ratio of 114.7%. Compared with full-year 2010 losses of $29.4bn and a profi table COR of 93.2%, it is

clear Bermuda has been hit hard by catastrophes.

Global reachBut Bermuda does not orbit in isolation. Macro-economic factors are also heavily infl uencing the Bermudian market. Hiscox Bermuda chief executive Charles Dupplin says: “There is pressure everywhere on the public purse. This is likely to be an increasing issue and potential differentiator between jurisdictions.” To make matters worse, policies from the EU and USA are keeping interest rates low.

ABIR president Brad Kading says infl ation is putting considerable strain on the market. “Companies are looking at an interest rate of maybe 2%-3% that they could earn on conservative investments. There is speculation that

infl ation rates are already at 3%-4% so how do you make any money when your low investment returns are being eroded by infl ation?”

Kading says the grim forecast on the asset side is prompting underwriters to try to claw back an underwriting profi t. “(Re)insurers are looking at a market where investment income would be expected to be less than forecast and so that investment income would be expected to be low for at least the mid-term,” he says. “Due to this, underwriters are trying to focus on getting an underwriting profi t without consideration of an investment income.”

One issue that has haunted the market for several years is excess capital in primary insurance and global reinsurance companies, meaning increased pricing pressure on commercial insurance and global reinsurance premium rates.

Positively, for the market as a whole, there is new capital entering the market meaning continued investor interest in catastrophe reinsurance. But new capital depressed rates, making it more diffi cult for underwriters to make

‘The industry still has abundant excess

capacity not being used and it is not clear that is there is a need for extra

capital coming in’Brad Kading ABIR

FIND OUTMORE ONLINE

goo.gl/UrBkB

NAT CATS DRIVE FUNDING PUSH

GR_33-35 Country.indd 34 18/11/2011 17:20


Country Focusensuring that they generate an appropriate shareholder return from their volatile books of business.

Bermuda is fi ghting fi res on every front. The battle to gain Solvency II equivalence before 2012 is not just a compliancy issue, it is a fi ght to remain competitive in the global marketplace.

“People are very focused on Solvency II compliance in Bermuda. We had 17 consultation papers with the BMA [Bermuda Monetary Authority] last year and we have a lot more this year,” Kading says.

Bermuda’s failure to attain Solvency II equivalency could present a number of challenges for reinsurers with operations both on the island and in Europe. Bermudan groups’ European entities would have to be overseen by a European regulator rather than the BMA because of the Bermudian regulator’s lack of equivalent status.

Furthermore, the Bermudian subsidiaries of European groups would have to abide by Europe’s rather than Bermuda’s capital requirements. And thirdly, there is the imposition of collateral requirements on a cross-border basis.

Bermuda has received a draft European Insurance and Occupational Pensions Authority report, which identifi ed 13 areas of concern. All will need to be reconciled by summer 2011 when a fi nal Eiopa assessment will take place. A fi nal report to the European Commission before 2012 is needed to make equivalence a possibility.

“Solvency II is a big concern for the Bermudian market. It is really about getting equivalency. Some of the ABIR memberships have two-thirds of the business written in Europe so we really need to make sure that Bermuda is in a position to gain equivalence so there aren’t capital penalties,” Kading says.

What historically attracted companies to Bermuda was the speed to market, meaning companies were able to launch new operations in the market quickly to take advantage of business opportunities, as well as the low tax environment.

Validus Re chief underwriting offi cer and executive vice-president Kean Driscoll says: “Bermuda will need to compete with other jurisdictions that will continue to offer attractive alternatives. To only just stay relevant but to be a leader, Bermuda will need to be more nimble than its competitors.”

After all, there are other attractive low tax environments in the world – perhaps it is time for the old dog to learn some new tricks. GR

BermudaCOUNTRY FOCUS

Bermuda’s gross written premiums are up 3% on the same period last year, but underwriting losses of $3.24m

– compared to the previous year’s same period profi t of $1.7m – indicate that the country has some way to go

before it fi nds the market appreciation it once enjoyed. Solvency II and RMS v11 will add to the challenge

Population: 64,268

GDP: $5.715bn

GWP: $61.94bn

Major exports: pharmaceuticals

By total assets1 ACE Ltd $83.35bn2 XL Group plc $45.02bn3 PartnerRe Ltd $23.36bn4 AXIS Capital Holdings Ltd $16.44bn5 Arch Capital Group Ltd $15.77bn6 Catlin Group Ltd $12.08bn7 Allied World Assurance Company Holdings, AG $10.42bn8 Alterra Capital Holdings Ltd $9.91bn 9 Aspen Insurance Holdings Ltd $8.83bn10 RenaissanceRe Holdings Ltd $8.13bn

By premiums earned1 ACE Ltd $13.50bn2 XL Group plc $5.03bn3 PartnerRe Ltd $4.77bn4 Catlin Group Ltd $3.21bn5 AXIS Capital Holdings Ltd $2.94bn6 Arch Capital Group Ltd $2.55bn7 Aspen Insurance Holdings Ltd $1.89bn8 Everest Reinsurance (Bermuda) Ltd $1.78bn9 Validus Holdings Ltd $1.76bn10 Hiscox Ltd $1.74bn

By net income1 ACE Ltd $3.1bn2 AXIS Capital Holdings Ltd $8.56m3 PartnerRe Ltd $8.52m4 Arch Capital Group Ltd $8.42m5 Oil Insurance Ltd $7.81m6 RenaissanceRe Holdings Ltd $7.02m7 Allied World Assurance Company Holdings, AG $6.65m8 XL Group plc $6.43m9 Validus Holdings Ltd $4.02m10 Everest Reinsurance (Bermuda) Ltd $3.91m

Bermuda’s top 10 (re)insurers by assets, premiums and net income

GR_33-35 Country.indd 35 18/11/2011 17:20


Rewind

Our man keeps his cool in the face of industry cheek and, gasp, beer rationing

A sure thingFor those of you who are convinced that insurance underwriting and dabbling in the bond market are akin to gambling, I have just stumbled across a product that combines all three. Online lottery giant MyLotto24 has bought a three-year insurance-linked security that protects it against paying out more than it would like to

in jackpots. Surely this could be classed as a punt wrapped in a wager tied up in a fl utter.

Mouthing offOne of my favourite things about

this industry is the ability of the big cheeses to hit the nail on the head with a well-crafted one-liner. Take Allianz board member Clem Booth, for example. Many of you will no doubt remember him from his days at Munich Re and Aon Re. He announced during a presentation at Baden-Baden that his shift to insurance from reinsurance in 2006 had simultaneously increased the IQ of both industries. Nice one, Clem, and thank you for doing everyone such a big favour with that selfl ess move.

One for the teamAnother man to get a big laugh at Baden-Baden was KBW analyst Chris Hitchings. He’s usually found giving hell to insurance executives who don’t give him enough numbers, but in his presentation he turned his fi re on a group of people who arguably pump out too many numbers – actuaries. On putting up a particular slide on the state of pricing, he added “apologies to any actuaries – or perhaps not”, raising a hearty chuckle from the great and the good. Thank goodness for actuaries. Saves brokers taking all the fl ak. GR

MontyTime gentlemen (to go elsewhere …)When I joined my old risk management chums in Stockholm at Ferma this year, we all expected a big bash but boy, were we left high and dry. Ferma’s welcoming party was missing one key element: celebratory drinks. The event, held at the Radisson, ran out of booze and glassware in 45 minutes. And, to add insult to injury, any of us who were desperate for a drop were forced to wait in line outside the hotel in the rain, only to be told upon arrival at the refreshment table that we were limited to half a bottle of beer each. Next year, I’ll be sure to bring my hipfl ask.

Plane sailingStill on Ferma and the good folks at ACE Insurance sure know what makes the industry tick. While most of the exhibits I strolled through were the usual bore of tinned mints and corporate pens, ACE kitted theirs out as a replica airline lounge. The experience came complete with Swedish air hostesses to tend to my every whim and need. One cheeky ACE gent told me: “It wasn’t our idea. We are just here ‘facilitating’”. Now that’s what I call servicing your customers.

To sunnier climesThis month, I am tipping my hat to Damien Smith, Hiscox’s new underwriting director in Bermuda. While many of us dream of giving up the metropolitan drudgery of big city living, few of us ever have the opportunity to head for sunny skies and sand. But I hear Damien gleefully threw in his towel after 17 years in London, saying he is looking forward to “the short commute and wonderful weather”. He forgot to add the threat of hurricanes for six months of the year, but I’m sure he’ll soon learn.

Thank goodness

for actuaries. Saves brokers

taking all the fl ak

GR_36 Monty.indd 36 17/11/2011 17:19

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Untitled-2 1 16/11/2011 16:35

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