global reinsurance - february 2012

Why the Omega setback won’t stop Mark Byrne building a (re)insurance empire p18

• Global Market Report: Bermuda laid bare p25

• Global Insurance Index: a unique measure of boardroom sentiment p10

NEW THIS ISSUE:• Financial Briefi ng: an in-depth look at the industry’s balance sheet p6

Like father, like son

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

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The future is like an iceberg. Most of the time what we can see before our eyes is only half the story. So how do we know the unknowable? Only those with relentless drive, expertise and foresight can see the whole picture – the risk that lies beyond. At Munich Re, seeing more is what we do. We work in interdisciplinary teams, each pair of eyes viewing something from a different perspective, all focusing on the best solution. With our worldwide network we can pinpoint complex global patterns when they arise. When it comes to grasping our future, we are never satisfied with half the story.

To find out more about what lies beyond,check out our website at www.munichre.com

NOT IF, BUT HOW

To see whether a risk poses a threat, don’t we have to see the big picture?

GR_Ad_Page.indd 1 07/02/2012 10:25

Leader

GLOBAL REINSURANCE FEBRUARY 2012 1

At Global Reinsurance we are committed to bringing you

genuine insight into the market in which you work. We understand that repackaging news stories with a couple of quotes from the market and a bit of additional background information is not enough.

With this in mind, we have introduced three new sections, which we believe greatly enhance our offering to you and bring the global reinsurance market into clearer focus.

First is the Global Market Report. Each issue, this section will take a comprehensive look at a major global reinsurance hub. Unlike some market focus sections, this is not simply a collection of chief executive interviews with a local premium volume pie chart thrown in for good measure.

The fi rst hub we have focused on is Bermuda. Global Reinsurance has collated a mass of information from off-record interviews and roundtable discussions, along with research and statistics from several respected sources, and presented it here in an accessible, at-a-glance format.

This issue also includes the results of the Global Insurance Index. This fi rst-of-its-kind initiative gauges industry sentiment about the big issues, such as regulation and the global economy, by surveying chief executives from a global group of insurance, reinsurance and broking chief executives.

Finally, we present the Financial Briefi ng. This section brings you fi nancial news, analysis of results and stock price movements, and insight from the industry’s top fi nancial minds. Hannover Re’s Roland Vogel appears in our fi rst chief fi nancial offi cer Q&A.

Of course, Global Reinsurance will continue to cover the biggest issues in the market, provide detailed analysis and profi le top executives and reinsurance buyers, both in print and online.

We hope you enjoy the new sections and would love to hear what you think about them.

Ben DysonAssistant editorGlobal Reinsurance

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We have introduced three new

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GR_01 Leader.indd 1 09/02/2012 10:36

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

FEBRUARY 2012 GLOBAL REINSURANCE2

News & Analysis1 Leader

4 News

6 Financial Briefi ng

8 Risk Atlas

10 Global Insurance Index Bad case of boardroom blues

12 News Analysis It was a record year for aviation safety

15 News Agenda January renewals are like a baseball game?

People & Opinion18 Mark Byrne Haverford’s chairman on the Omega deal

36 Diary Monty chose tropical shores over January renewals

Cedants22 Q&A Esure’s Stuart Vann on the personal lines specialist’s

careful and conservative approach to both reinsurance and risk

Global Market Report: Bermuda26 The big picture How the major stories affect Bermuda

28 Timeline Can the island keep business within its shores?

30 Horizon Regulatory moves, from Solvency II to Neal Bill

32 Market map Bermuda’s numbers reveal some surprises

35 Inside / out Forecasts from leaders in and outside Bermuda

1 January renewals, page 15 Mark Byrne, page 18 Bermuda’s big picture, page 26

Editor-in-chief Ellen Bennett

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Email [email protected]

Assistant editor Ben Dyson

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Markets editor Lauren Gow

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Group production manager Tricia McBride

Senior production controller Gareth Kime

Digital content manager Michael Sharp

Head of events Debbie Kidman

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February

GR_02 Contents.indd 2 09/02/2012 10:33

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


News

Costa Concordi

Montpelier: the truth behind its $1bn loss● $400m special dividend meant extent of loss was ‘misunderstood’ by market● Deputy chairman Tom Busher denies actively seeking mergers and acquisitions

On the eve of its 10th anniversary, Bermudian short-tail catastrophe reinsurer Montpelier Re broke its silence about the company’s huge $1.1bn (£616m) 2005 losses.

Deputy chairman Tom Busher told Global Reinsurance that a lack of communication fuelled speculation that there was trouble afoot.

“Perhaps we should have communicated more effectively. What really happened was that pre-Hurricane Katrina, Hurricane Rita and Hurricane Wilma, we were the poster child for the class of 2001. Then after the losses, we went the other way.”

Busher said the extent of the reinsurer’s losses was “misunderstood” because of a special and regular dividend payment of $400m in April 2005.

“If you bear that in mind when you look at the subsequent losses, it is because we had reduced our capital by that proportion that the losses looked so big,” Busher said.

“If you add back that $400m, it wasn’t as bad as it looked. After Katrina we went back to the equity market to reload, and, because of our track record of capital management and the special dividend earlier in the year, it responded.

“Between 4pm and 5pm on the day of the raise over $600m came in, which we were able to walk up from the original target because of the level of demand.”

Busher said post-2005, Montpelier Re has worked to re-underwrite and de-risk its book, moving its focus away from catastrophe and setting up London, US and Swiss operations.

“We’re still taking out risk from the book even now, although I think the prospects for the current renewals are

probably just looking up over the last week,” said Busher.

“Although 2005 was formative in Montpelier’s 10-year

history, the lessons we learned have since helped propel us to the achievement of some important milestones, including the launch of

Syndicate 5151 and our US platform,” Busher said.

Busher also dismissed speculation the reinsurer is actively planning mergers and acquisitions.

“We always keep our eyes and ears open but we don’t believe bigger is automatically better.” He added that the value generated for shareholders by mergers is “not always wonderful”.

“M&A is always talked about but few deals seem to be done in the industry for one reason or another. The track record is not strong so you need to be highly selective in order to succeed. As long as book values remain in the doldrums in the sector, it is hard to get excited.”

Montpelier’s latest results show the reinsurer lost $143.6m in the fi rst nine months of 2011,

while gross written premium was up 3% year-on-year to $633.8m from $617.7m.

On 20 September, Montpelier sold its US arm Montpelier US Insurance Company to Selective Insurance. The deal is expected to be closed in the fourth quarter.

The full interview with Busher is available on globalreinsurance.com. Go to goo.gl/WtUQJ.

● Montpelier Re made a canny move when acquiring the renewal rights of fellow Bermudian (re)insurer Torus’s property catastrophe reinsurance business in August. Under the deal, Torus is providing sidecar capacity to Montpelier from 1 January. ● That deal, and the sale of Montpelier US, will give the reinsurer a welcome capital boost after 2011’s high level of catastrophe. ● This year is set to be big for M&A internationally. With the Transatlantic sale ongoing and the Omega sale imminent, Montpelier should be on high alert, both for buying and for being bought.

We say ...

FIND OUTMORE ONLINE

goo.gl/1oxo7

MONTPELIER TAKES ON TORUS CAT BOOK

Going global: Peo

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London (Re)insurance broker Willis Re has appointed John Cavanagh as chief executive. He succeeds Steve Hearn, who became chairman and chief executive Willis Global last December.

San Francisco Former Hannover Re chief executive Wilhelm Zeller has joined the board of Exigin Insurance, a San Francisco-based technology company.

Bermuda Third Point Reinsurance has hired Rob Bredahl as chief fi nancial and operating offi cer, and Dan Malloy as executive vice-president, underwriting.

1

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Montpelier’s share performance since fl otation

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SOURCE: NEW YORK STOCK EXCHANGE DATA: 9 NOV 2002 TO 14 NOV 2011

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7 MARCH 2005High: $43

21 November 2008Low: $10.49

GR_04-05 news.indd 4 08/02/2012 17:18


News

dia: Insured loss tops $510m

SHIPWRECK:Cruise liner Costa Concordia ran aground off the coast of Italy on 13 January with 4,200 passengers on board. At the time of going to press, 17 bodies had been recovered. Fifteen people are listed as missing and presumed dead. The ship’s owner Carnival puts the wrecked ship’s net value at $490m and it has insurance coverage of around $510m. Damage excesses total $40m while the fi rm self-insures forloss of use.

MultaQa puts Gulf in focus● Top names signed to speak at March conference● Programme will look at challenges in Gulf market

Weblogglobalreinsurance.com

PartnerRe chief executive Emmanuel Clarke, Arig chief executive Yassir Albaharna, and the Qatar minister of fi nance H E Yousef Hussain Kamal are among the luminaries signed up to speak at the MultaQa conference in Qatar in March.

Now in its sixth year, the conference, hosted by Global Reinsurance in association with the Qatar Financial Centre, explores the challenges and opportunities facing the growing (re)insurance sector in the Gulf region.

On the programme this year will be product innovation; the balance between insurance and reinsurance in the market; and

public awareness of the benefi ts of insurance. Lloyd’s internal markets director Jose Ribeiro will also look at the role of the Middle East in Lloyd’s international expansion strategy.

Other confi rmed speakers include Aon Benfi eld president Geoff Bromley, Berkshire Hathaway Re managing director Manfred Seitz, Gulf Re chief executive Michael Gertsch, ADNIC chief executive Walid Sidani, Munich Re MENA head Andreas Pollmann and Swiss Re head market underwriter Lukas Mueller.

For more information about this year’s conference, go to multaqa.com.qa

eople moves Online top fi ve

Reinsurers’ hopes for a quiet new year ended with the grounding of the 1,000ft cruise ship Costa Concordia off the Italian island of Giglio on 13 January.

Munich Re’s assessment of the situation added further gloom to the market’s suspicions. The German reinsurer expects its loss from the cruise ship disaster to be in the mid double-digit million euro range. As well as the cost of the stricken vessel, losses may arise from passenger liability claims, wreck recovery and possibly environmental liability, the reinsurer said.

Up next, Global Reinsurance’s list of 2011 heroes and villains certainly captured the market’s attention. We have appreciated all the feedback from our readers, especially one who said he should be declared “the selfl ess Mother Teresa of capitalism in the global reinsurance industry”.

In third position, the Costa

Concordia reappeared, with the industry’s concerns echoed by Espirito Santo analyst Joy Ferneyhough who said the cruise liner disaster may be “the largest ever marine loss”, estimated to be between $500m and $1bn.

The 1 January renewals season did not bring good news for reinsurers. Prices did not respond uniformly, and either rose or fell relating to loss experience. Catastrophe-hit lines of business, particularly in the Asia-Pacifi c region, saw increases of between 40% and 150%.

Rounding out the top fi ve was a story confi rming what the industry already knew: 2011 was the worst year on record for insured losses. This year has had a bad start too, but who knows what the rest of 2012 will bring?

1. MUNICH RE CRUISE SHIP LOSS IN TENS OF MILLIONSLoss could include hull,

passenger liability and

environmental liability

2. 2011 IN REVIEW: HEROES AND VILLAINSHow has the industry

weathered the storm?

3. COSTA CONCORDIA ‘BIGGEST MARINE LOSS’Espirito Santo analyst puts

loss at up to £653m

4. JANUARY RENEWALS REVEAL A MIXED BAGConfusion and

inconsistency at 1 January

reinsurance renewals

5. 2011 WORST YEAR ON RECORD FOR INSURED LOSSES – MUNICH REInsurers suffer $105bn of

insured losses, the largest

since Hurricane Katrina

To contribute to the website,

email Lauren Gow at

[email protected]

T

New Jersey Broking group Howden’s US arm hired Karen Kutger and Dawn Sequeira to its wholesale and reinsurance division. They will be based in New Jersey. Kutger and Sequeira join from Professional Risk Solutions, where they developed major client portfolios in professional liability and directors’ and offi cers’ insurance.

Switzerland Michel Liès, Swiss Re’s chairman of global partnerships, became group chief executive on 1 February, replacing Stefan Lippe, who resigned in December.

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Financial Briefi ng

● The top 10 reinsurance stocks largely had a good run in the month to 16 January, with most posting increases of 3%-6%.

● While the industry took a beating in 2011, it has proved resilient and there is likely a strong core of companies will be profi table.

6.5%SCOR was this month’s biggest riser

*All prices expressed in local currency 15 December 2011 - 16 January 2012

CFO interview: Roland Vogel Q: What are your biggest challenges in the current market?A: As CFO I am also chief investment offi cer, so investing our €27bn of assets in these volatile markets is one of the most challenging tasks on my desk. That includes coping with the euro crisis as well as making sure that the current very low market yields are refl ected in our reinsurance pricing.

Secondly, we have to manage and combine all the current developments around solvency and accounting. We have many different requirements

from regulators, standard-setters, rating agencies and the capital markets, and we have to implement systems to provide them with the information they need. But we also have to remain lean and effi cient.

Q: How are you tackling the low-yield investment environment?A: One of the most important things for us is to have tools that translate the yield environment into our reinsurance pricing. If I can ensure investment yields are the basis for our reinsurance

pricing, future interest rate movements do not concern me too much.

It may not be possible to pass on every decrease in yields directly to our cedants immediately, but if the reinsurance contracts we underwrite do not provide profi tability, we shouldn’t write that business.

Q: How big an issue is the eurozone sovereign debt crisis for you?A: We have never been invested in the peripheral countries of the eurozone to a large extent, so the crisis hasn’t had a

Marketwatch: Losses bring hope of price rises

Roland VogelChief fi nancial offi cerHannover Re

Hannover Re’s fi nance chief explains why the pricing is right if it refl ects the yield environment

2012 looks good for securities● $2.1bn of catastrophe bonds to mature in fi rst half

Observers predict a strong 2012 for insurance-linked securities, following an active fourth quarter.

“A deep pipeline of transactions exists for the fi rst half of 2012 and beyond,” Guy Carpenter’s global head of business intelligence, David Flandro, said.

About $2.1bn of catastrophe bonds are expected to mature in the fi rst half, Flandro said.

There has already been a strong start to the year, with cat bonds protecting Zenkyoren, Assurant, Swiss Re, the California Earthquake authority, and Aetna already launched.

Deal name

Embarcadero Re

Kibou Ltd

Ibis Re II

Successor X

Vitality Re III

Cedant

CEA

Zenkyoren

Assurant

Swiss Re

Aetna

Amount

$150m

$150m

$130m

$63m

$150m

Duration

3 years

3 years

3 years

3 years

3 years

Risk

US quake

Japan quake

US wind

US wind, Euro wind

Medical benefi t claims

8090

100110Munich Re

105k110k115k120kBerkshire Hathaway 'A'

34363840Hannover Re

17181920SCOR

48505254Reinsurance Group of America

60626466PartnerRe

75808590Everest Re

40455055Swiss Re

● The heavy losses also bring investors hope of price rises and better performance.

SOURCE: COMPANY/RATING AGENCY ANNOUNCEMENTS

GR_06-07 Fin.indd 6 08/02/2012 17:03


Financial Briefi ng

Buyers avoid eurozone exposed reinsurers

Reinsurance buyers are being increasingly wary about which reinsurers they use as fears about the eurozone crisis add to heavy 2011 catastrophe losses. Some have started to limit the business they place with those they are most concerned about.

The news comes as Europe’s fi nancial woes continue to erode confi dence in the insurance sector. On 27 January, eurozone pressures led rating agency Standard & Poor’s to put Europe’s three largest insurance groups, Allianz, Aviva and AXA, on negative outlook.

While the crisis is hitting primary insurers with large life books hardest, and reinsurers’ geographic diversity is likely to provide protection, uncertainty about the crisis’s outcome is making nervous buyers even more uneasy.

Lloyd’s insurer Beazley’s head of ceded reinsurance, Christian Tolle, said: “We are monitoring the situation more closely than we were,” adding that his company does not have large exposure to reinsurers most at risk.

“We are very wary about placing new business with the companies we think are most affected,” he said. “We would probably be okay to continue a trading relationship with them, but I don’t think we want to put any more business with them at this point in time.”

The concerns are being prompted in part because there is little sign of improvement in the eurozone’s fi nancial health.

While reinsurers have weathered the eurozone storm so far, there is such a wide range of possible outcomes that some buyers are fi nding little comfort in the resilience to date.

Markel International president Jeremy Brazil said: “Issues such as Solvency II are more tangible. Whereas with the eurozone some

people say ‘they’ll never let Greece go bust’, others say ‘perhaps they can’t afford to not let Greece go bust’. It is a worry in terms of solvency margins if someone is very heavily, even if indirectly, into eurozone bank debt. That can have repercussions.”

Making the fears worse is the fact that a small group of reinsurers have been hit heavily by the 2011 catastrophe burden. For example, large losses have led Flagstone Re to restructure.

Rating agency AM Best recently placed A+ ratings on Bermuda-based reinsurer PartnerRe – one of the world’s top 10 reinsurers – after it announced it expects a fourth-quarter 2011 pre-tax operating loss of $110m-$130m because of Thailand fl ood claims and a deterioration in loss estimates from last year’s Japanese earthquake.

Concerns are also high for companies based in peripheral eurozone countries. Spanish reinsurer Mapfre Re, for example, was downgraded from A from AA- on 17 January.

While elsewhere in fi nancial services, instruments and companies rated above BB+ on S&P’s rating scale are considered investment grade, buyers of commercial insurance and

reinsurance consider A- the lowest acceptable fi nancial rating. While they feel no company is at risk of collapse, the fl ow of poor news within and outside the industry is not easing buyers’ jitters.

Ceded reinsurance offi ces, the divisions tasked with buying reinsurance, typically have limited resources and rely heavily on the fi nancial strength ratings assigned by the major rating agencies, plus advice from brokers and others.

● Reinsurers still have lots of money and none has gone bust. Why are buyers worried?In short, it is uncertainty. Like all managers of risk, reinsurance buyers are nervous about what they cannot measure. The uncertainty is coming from all angles: the bill from the 2011 losses, the effects of the eurozone, and their reliance on others for their view of counterparty risk. ● How big could the effect of the eurozone be?Swiss Re believes the insurance industry as a whole could be on the hook for up to €143bn ($189bn), or 24.3% of its combined shareholders’ funds, if the sovereign bond values of all the fi ve peripheral eurozone countries are halved (see chart).

FIND OUTMORE ONLINE

goo.gl/hgf7l

CATASTROPHE CUTS MUNICH RE PROFIT BY 70%

Pass notes

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The cost of defaultInsurance industry losses as a percentage of shareholders’ funds

*assumes a 50% reduction in the value of the relevant country’s sovereign bonds

material direct impact. Even before the crisis, we never treated the non-triple-A countries as risk free. But of course there are various possible scenarios and their impact ranges from very moderate to very extreme.

We have decreased our portion of sovereign risks and shifted part of the portfolio to corporate credit.

Q: How is preparing for Solvency II affecting your job?A: Work on Solvency II is our biggest project right now. We are focusing particularly on getting our internal model approved. This is really important for us, because it ensures that our Solvency II application and reporting will comply with our internal capital model.

2.4% Greece €14bn 4.3% Greece + Portugal + Ireland €25bn 9.8% Greece + Portugal + Ireland + Spain €58bn 24.3% Greece + Portugal + Ireland + Spain + Italy €143bn

● Insurers wary of companies at potential risk as EU crisis shows little improvement● Standard & Poor’s puts Allianz, Aviva and AXA on negative outlook over eurozone53

545556Transatlantic Holdings

13k14k15k16kKorean Re

rRe

t Re

COUNTING THE COST OF CATASTROPHEThe impact of the 2011 catastrophes is clear in the full-year results of those companies that have reported so far. Munich Re’s profi t fell 70%, Validus’s fell 94%, and Transatlantic made a loss.

SOURCE: SWISS RE

GR_06-07 Fin.indd 7 08/02/2012 17:03


Risk Atlas

3

1

Likelihood of political forces negatively affecting business Insignifi cant Low Medium High Extreme

The last 12 months have been characterised by political fl uctuations in

many parts of the globe, and civil unrest in the Arab world has probably resonated loudest.

The Middle East is a lynchpin in the world economy, owing to its huge oil and gas reserves. Peace in the region – sadly rare – is crucial to maintaining stable energy prices.

A recent briefi ng by Aegis Advisory says rising instability in the Arab nations is affecting the risk exposures of businesses worldwide in two main ways: by hitting energy prices, and by demonstrating the usefulness of

social media, such as Twitter and Facebook, to co-ordinate protest and political activity. Social media has played a part in political unrest from Chile and the USA to Spain, Italy, Greece and the UK.

But mass protest is not confi ned to the dictatorial regimes of the Middle East and North Africa. Across Europe, people are rising up against both the failure of the ruling powers to restrain the excesses of a capitalist system and the austerity measures implemented in response to these failures.

In Europe, actions to remedy national fi nancial problems,

largely stemming from bank bailouts, are likely to spark further protests and riots.

Greece is expected to make further spending cuts as a condition of its bail-out package from the EU and IMF. Its October strikes and work stoppages in reaction to austerity measures could be followed by more of the violent protests that began in May.

The same could be true in other European countries as governments fi ght against a return to recession. The French fi nance minister announced

austerity measures in September. The UK chancellor of the Exchequer has pledged to continue the country’s fi scal squeeze, despite unemployment hitting a 15-year high. Spain and, to a lesser extent, Italy have seen protests against cuts.

In contrast to the Middle East, these popular movements are unlikely to lead to wholesale political upheaval or revolution. Western political institutions tend to be fairly responsive and temper that revolutionary spirit. GR

A different kind of revolution● Protests against government austerity measures are set to continue across Europe as spending cuts bite● But, unlike in the Arab world, unrest is not predicted to lead to wholesale political upheaval and instability

FIND OUTMORE ONLINE

goo.gl/4fw4x

PROTESTS LIKELY AS GREECE MAKES MORE CUTS

Risk Atlas: Political risk

2

GR_08-09 Risk Atlas.indd 8 08/02/2012 15:42

9GLOBAL REINSURANCE FEBRUARY 2012

Risk Atlas

Egypt A week of violent clashes in Cairo’s Tahrir Square in November 2011 left around 800 people injured and two dead. The protesters demanded that Egypt’s military rulers transfer power to a civilian government as soon as possible. Amid the violence, Egyptians went to the polls in the fi rst election since the revolution that toppled Hosni Mubarak. US Council on Foreign Relations Senior fellow for Middle Eastern studies Ed Husain said that the Muslim Brotherhood’s Freedom and Justice Party looks to be the most organised political force.

Commenting on the situation from Cairo, he said: “The liberal, urban and elite Facebook and Twitter generation of Egyptians may have led the January revolution, but they simply do not possess the real-world resources, unifi ed thought patterns, and socio-political networks of their Islamist rivals.”

Israel The rise of populist movements in the Arab countries surrounding Israel has dramatically changed the security dynamic in this part of the world and revealed the weaknesses of Israel’s situation. As a blog on broker JLT’s World Risk Review website says: “The Arab Spring has reshaped the risk environment for all countries in the Middle East and nowhere is the impact more keenly felt than in Israel.” Israel’s security position once relied on reaching deals with ruling military elites and not alignments with the Arab public, who remain broadly hostile to a Jewish state in their midst, according to JLT.

Political instability in Egypt and Syria, which both share land borders with Israel, is having a profound impact on the regional security situation. “For more than 30 years, Israel has grown accustomed to calling the shots as the regional power broker,” continued JLT.

But this situation is changing. Egypt’s former president Hosni Mubarak could previously be relied on to keep to the terms of his country’s 1978 peace agreement with Israel. Now that the political situation in Egypt is unclear, this assumption is increasingly coming under question. Additionally, now that Syria’s ruling Assad regime, which used to prevent protestors and terrorists from infi ltrating the Golan Heights, is under threat, stability along this border is far from certain.

Middle Eastern (re)insurance markets are set to

continue expanding at double-digit real annual

rates. Growth momentum will be underpinned

by low penetration levels, the region’s ongoing

economic diversifi cation away from the

hydrocarbon sector as well as robust demand for

oil and gas, increasingly from emerging countries.

Beyond growth, market sophistication is

increasing as new products such as healthcare insurance solutions

are launched. In this respect, compulsory insurance requirements

serve as an important catalyst and are instrumental in overcoming

structural challenges such as a limited awareness of insurance and

adverse selection – that is, ‘good’ risks opting out of insurance.

At the same time, insurers in the region have to cope with

heightened uncertainty and a growing complexity of their operating

environment, primarily emanating from global developments.

Record-low interest rates, sovereign debt crises and increasing

capital market volatility have rocked one of the most important

traditional pillars of industry earnings: investment returns. Business

models need to be revisited to ensure their standalone ‘technical’

viability. This is a particular challenge for Middle Eastern insurers

given their historically strong reliance on investment income.

In addition, regulations are tightened, further curtailing

insurers’ degrees of freedom, in asset management and product

development for instance. Even though Solvency II or any similar

regulatory regime is not yet imminent for Middle Eastern insurers,

companies will ignore these developments at their peril.

For regional insurers, a very immediate development to watch

for is the global reinsurance market and its dynamics. The year

2011 was the second most expensive catastrophe year on

record. New risk scenarios have emerged, such as the disruption

of global supply chains in the wake of regional disasters. Also,

some major global reinsurers are signifi cantly exposed to the

eurozone’s sovereign debt woes. All these developments make

the global reinsurance outlook highly uncertain, another particular

challenge for Middle Eastern insurers that are so heavily

dependent on global reinsurance.

Against this momentous backdrop, the sixth annual MultaQa

conference, hosted by the Qatar Financial Centre Authority and

taking place in Doha in March, provides a timely opportunity to

discuss key strategic challenges and explore the most promising

responses. Lloyd’s of London head of international markets

José Ribeiro and PartnerRe Global president and chief executive

Emmanuel Clarke will highlight the trends that reshape global

insurance and reinsurance markets.

A top-calibre panel of regional executives, including ADNIC

chief executive Walid Sidani, will discuss the ramifi cations for

regional markets. Another panel featuring, among others, Aon

Benfi eld International president Geoffrey Bromley will examine the

prospects for global reinsurance markets. President of the New

York-based Insurance Information Institute Robert Hartwig will

share a global economic outlook.

And, fi nally, a panel of senior insurance regulators and

executives will address the new regulatory paradigm and why it

increasingly calls for the board of directors’ direct involvement.

As a particular highlight of this panel, Taiwan’s Insurance

Brazil The Federation of European Risk Management Associations (Ferma) urged Brazilian insurance regulator SUSEP to limit the impact of controversial regulations 225 and 232, which require 40% of insurance contracts to be placed locally. Ferma has campaigned to relax the regulations on behalf of its European multinational members. Ferma president Jorge Luzzi made the case in a letter to SUSEP, saying that the possible limits on capacity and threat to insurer security posed by the regulations has raised many concerns from risk managers.

3

1

People injured in renewed clashes in Cairo, Egypt

Reported incidents of piracy inSoutheast Asia (2008-Q3 2011)

0 30 60 90 120 150

of global risk experts believe a major social disruption is likely to occur over

the next 12 months, according to a World Economic Forum survey

800

60%

Piracy

Middle East focusAkshay Randeva, director, strategic development, QFC Authority

Setting the scene for MultaQa

2008

2009

2010

Q1-3 2011

2

Commissioner, Dr Thomas Huang, will share

his experience with risk-based capital as a

modern solvency regime.

The QFC Authority is proud to host

such a pre-eminent platform for strategic

dialogue in times when both opportunities

and challenges abound.

Akshay Raneva

GR_08-09 Risk Atlas.indd 9 08/02/2012 16:02


Global Insurance Index

Survey: Business confi dence

The fi rst Global Insurance Index sentiment survey reveals a mixed view of the

market’s prospects for 2012. The survey asked a panel of senior (re)insurance industry leaders about their levels of confi dence and views on the market.

Respondents were relatively pessimistic about the outlook for the global economy, scoring on average just 2.8 of a possible 5 points on the pessimistic-to-optimistic-o-meter (see right).

But the same pool of respondents showed a more confi dent attitude towards the global (re)insurance industry’s ability to cope with the fi nancial crisis: scoring 3.4 out of a possible 4 points, on a scale from “not confi dent” up to “confi dent”.

One question that polarised views was on the risk of business failure, with 69% of respondents expecting to see companies go bust. But one respondent’s qualifying comment put the fi gure in some perspective, suggesting that smaller companies may be most at risk.

The area causing most concern among our global (re)insurance industry chief executives was the fi nancial crisis, scoring 3.7 out of a possible fi ve on the low-to-high concern measure.

Pessimism rules boardrooms● Survey shows (re)insurance industry leaders remain downcast about outlook for global economy in 2012● But they are confi dent of industry’s ability to cope with fi nancial crisis, which remains their top concern

Q: How do you feel about the global economic outlook in 2012?

Q: How confi dent are you the global (re)insurance industry can cope with the current fi nancial crisis?

Q: Do you think international regulation such as Solvency II should be revised in light of recent economic events?

Q: How would you evaluate the industry’s outlook for profi tability in 2012?

Q: How concerned are you about these issues for global (re)insurance in 2012?

Q: Do you think any (re)insurers are at risk of failure in 2012?

Q: What is your view of the global fi nancial outlook for 2012 and the potential impact on reinsurance?

Optimistic Confi dent

YesGood

Maximum concern

Pessimistic Not confi dent

NoPoor

Minimum concern

No8%

Yes69%

Not sure23%

1 1 1

22

2

1

2

3

3

3

3

4

4

4

5 5

2.8Average score

3.4

1.9

38%

62%

3.7 Financial crisis

Regulation 2.9Staff retention 2.6

3.3 Catastrophes

2.6 Client retention

My biggest concern for 2012 is that the

recent dramatic events in 2011 ($100bn

of catastrophes) do not increase demand

for reinsurance, while at the same time

we have an excess of competitors all

determined to focus on market share. If

this happens and companies start to lose

sight of their underwriting standards, it is

quite possible that we may move towards

late-1990s underwriting conditions over the

next two or more years.”

The euro crisis

could have a

huge impact

on the industry,

and a potential

collapse has

not been

contemplated

in contract

language.”

Asset value declines from 2008

and 2009 have yet to be fully

recognised in profi t and loss

statements; the continued low

interest environment impacts

earnings signifi cantly; further

value corrections in sovereign

bond holdings are a strong

possibility, as are additional

capital requirements for bond

holdings under Solvency II.”

“I do not expect any

major (re)insurer to fail.

Inevitably, there may be

small companies failing

but they will not be

signifi cant in my view.”

GR_10 GII.indd 10 08/02/2012 15:08

GR_Ad_Page.indd 1 23/09/2011 17:05


News analysis

Aviation safety

Brighter skiesLast year was the safest ever for the aviation industry, with no major fatal crashes and a

halving of hull and liability losses, reports Lauren Gow. While better security helped, so too did luck

Last year was the best on record for fatal accident and passenger fatality rates in the aviation industry, with no major airline catastrophes reported. Current estimated costs of incurred hull

and liability losses for the year are $1.18bn, $966m less than 2010 when $2.15bn in losses were incurred, and $820m less than the estimated $2bn of premium written during the 2011 calendar year.

According to figures from aviation data provider Ascend, the estimated incurred cost of airline claims in 2011 was the lowest for seven years. This is broadly similar to the exceptionally low level of loss seen between 2002 and 2004.

But rather than being thrilled, aviation underwriters seem cautiously hopeful. These low levels of incurred losses are only the beginning for insurers, who are clawing their way back after a string of bad losses in recent years.

The estimated cost of incurred losses has been close to or exceeded premium in four of the last five years. Written premium for 2007-11 totalled about $9.3bn, $100m less than the estimated cost of incurred losses, which was $9.41bn during the same period.

The bottom line is that the industry experienced a fortunate combination of the hull type lost and jurisdictions where the fatal accidents occurred. But was it good luck or good management?

Most of the aircraft lost in 2011 were relatively small or old and relatively low value. In terms of passenger liability, most of the passengers who were involved in accidents were from developing nations where settlements tend to be lower.

Low losses but not much profi t eitherGuy Carpenter managing director of aviation Ian Wrigglesworth says the losses should be seen in context. “There hasn’t been a major loss but there have been a number of smaller losses. There have been three major incidents where the insured losses were greater than $50m. But the overall losses for the calendar year were about $1.2bn. If we put that against a backdrop of $1.6bn of composite airline premium, even without a big loss there hasn’t been a large profi t margin.”

Ascend’s director of air safety, Paul Hayes, says the main reason the cost of incurred claims last year was so low is that long-term improvements in safety, particularly in the developed world, are limiting the cost of claims.

“There are a number of generic areas that are driving safety. Improvements in aircraft technology and equipment fit, a better understanding of man-machine interface and the way the crews work

together and how they interact in different situations,” Hayes says.Hayes adds that a change of organisational behaviour in airline

management is driving standards of safety that are fl owing through to the developing world.

“There is more of an outreach from major fi rst world airlines that are really driving best practice in safety. Whereas 30 years ago these countries developed best practice, developing nations weren’t taking notice. Now it is fi ltering through,” Hayes says.

Better security means improved safetyPost-September 11, security measures signifi cantly increased, and Hayes believes there is a direct correlation between better security and improved safety. He says: “Had the industry not increased security, I think there would have been potential for more sabotage losses. I

think in terms of security, though it is such a headache putting up with it, fi gures suggest it has prevented some sabotage losses.”

Hayes says one such sabotage attempt by an al-Qaeda operative known as the ‘Underwear Bomber’ proves that improved security measures are working. Umar Farouk Abdulmutallab attempted to detonate plastic explosives hidden in his underwear while on board Northwest Airlines Flight 253, en route from Amsterdam to Detroit, Michigan, on 25 December 2009.

“It is really the last way someone would sabotage an aircraft. It suggests that security is working to the extent it needs to, that is, it is harder to get a bomb on board so he ended up trying to set fi re to his knickers,” Hayes says.

Wrigglesworth agrees luck plays a role in potential catastrophic aviation losses. “The airlines purchase up to $2.25bn in liability and there are, and continue to be, near-misses. There is certainly the possibility of a large loss. You can never eradicate that in spite of the modernisation of the fl eet,” he says.

Hayes says the trend towards improved safety will continue. “In fi ve years’ time, I think the industry will have continued to become safer. It doesn’t mean you won’t have had some bad years. I have made a big deal about last year being the safest but one year is really meaningless in longer term trends, which support the view that the industry is getting safer.”

But it only takes one bad year, Hayes adds. “If last year had been the worst year on record, it doesn’t mean the industry is getting less safe. When it comes to distribution of events, it only takes one or two to turn a good year into a bad year. If they all happen in one year, it makes all the difference.” GR

Airline hull and liability claims cost v premium

$1bn

$5bn

$3bn

0

$4bn

Claims cost Written

DATA: ASCEND

$2bn

$6bn

GR_12 NewsAn.indd 12 08/02/2012 13:38

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News Agenda

The 1 January reinsurance renewals were never going to be easy. According to

reinsurance broker Aon Benfi eld, around $80bn of the world’s total $145bn of premium renews on 1 January, so getting everything done is a tall order at the best of times.

However, this year was particularly tough. The global insurance industry suffered its second-largest natural catastrophe year ever in 2011, and was ravaged by more than $100bn of losses. And this was in a year when one of the main risk modellers, RMS, updated its windstorm models for both Europe and the USA.

To make matters worse, one of the bigger events, the Thailand fl ooding,

hit the industry towards the end of the year while renewals work was in full swing. Insured loss estimates for the Thai fl oods range from $10bn to $20bn, though the reinsurance bill could be around 60% of that amount.

To cap it all, the industry had to contend with the persistent challenges of the eurozone debt crisis, low interest rates, and uncertainty about the implementation date of Solvency II.

The year’s events gave the industry a lot to mull over, and led to a late, messy, fragmented renewal.

“The renewals season was more like a basketball game because so much was about the last two minutes,” Aon Benfi eld co-chief executive Dominic Christian says. “So much

Ben Dyson looks at what this year’s tough 1 January renewals means for the year ahead after an unprecedented level of catastrophe

events in 2011

An industry in change

Signifi cant cat losses 2010-2011$60bn

$50bn

$55bn

$40bn

$45bn

$30bn

$35bn

$20bn

$25bn

$10bn

$15bn

0

$5bn

Q1 2010 Q1 2011Q2 2010 Q2 2011Q3 2010 Q3 2011Q4 2010

A) Japanese earthquake

B) New Zealand earthquake

C) Cyclone Yasi / Aus fl oods

D) US storms May

E) US storms April

F) Hurricane Irene

G) Copenhagen fl oods

H) Thailand fl oods

Q4 2011DATA: GUY CARPENTER, PROPERTY CLAIMS SERVICE, INSURANCE COUNCIL OF AUSTRALIA

C

D

F

G

A$35bn

B

E H

$14bn

$15bn

$13bn

Global property-cat rate-on-line index450

400

350

300

250

200

150

100

50

0

1990

1998

1994

2002

2008

1992

2000

2006

1996

2004

2010

2012

*

DATA: GUY CARPENTER 1 JANUARY 2012*

GR_15-17 News Agenda.indd 15 08/02/2012 15:56


News Agenda

‘We have seen the effect of many of these Asia-Pacifi c events in non-Asia-Pacifi c regions’Nick Frankland Guy Carpenter

FIND OUTMORE ONLINE

goo.gl/vBPNJ

IAG BUYS 14% MORECATASTROPHEPROTECTION

business was transacted in the three days between Christmas and New Year – much more than we have seen in many years. That might tell you something about the marketplace we are part of today.”

Challenging and frustrating though it was, the renewal process contained important lessons about how industry behaviour and practices are changing, and what we can expect from buyers, reinsurers and brokers in the coming year. What the market considers “peak zones” may need rethinking, and a unifi ed, market-wide pricing response is becoming a thing of the past.

The main focus of the 1 January renewals is Europe, although around half of the US business and about a quarter of Asia-Pacifi c business renews on that date. Most of the 2011 loss activity was in the Asia-Pacifi c region, outside the traditional peak catastrophe zones (US windstorm, US earthquake, European windstorm). So a large part of the business most affected by the losses was not included in this particular renewal.

Nevertheless, the Asia-Pacifi c catastrophes, which included three earthquakes in New Zealand, the Tohoku earthquake in Japan and windstorms and fl ooding in Australia, made their presence felt in the renewals.

Both Australia and New Zealand renew some of their business at 1 January. Guy Carpenter said in its renewals report that at the 1 July 2011 renewals, reinsurance programmes exposed to both the Australia and New Zealand catastrophe events sustained rate increases of more than 50%, a trend that continued at 1 January 2012.

“Rates increased considerably for lower layers as a result of loss experience,” the report said. “Upper layers also have experienced signifi cant increases, as reinsurers re-evaluated the cost of deploying their capacity to Australian and New Zealand catastrophe programmes.”

Passing on the costThe premium base in the Asia Pacifi c is relatively small, and so reinsurers have had to pass some of the cost of the catastrophe burden on to cedants elsewhere in the world.

“Even though 1 January is not a big Asia-Pacifi c renewal, we have seen the effect of many of these Asia-Pacifi c events in non-Asia-Pacifi c regions,” reinsurance broker Guy Carpenter’s European operations chief executive Nick Frankland says. “It has fl owed through, and that is part of the adjustment to paying back [reinsurers’] cost of capital.”

Overall, Guy Carpenter reported that

global property-catastrophe rates on line (premium as a percentage of the coverage afforded) were up by an average of 9.5%, with rate increases ranging from 5% to 15%. US property-catastrophe rates were up 8% on average, also with an increase range of 5%-15%. European rates were up on average by 2%, while UK rates were fl at.

Rethinking catastropheThe fact that most of the losses have come from outside the traditional peak zones for the past two years has also prompted reinsurers to rethink how they look at catastrophe risk. As the insurance markets in countries such as Chile and Thailand grow, so too does the exposure, and reinsurers may soon have to reassess what they consider to be peak catastrophe zones.

“As the global market continues to expand and the global economy continues to emerge, insurance carriers are beginning to penetrate many of these new growth zones, and risks that were previously considered cold spots are beginning to increase,” Guy Carpenter’s global head of business intelligence, David Flandro, says. “This is a broad, global, long-term trend and we began to see evidence of it in 2010/2011.”

Only around $30bn of the total loss found its way to the industry, meaning that the bulk of the year’s losses were contained within insurance companies’ retentions. Furthermore, 2011’s high losses came from a series of medium-sized events rather a few mega-catastrophes. “In 2011, at least 12 natural catastrophes resulted in insured losses of more than $1bn,” Flandro says.

These factors prompted buyers to look closely at the protection afforded by their reinsurance programmes, leading many to seek aggregates, covering against frequency as well as severity of loss.

One example of an insurer that was

able to buy aggregate, or sideways, cover as it is often called, is Australian insurer IAG. At the 1 January renewal, within its new A$4.7bn ($4.9bn) reinsurance programme for 2012, the insurer purchased A$250m of aggregate cover with a A$300m excess. It had also taken steps to reduce the exposure within the A$250m retention on its programme – for example by using a so-called buy-down arrangement that reduces the maximum cost of a fi rst event to IAG to A$150m.

However, there was a sense that reinsurers were not always willing to provide cedants with the aggregate cover they needed. In its renewals report, Aon Benfi eld said that insurers’ interest in aggregate cover had not resulted in a signifi cant number of new buyers at 1 January. According to the broker, some insurers renewing aggregate programmes chose increased co-participations rather than higher prices.

Aon Benfi eld appeared to suggest that reinsurers were pricing aggregate covers out of cedants’ reach, which had stifl ed take-up at 1 January. “New demand may emerge for these products if reinsurers more often take longer-term views of insurer experience,” the broker said in its renewal report.

Guy Carpenter contended that demand may have driven up the price for aggregate covers. “If there is an

Long-term evolution of shareholders’ funds$180bn

$160bn

$140bn

$120bn

$100bn

$80bn

$60bn

1998

2002

2000

2004

2007

1999

2003

2006

2001

2005

2009

2010

2008

2011

*

Soft market

Hard marketCrisis

Excess capital

Hard market softening

9 MONTHS 2011*DATA: GUY CARPENTER



News Agenda

increase in demand from [global insurance underwriters] clearly it is because there is a need,” Guy Carpenter’s Frankland says. “If there is a need then that probably means that the covers are more diffi cult to place than they have been before.”

Another big change that was expected, but has so far failed, to spur more demand for reinsurance at 1 January was the update of risk modelling agency RMS’s European and North American windstorm models to Version 11. “We don’t see the model changes as having a signifi cant infl uence on what happened during the renewal season,” Aon Benfi eld head of international analytics John Moore says.

Model missesThe timing of the European windstorm Version 11 launch in particular – it was delayed until July – meant there was little time for cedants and reinsurers to implement the changes. And some felt the model’s new view of risk clashed with historical loss records, and so companies were reluctant to rely too heavily on the model.

A similar problem was evident for RMS’s US windstorm model change, according to Moore. RMS version 11 suggests that there was $400bn of US hurricane losses between 1989 and 2010, while historical records put it at $250bn. “A lot of the industry now sees this as a “model miss”, and so it doesn’t necessarily work its way into risk management processes of insurance companies or reinsurance company processes and pricing,” Moore says.

Solvency II and the eurozone debt crisis also did not spark signifi cant increased demand for reinsurance. All told, brokers report that demand for reinsurance was largely stable, and that cedants bought coverage levels similar to the previous year. Aon Benfi eld

attributes this in part to expectations of price rises in non-loss-hit areas to pay for the losses in heavily affected areas.

Despite 2011’s heavy losses, rates did not harden industry-wide. Signifi cant price fi rming was confi ned to loss-hit areas, while price movements remained relatively subdued elsewhere.

Brokers also report that while there was some general uplift in property pricing, casualty rates, outside of troublesome motor markets such as the UK, remained soft despite the persistent low interest rates.

“Other than motor, the behaviours of property and casualty business at 1 January were very different,” Aon Benfi eld’s Christian says.

There were wide variations depending on geography and territory. “The market is increasingly segmented, with rate movements being driven by individual loss history and perceived exposure movements, and not by an overall blanket increase,” wrote Willis Re chairman Peter Hearn in his company’s renewals overview. “While this is a superfi cially logical approach, it has led to signifi cant differences in rate levels, which some buyers have found diffi cult to assimilate as they struggle to manage the margin between their original pricing and the cost of reinsurance.”

Acting as individualsJust as there was a large variation of response according to geographic area and business line, there were also big differences between reinsurers’ reaction to the market environment. In previous years, reinsurers – much like their clients – have been happy to take cues about pricing from each other and reluctant to move against the grain. This in part has contributed to the highly cyclical nature of the reinsurance business.

But brokers report that at 1 January, reinsurers were more keen to assert

themselves and act as individuals. “The renewals saw a shift in both insurer and reinsurer behaviour as they became increasingly sophisticated, implementing more customised approaches to risk assessment and mitigation,” Guy Carpenter’s Frankland says.

While noting that reinsurers in general took a step back to evaluate RMS’s model changes, Flandro says: “As reinsurers continue to enhance their technical expertise, their incorporation of model components is becoming increasingly tailored to their own view of risk and we encourage this both among our reinsurers and our clients.”

The reinsurance market coped well with the challenges of 2011. While capital levels were hit, for example after the Tohoku earthquake in Japan, reinsurers were able to replenish lost funds and the industry’s year ended much as it began.

Aon Benfi eld reports that the Aon Benfi eld Aggregate – the world’s 28 largest reinsurers – reported a collective profi t of $7bn for the fi rst nine months of 2011 and had $245bn in capital.

So while there were some frustrations with aggregate covers, cedants were not left wanting for reinsurance at reasonable prices. “The sector’s response was able to satisfy capacity demands while retaining suffi cient competition to mitigate pricing extremes,” Frankland says. “This in itself has been remarkable in a year of near-record catastrophe losses, second only to 2005.”

Precariously balancedThe 1 January buying activity only tells part of the story, with major renewals due in April, June and July. The true impact of the Asia-Pacifi c catastrophe losses has yet to be felt. While global reinsurers appear to have coped, and brokers report there has been no problem recovering claims payments, it is not yet clear how domestic Asian reinsurers have responded.

As it was before the renewals and the Thailand fl ood losses, the industry remains precariously balanced. Another big catastrophe could change everything. While there was limited participation by new entrants at the 1 January renewals, more losses could tempt those waiting on the sidelines into the market, particularly on the retrocession side.

“Retro is at an infl ection point,” Frankland says. “With one more cat loss I think there would be an awful lot more investment in that part of the market.”

With winter storms ravaging parts of northern Europe late last year and early this year, and low windstorm activity in the USA for two years running, one of the industry’s peak zones may be triggered very soon. GR

Impact of nine-month 2011 catastrophe losses on major reinsurersFl

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40%

30%

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DATA: GUY CARPENTER



Profi le

Son of an insurance legend, friends with Warren Buffett – Mark Byrne has industry credentials to spare. So when his fi rm, Haverford, made an audacious bid for Omega, the market was enthralled. But what went wrong?

‘‘ ‘‘I might have put a price adjustment clause in the Omega tender contract. There wasn’t one

GR_18-20 Profile.indd 18 08/02/2012 11:21


Profi le

FIND OUTMORE ONLINE

goo.gl/o4UUW

OMEGA HAVERFORD DEAL LAPSES

It’s a tough question, one that Haverford chairman Mark Byrne is expecting, and the moment has arrived: what has he learned

from the collapse of the deal to buy a stake in Lloyd’s (re)insurer Omega?

Byrne takes a moment to collect his thoughts. He grabs a Diet Coke from the fridge, his second of the interview, and returns to his chair.

“I might have put a price adjustment clause in the tender contract.” he says. “There wasn’t one. A price adjustment clause would probably

have made more sense in the lengthy time that approvals take.”

For those who don’t know, Haverford, during a blaze of publicity at the Monte Carlo Rendez-Vous last September, launched a tender offer of 83p per share for 25% of Omega.

The market was captivated. Byrne is the son of Jack Byrne, who built his reputation on rescuing decrepit insurers from the brink. Mark Byrne had also built his own reputation as canny dealmaker and founder of Flagstone Re. Omega, plagued by shareholder revolts and

GR_18-20 Profile.indd 19 08/02/2012 11:21


Profi lea string of catastrophe losses, was about as diffi cult as they come. Could he secure a deal?

A few weeks later, in its third-quarter interim management update statement, Omega revealed the bad news: fi rst-half 2011 losses had deteriorated by $6m, it had incurred an additional $10m of third-quarter catastrophe losses, and $9m of attritional losses.

Concerned that it might be overpaying for a business that had suffered a deterioration in capital adequacy, Haverford proposed a cheaper 74p-a-share deal at a fi xed price. Angry Omega shareholders shot down the revised proposal and Haverford pulled out just before Christmas.

Lessons learned Byrne would no doubt have loved to have snapped up a 25% stake in Omega, using it as a springboard to turn the company around. However, it wasn’t to be.

In hindsight, would he have done anything differently? “For the fact that the fi nancial position of the company could change for the better or the worse materially during that time, it would seem to me – particularly for a cat-exposed company during the storm season – that it’s a good idea to have a price adjustment clause,” Byrne says, continuing his previous line.

He hints that he is still in the market for a Lloyd’s deal. “The thing that makes some of the businesses for sale attractive is really the price. Usually, Lloyd’s vehicles trade for a hefty premium to their book value, but these days they are trading at or below their book value.”

As you’d expect from an entrepreneur, Byrne is upbeat: lessons have been learned, and now he’s keen to move on and follow in the footsteps of his legendary family.

He’s a son of a member of the insurance industry’s hall of fame, former GEICO chief executive and White Mountains founder Jack Byrne, whose father before him also worked in insurance.

When asked how great the pressure was to complete the holy trinity, Mark Byrne says wryly that there was little chance he would not spend part of his career in the insurance industry.

“Insurance was ordained from birth, given my father’s infl uence. I have owned four private insurance companies. I have been on the board of four public companies, so I have been around insurance literally since I was a kid.”

The affable yet conservative 50-year-old forged a successful early career predominantly as a derivatives trader, living an ex-pat existence in Tokyo, London, California, Paris and Sydney. After tiring of fi nance, Byrne decided to

play one hell of a trump card. “I started a hedge fund with Warren Buffett as my limited partner. He is not my godfather, despite that story following me around for the past 30 years, just a very good friend. That fund was called Value Capital and I ran that for 10 years. I shut that down to create Flagstone in 2005.”

Byrne and co-founder David Brown launched short-tail reinsurer Flagstone Re in December 2005 in the aftermath of Hurricanes Katrina, Rita and Wilma, to take advantage of severe market dislocation and substantive losses suffered by the insurance industry.

In May 2010, Byrne surprised everyone when he sold his $24m worth of shares in Flagstone and stepped down from his executive chairman position. By December that year, he retired entirely from Flagstone’s board and disappeared off the industry’s radar.

“I sold out of Flagstone and left its management to go sailing for a year. I hadn’t had more than a two-week vacation in 28 years of working.”

When Byrne fi nally came ashore, he returned to his position as chairman of his Bermudian reinsurer and investment fi rm Haverford with a healthy acquisition appetite.

Big plansLooking ahead, Haverford is intended to predominantly serve as the reinsurance vehicle for the eventual London operation, Byrne says. “I am focused now on creating or buying a London vehicle, which will then reinsure to Bermuda.”

And Byrne has even bigger plans beyond the Lloyd’s doorstep. “A very useful structure is to have a reinsurance company in Bermuda, a Lloyd’s insurance/reinsurance platform, as well as an insurance company underneath. We might want to be in the company market as well as the Lloyd’s market in due course, but it wouldn’t be the urgent thing. We’ll focus our attention on Lloyd’s to begin with.”

Byrne says he feels no great sense of urgency to fi nd a new acquisition target, comparing a Lloyd’s purchase to walking into a marina and asking if any of the boats are for sale. “The answer is that they are always for sale,” he laughs.

His heart now, Byrne reveals, lies elsewhere. “If you divide the world up into these merger and acquisition auction transactions, versus doing something organic or a start-up, while we are going to look at everything that is for sale, my heart really lies more with doing a start-up.”

That’s Byrne through and through: an entrepreneur at heart, who is bubbling with enthusiasm. It’s clear the industry is going to hear a lot more from the heir apparent to the Byrne name. GR

Age: 50Hometown: Clerkenwell, LondonFirst job: A broker at Ellinger Heath Western (now part of Aon Benfi eld)Interests: Sailing, skiing, cookingIn his own words: ‘My heart really lies more with doing a start-up’

Global offi ces: TwoMarket view: A savvy investment fi rm with reinsurance prowess that takes pride in making slow, decisive moves on acquisition targets.

THE MAN

THE COMPANY

GR_18-20 Profile.indd 20 08/02/2012 14:34

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QatarVI_GR_FP_Feb12.indd 1 07/02/2012 11:42


Cedants

PHOTO: ESURE

Stuart Vann has been at UK personal lines insurance specialist Esure since its formation in 2000.

Previously the company’s head of insurance, risk and acquisition, Vann was appointed to the newly created role of chief operating offi cer in October 2010.

Among his many responsibilities is helping to co-ordinate and manage his fi rm’s reinsurance purchase and keeping in regular contact with reinsurers and brokers.

Esure was founded by Peter Wood, an entrepreneur who is perhaps best known in the insurance market for founding UK motor insurer Direct Line, famous for its distinctive red phone mascot.

Complete controlWood formed Esure, originally as a 30-70 joint venture with Lloyds Banking Group, to use the internet as a main sales channel.

Lloyds eventually sold its 70% stake to a management buyout vehicle owned by Wood and backed

‘Solvency II makes insurers

look at the whole risk landscape and so requires us to develop a

more integrated approach to risk and capital management’

Stuart Vann

WITHQ A&Esure’s chief operating offi cer talks about the effect of PPOs, the qualities he looks for in reinsurers, and why his golf handicap is suffering

GR_22-23 Cedants QA.indd 22 08/02/2012 15:55


CedantsA. I’m unable to give specifi cs but we believe we have a low retention level, perhaps the lowest in the market. But then, we are a like a stick of rock that has ‘risk averse’ running through the centre.

Q. To what degree do you use alternative reinsurance structures?

A. We don’t. Sorry. We’re fairly conservative and always have been.

Q. To what extent do you rely on fi nancial strength ratings from the major rating agencies to choose your panel?

A. Reinsurers underpin the biggest risks that insurers face from natural disasters. On the motor side, there will always be catastrophic accidents and injuries and, for home, the fl oods that hit Britain in 2007 along with Storm Kyrill and then again in 2009 are recent reminders of how important strong reinsurers are in securing a strong, confi dent market.

We are also at a point in history when fi nancial crises at every level – from the eurozone to the banks and down to individual companies – have sharpened business and public scrutiny of rating and the underlying strength they seek to refl ect. There are other considerations but reinsurers’ fi nancial rating considerations are a hygiene factor and one that is written into our risk appetite and policies.

Q. Who do you admire most in the industry and why?

A. Clearly I hugely admire Peter Wood. He has always been one of the few real game changers in UK insurance, but in the wider insurance world I think it has to be Warren Buffett for his simplicity and clarity of vision and his work ethic. Peter often quotes his maxim that the brain is a muscle that always needs exercise.

Q. What do you do in your spare time?

A. I love to spend time with my family and with two young children, if there is ever any more spare time, I enjoy playing golf. I used to be good but the handicap is edging up through a bit of neglect right now! GR

FIND OUTMORE ONLINE

goo.gl/IZ2y6

ESURE’S BROKING VENTURES GO LIVE

by private equity fi rm Electra Partners, which gave him complete control of the business.

Esure’s principal home and motor insurance subsidiary, Esure Insurance Ltd, wrote £468.5m of gross premium in 2010, the most recent year for which fi gures are available, and ceded £27.4m, or about 6% of its GWP, to reinsurers.

Strict risk selectionBuying reinsurance is far from a one-person job at Esure. Three of the company’s top executives, including Vann himself, get involved, with analytical support from lower down the company.

Here, Vann talks about how Esure tackles its reinsurance buying, and how this is driven by the company’s strict risk selection.

Q. How do you expect 2011’s natural catastrophes to infl uence pricing?

A. For Esure’s world of private motor and home insurance, not too badly. In our market, it is more the gradual creep of the effect of periodic payment orders (PPOs) and costs of care that will begin to affect everyone in the motor market.

Q. How do you decide what to buy and how to structure your reinsurance programme?

A. For a relatively simple personal lines insurer such as Esure, good reinsurance has always been a cornerstone of our risk mitigation. What we buy and how we structure refl ects our risk appetite and our whole approach to underpinning a strong business.

The Solvency II regime makes insurers look at the whole risk landscape and so requires us to develop a more integrated approach to risk and capital management. This in turn helps us to evaluate our reinsurance placements decisions in the light of their impact on capital requirements.

Q. How do you expect renewals discussions to go, based on the events so far in 2011?

A. Reinsurance renewal discussions are never just discussions. They are negotiations and should be approached as such – with

‘Ultimately any broker

must be judged on the quality of programme and the prices they bring to you, and any

reinsurer on their effi cient payment of claims once the business is in place’

preparation, cool heads, excellent stats and a clear objective.

Q. To what extent are C-suite executives getting involved in the buying process?

A. Two or three of us are involved very closely indeed. It is a major spend and also one of the most important cornerstones of our business so it deserves C-suite focus. I have to say, it also gets an awful lot of research and analysis from the layers below too.

Q. What qualities are most important in reinsurers?

A. There are hygiene factors – good prices, good panels, good research – but above this the ability to build good, honest, frank relationships and to treat insurers as the distinct individuals that they are.

Q. How do you evaluate the service you receive from reinsurer and brokers, and how could it be improved?

A. We receive a very good service from both our reinsurers and brokers – Aon and Benfi eld – and have done for many years. But any broker, however good your relationship with them, must ultimately be judged on the quality of programme and the prices they bring to you and any reinsurer on their effi cient payment of claims once the business is in place.

Q. How much premium do you usually cede to reinsurers?

GR_22-23 Cedants QA.indd 23 08/02/2012 15:55

Since 1993, we have been dedicated to the art of managing risk in a volatile world. We listen, we share what we know, we craft solutions, forging partnerships that last.www.renre.com

A WORLD OFEXPERIENCE

GR_Ad_Page.indd 1 07/02/2012 10:27


Global market report

The big picture: Coping with catastrophes

Timeline: Bermuda keeping pace with change

Market map: Crunching the numbers

Horizon: What lies ahead for regulation

Inside / out: Contrasting views of Bermuda

BERMUDA

3 2 ° 1 9 ’ 5 9 ” N / 6 4 ° 4 5 ’ 0 ” W

GOVERNMENT BRITISH OVERSEAS TERRITORY (CONSTITUTIONAL MONARCHY AND PARLIAMENTARY DEMOCRATIC DEPENDENCY)

MONARCH HM QUEEN ELIZABETH II GOVERNOR SIR RICHARD GOZNEY PREMIER PAULA COX POPULATION 64,268

CURRENCY BERMUDIAN DOLLAR

GR_25 GMR Cover_v2.indd 25 08/02/2012 15:56


Global market report: Bermuda

THE BIG PICTURE

Reasons to be cheerful● Reinsurers have

coped with record losses

● Firms benefi ted from a

lack of big US hurricanes

Bermuda’s reinsurance market sustained a huge income blow in 2011, with a record $105bn in catastrophe losses recorded.

According to Munich Re, the year’s 820 events caused about $380bn in economic losses, nearly two-thirds higher than 2005’s $220bn. Earthquakes in New Zealand in February and Japan in March accounted for nearly two-thirds of these losses, making the fi rst quarter the costliest on record.

Despite the losses, Canopius Bermuda chief executive Susan Patschak says the Bermudian market has coped better than expected, with no signs of trouble in balance sheets to date.

“It seems to still only be an income statement event as

opposed to a balance sheet event for companies on the island. It will be interesting to see what happens once fourth-quarter results come out.”

Patschak also says that the nature of single big events and the lack of catastrophic Atlantic hurricanes meant reinsurers have been better able to cope with the large losses.

“Cumulative losses have been high but there has not been that one really severe event. Companies have taken one event at a time and been able to keep their balance sheets in order.

“With no really big hurricanes in the USA last year, I think people were able to catch up a bit of lost revenue from the many catastrophes that happened,” Patschak says.

Signifi cant overcapacity in the market has meant that the 1 January renewals season has not achieved the market hardening that many had hoped, according to Deloitte insurance partner Stephen Ross.

“It has only been in catastrophe-hit areas that the reinsurance rates have increased signifi cantly. In the areas without signifi cant losses, rate movements have been virtually non-existent or marginal.”

But Patschak says it is more complicated than simply waiting for market cycles to occur naturally.

“I believe the levels of amplitudes of the hardening and softening of the market will

not be to the extremes that we have seen. When people say ‘When is it coming?’, I do not see it ever coming back because there are too many other people waiting in the wings with different forms of capital.

“Looking back at KRW [Hurricanes Katrina, Rita and Wilma], I was convinced that not only would the property markets harden but the casualty too.

“However, when the hedge

funds decided to take the plunge into the cat market, it did not happen. As a result, people were not capital constrained like they expected to be. They had their capital shelves waiting and were able to reload within days.”

For Patschak, the issue of excess capital and how best to deploy it continues to plague the market. “No one wants to give back their capital for fear they might need it again soon,” she says.

Bermuda’s reinsuranceBermudian reinsurers are inextricably linked to the biggest stories in the global reinsurance market in 2011. Whether buying or selling, claiming or being claimed upon, Bermuda’s market held up surprisingly well in the face of unusual levels of catastrophe activity

USA: WINDSTORMS$20BN

CATASTROPHE

GR_26-27 GMR Big Picture_v2.indd 26 08/02/2012 13:39


Consolidate and conquer● Mergers are set to continue, but

taking on the lessons of 2011

● Companies unable to compete

outside Bermuda will face pressure

Companies that lack book diversifi cation and an ability to compete effectively outside Bermuda will face the biggest pressure as merger targets, according to Cash.

Canopius Bermuda chief executive Susan Patschak says: “We really have to wait and see what happens with the fourth-quarter results. There are certainly rumours out there about a couple of companies that are going to take it on the chin and it might be just the last blow for them.”

With excess capital looming for another year, Bermudian reinsurers may be willing to make acquisitions of small to mid-sized companies

“I think companies will have this as one of their strategies for growth going forward. Mergers and acquisitions won’t shrink, though it probably won’t happen to the degree that people imagine unless we see real

distress in Europe,” Cash says.US investment fi rm Alleghany

confi rmed its $3.4bn deal with Transatlantic in November 2011, after the collapse of the Allied World merger and unsuccessful bids by Warren Buffett’s National Indemnity and Ed Noonan’s Validus.

The Alleghany agreement will net shareholders $59.79 per share. Following the deal, Transatlantic will become an independent subsidiary of Alleghany.

Lloyd’s insurer Omega remains a target after the lapse of Haverford’s 74p per share proposal. Haverford had offered an initial 83p per share deal but chief executive Mark Byrne says the offer lapsed once new fi nancial information came to light.

Omega also received offers from fellow Lloyd’s insurers Barbican, Novae and Canopius, though they were rejected by Omega’s board.

AUSTRALIA: FLOODS $2.2BN

NEW ZEALAND: EARTHQUAKE$14BN

Consolidation looks set to continue in the Bermudian market in 2012 as reinsurers struggle to weigh excess capital issues against fi erce competition.

Market leaders say lessons have been learnt from 2011’s biggest merger sagas, including the battle to buy Transatlantic and failed bids for Omega.

Endurance chief executive David Cash says: “There will be more consolidation, although it does appear it will depend on the terms of the company that is being acquired.”

M&A

JAPAN: EARTHQUAKE AND TSUNAMI $35BN

DATA: GUY CARPENTER

GR_26-27 GMR Big Picture_v2.indd 27 08/02/2012 13:39


TIMELINEGlobal market report: Bermuda

A struggle for survival

Adapt or die. There is little doubt that Bermuda is choosing

the former, but the rate of adaptation is its key to survival. With mounting pressure from within Bermuda and beyond its shores, Bermuda’s government is working hard to stave off a fl ow of business away from the island.

Bermudian insurance insiders list the problems in Bermuda as numerous and wide-ranging. They include violence, corruption, high unemployment rates and an education system lacking high standards.

Short work permits mean expatriates do not feel settled on the island and leave some feeling isolated from the local community, unwilling to contribute. Insiders also reveal that, in 2011, about 30 senior managers left the island and returned home to the UK and USA, some taking their families with them and instead commuting to the island from the USA each week.

In addition, changes to US legislation on collateral held by foreign reinsurers is the fi rst step to creating new barriers for Bermudian reinsurers to increase business opportunities in the USA. Up until late 2011, only a handful of states had adopted a reduced collateral policy.

However, at the close of the year, policy revisions by the National Association of Insurance Commissioners (NAIC) mean that Bermuda is making a slow but positive step forward.

After a cabinet shake-up in November and improving crime fi gures, premier Paula Cox is pushing changes through government, though some are proving less than popular within government and in the local community.

But with the Cayman Islands relaxing its visa legislation and major European jurisdictions lowering corporation taxes, Cox will have to fi ght hard to remain relevant and business-friendly to the (re)insurance market.

October 2008Florida statute comes into effect for property and casualty lines, authorising the insurance commissioner to lower reinsurance collateral requirements for foreign reinsurers that have a surplus of $100m.

December 2010Bermuda’s census shows unemployment fi gures have hit 6%, double that of 2000 fi gures.

January 2003Republic of Ireland introduces 12.5% corporation tax for trading income, down from 32% in 1998. A higher tax rate of 25% was introduced for passive income, income from foreign trade and certain development and mining activities.

WHAT HAPPENED

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2000

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2002 2004 2006 2008 2010

Unem

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DA

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: B

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DE

PA

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F S

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Bermuda is battling to stem the fl ow of (re)insurance business from its shores. But as Lauren Gow reports, the rate of change from within government needs to be faster

Expat exodusIntellectual capital drains from island over safety fears● Safety and security is “the single biggest threat to doing business in Bermuda” says one Bermuda chief executive.

● In 2011, 32 top-tier managers left Bermuda due to what island insiders describe as “executive convenience”.

US regulationCollateral reductions for foreign fi rms● Under current National Association of Insurance Commissioners (NAIC)’s Credit for Reinsurance Model Law and Regulation, in order for US ceding companies to receive reinsurance credit, the reinsurance must either be ceded to US-licensed reinsurers or secured by collateral representing 100% of the US liabilities for which the credit is recorded.

CompetitionOther jurisdictions vie with Bermuda to attract more reinsurers● Competition is bearing down on Bermuda as other low-tax jurisdictions offer business-friendly incentives to attract reinsurers to redomicile their operations.

THE STORY

➤ ➤

➤ ➤

GR_28-29 GMR TimeL_V2.indd 28 08/02/2012 11:21


● Reductions in collateral mean barriers for Bermudian reinsurers doing business in the USA are now signifi cantly lower.

● The new Model Law and Regulation still has to be approved by individual states, because insurance is regulated at state level in the USA, rather than at federal level.

● The Bermudian government is trying to balance decreasing local unemployment against remaining an attractive centre for international business.

● Working to lower crime rates is diffi cult in an economically unstable environment but is necessary to avoid an expatriate exodus.

● Bermudian premier Paula Cox needs to consider any additional business incentives, such as further easing of work permit restrictions, improving quality of life and lowering tax that may assist Bermuda in fi ghting off competition from other low-tax jurisdictions.

March 2011New Jersey passes a law allowing the commissioner to reduce the amount of collateral required of reinsurers with surpluses in excess of $250m, within the commissioner’s discretion.

April 2011Bermudian economy, trade and industry minister Kim Wilson announces 10-year work permits will be available for expatriates if international businesses are able to prove they are “providing opportunities for Bermudians at all levels”.

March 2007UK budget announces tax rate cut from 30% to 28%, effective from April 2008.

April 2011Indiana introduces reduced collateral status for property, casualty and life business for reinsurers holding at least $250m in surplus (or the equivalent).

October 2011Q3 crime fi gures show a crime rate decrease of 5.6% compared with the second quarter of 2011. It is the fi fth-lowest quarterly fi gure since 2000.

March 2011 UK lowers corporate tax rate by 2%, with the rate to fall by 1% per year until 23% is reached. UK chancellor of the exchequer George Osborne said when making the announcement: “Let it be heard … that Britain is open for business.”

WHAT’S NEXT

November 2011NAIC unanimously adopts revisions to the Credit For Reinsurance Model Law and Regulation. All 50 states, the District of Columbia and fi ve US territories are now able to certify non-US reinsurers to post only a percentage of collateral based on a rating given for this reason.

November 2011Premier Paula Cox announces that government revenues are expected to be between $10m and $20m less than the $940m projected in February’s budget.

November 2011 Cayman Islands premier William McKeeva Bush outlines plans to offer 10-year work permits for senior executives and reduce work permit fees.

➤ ➤ ➤ ➤

➤ ➤ ➤ ➤

GR_28-29 GMR TimeL_V2.indd 29 08/02/2012 11:22


Global market report: Bermuda

HORIZON

Bermuda set for Solvency IIequivalencyEurope may be pushing for a more robust insurance framework with Solvency II, but Bermuda is not about to be left behind in the regulation stakes. Lauren Gow reports

For the past two years, Bermuda has been working against the

Solvency II clock. In an effort to gain regulatory equivalency under the EU Solvency II directive, the Bermuda Monetary Authority (BMA) – Bermuda’s fi nancial services watchdog – has implemented a number of signifi cant insurance regulations for the market.

Bermuda already has a robust regulatory system, but the recent changes to the Companies Amendment Act and the introduction of the formalised guidelines within the Insurance Code of Conduct mean the industry is spending more time and money on compliance than it ever has.

In addition, there is the looming threat of the Neal Bill, a piece of US legislation aimed at stemming the fl ow of premium dollars to tax havens.

But rather than being weighed down by the volume and complexity of changes, the Bermudian (re)insurance market is embracing the changes.

While (re)insurers there dismiss the likelihood of the Neal Bill passing, amendments to the Companies Act mean that doing business on the island could be easier, and more profi table, than ever before.

LEGAL:

Neal Bill opposition grows President Barack Obama’s 2012 budget includes a provision 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.

The new Bill will effectively eliminate that competitive advantage and defer the tax 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 are not disadvantaged relative to domestic insurers, the legislation

1 November 2009: The Solvency II

directive was approved by the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops), and will be adopted by all 27 EU member states plus three in the European Economic Area. Other countries can apply for equivalency. The new regime applies to insurance fi rms with GWP exceeding €5m ($6.6m) or gross technical provisions in excess of €25m.

2 October 2011: The European

Insurance and Occupational Pensions Authority (Eiopa) published a report on its preliminary Solvency II equivalence assessment of Bermuda. The results showed that Bermuda’s regime for commercial insurers meets the criteria for Solvency II equivalence, with certain caveats that the authority anticipated.

3 April 2012: Postponed until

April 2012, the European parliament had originally earmarked January 2012. The vote is crucial to fi nalising Level 1 framework of Solvency II and Omnibus II.

4March 2013: The directive should

be integrated into countries’ law and regulations by 31 March 2013.

‘Nobody wants a loss of momentum, as insurers have been working towards Solvency II for many years’Jim Bichard PricewaterhouseCoopers

5 January 2014: The date for

full implementation of the directive by all companies is now one full year later than the previous deadline that was proposed by the European Commission in January 2011.

FIVE MAJOR MILESTONES OF SOLVENCY II

BERMUDA’S ACTIONS

GR_30-31 GMR Horiz_v2.indd 30 08/02/2012 11:22


REGULATION:Business-friendly measuresOn 14 December 2011, Bermuda’s government enacted changes to the Companies Amendment Act, aimed at resolving practical issues that have arisen in recent years. While the changes are not written specifi cally for insurers, the Bermudian insurance industry welcomes them.

“This is one of the most important amendments to the Act in the past 10 years,” Conyers Dill & Pearman’s Doyle says.

He adds: “It is important to note that the government is committed to working with the private sector to ensure Bermuda retains its competitive edge in the offshore world.”

Long-awaited changes

The changes to the Act introduce new concepts and procedures into the legislation, including a new process for mergers as an alternative to existing amalgamations, while sole directorships and corporate directorships of Bermuda companies will be permitted.

(Re)insurers in Bermuda say the market has pushed for these changes for years. Companies will also have the option of waiving their annual general meeting.

The changes are also aimed at removing the bans on providing fi nancial assistance, which (re)insurers say is “encouraging”. In addition, paperless share transfers will be possible for listed companies.

We say: These are good, sound developments aimed at the weakest points in Bermuda’s business law. With competition fi erce in other low-tax jurisdictions, any changes like this will not only encourage domiciled companies to stay but hopefully encourage further economic development on the island.

allows foreign-based groups to avoid the deduction deferral rule and be taxed similarly to a US company on the income from affi liate reinsurance transactions. A foreign tax credit is provided for any foreign taxes paid on such income.

While the Bill is not aimed specifi cally at Bermudian (re)insurers, the effect of its passing is undeniable. Bermuda-based law fi rm Conyers Dill & Pearman’s director, David Doyle, says: “This Bill is certainly a threat to Bermuda. While the Bill applies to all foreign reinsurers, it is clear that it is aimed directly at us and, if it is passed, it would end up hurting Bermuda – no question.”

As opposition mounts, (re)insurers in Bermuda are adamant that the Neal Bill will be unsuccessful. Insurance advocacy group The Coalition for Competitive Insurance Rates says that more than 100 insurers, independent experts, state government offi cials, business owners and associations have publicly fi led opposition letters against this tax proposal.

We say: With so much opposition to the Bill, both from inside and outside the USA, questions need to be asked about whether the positive effects of ensuring US capital remains

(Above, left) The US Capitol building in Washington, DC

(Above, right) Bermudian premier Paula Cox

on US shores are worth it, considering the negative effect for the global insurance market.

REFORM:Regulation overkill?The Bermuda Monetary Authority (BMA) issued an Insurance Code of Conduct in February 2010. Originally, full compliance was required by 31 December 2010, but this was later pushed back to 1 July 2011.

Conyers Dill & Pearman’s Doyle points out that the code is broadly consistent with the BMA’s previously published guidance notes, and is within the principles of the International Association of Insurance Supervisors, of which it is a member.

“It formalises a lot of the previous guidelines introduced by the BMA, now captured in one document,” Doyle says.

Non-compliance consequences

Since the July 2011 compliance date, the BMA has enforced the code through its regular prudential supervision and reviews of insurance companies. The code applies to all insurers in the Bermuda market, and failure to comply with it is an offence.

In addition, from 2012 every insurer is required to submit, as part of its annual statutory return, a statutory declaration confi rming that it complies with the requirements of the code.

Failure to comply will be taken into account by the BMA in determining whether an insurer is conducting its business in a “sound and prudent manner”, says Doyle. Compliance failures could result in suspension of business licences.

We say: The Code of Conduct is regulation overkill in such a small market. Although Bermuda is known for admirably strong fi nancial services regulation, at a time when (re)insurers are struggling with global economic uncertainty and the rush to achieve Solvency II equivalency, the cost and effort of further regulation could do more harm than good.

GR_30-31 GMR Horiz_v2.indd 31 08/02/2012 11:22


MARKET MAPGlobal market report: Bermuda

26,422

PartnerRe 4,881

Everest Re 4,201

XL Group 2,255

Axis Capital 1,834

Catlin 1,290

RenaissanceRe 1,165

Aspen Insurance 1,162

ACE 1,146

Validus 1,101

Flagstone Re 1,098

White Mountains 1,079

Endurance Specialty Holdings 941

Alterra Capital

892

Arch Capital Group 875

Platinum Underwriters Holdings 780

Ariel 644

Maiden Holdings 554

Allied World Assurance

Company 524

BERMUDA GWP 2010 ($m)

MARKET REALITIESThe amount of industry attention and column inches devoted to Bermuda gives the impression that it is the centre of the reinsurance universe. This perception is heightened by the fact that, as a catastrophe reinsurance hub, Bermuda plays a major role in handling the industry’s largest and most headline-grabbing losses and is a focus for start-ups. A glance at the premium numbers, however, shows that while Bermuda certainly punches above its weight, it is by no means the leader.

KEY STATS

● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●

Bermuda = double the reinsurers of any other region

TOP 50 GLOBAL REINSURERSThe top 50 global reinsurers list, compiled by rating agency AM Best, is the who’s who of the market. Bermuda’s reinsurers take 18 of the top spots, highlighting its importance in the global market.

BERMUDA TOTAL GWP MUNICH RE GWP

$26,422m $31,280m

BERMUDIAN TOP THREE GWP

LLOYD’S TOTAL GWP

$12,977m$13,215m

TOP 50 REINSURERS’ TOTAL GWP

16%

7%

TOP 10 REINSURERS’ GWP

PartnerReEverest Re

Bermudian companies in the top 50

● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●● ● ● ● ● ● ● ● ● ●

TOP 50 GLOBAL REINSURERS

Total of European top 10 GWP

Total GWP of rest of top 50

Top three:Munich Re, Swiss Re and Hannover Re

71%

DA

TA

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GR_32-34 GMR Market map V2.indd 32 08/02/2012 14:36


, ,

96,606

Munich Re

31,280

Swiss Re 24,756

Hannover Re 15,147

SCOR S.E. 8,872

Allianz S.E. 5,736

MAPFRE RE 3,143

Generali 2,463

AEGON NV 2,391

Caisse

Centrale de

Reassurance

1,814

Amlin 1,004

EUROPEGWP 2010 ($m)

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Marine and aviation

Financial guarantee

Accident and health

Property

Property catastrophe

Professional liability

Excess liability

General liability

Casualty

Finite

Workers’ comp

Life

Terrorism

Other

LINES OF BUSINESSBermuda’s roots in professional liability insurance and property catastrophe reinsurance can clearly be seen in the breakdown of what companies are writing (the yellow and brown bars, respectively). However, it is also clear that, despite its image, Bermuda is about far more than these business lines. While the island is world-renowned for catastrophe reinsurance, this makes up a smaller proportion of the total than one might expect. Interestingly, the island continues to be underweight in general liability, possibly refl ecting the pain their longer-established counterparts endured in this line in the mid-to-late 1990s.

DATA: COMPANY

REPORTS, DELOITTE,

STANDARD & POOR’S



MARKET MAPGlobal market report: Bermuda

MARKET MAP

900

800

700

600

500

400

300

200

100

0

-100

-200

-300

-400

-500

-600

-700

-800

-900

Arch Capital $273.7mEst. 1995

Flagstone Re ($216.8m)

Validus Holdings ($6m)

CLASS OF 2005

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

90

80

70

60

50

40

30

20

10

0

-1

-2

-3

-4

-5

-6

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PROFIT($M)

SHARE PRICE

($)

ACE $835mEst. 1985

ACE 26 Jul 2011ACE reports Q2 net income of $607m, operating income of $686m and combined ratio of 92.6%.

ACE 17 Nov 2011ACE announces board will recommend 33% quarterly dividend increase to shareholders, to $0.47 from $0.35 per share.

ACE 15 Mar 2011 ACE announces loss estimates for fi rst-quarter natural catastrophes to be around $210m, with additional Japan losses of around $250m.

ARCH CAPITAL 28 Apr 11Arch Capital group posts a fi rst quarter profi t of $19.3m

VALIDUS HOLDINGS 25 Jul 2011 Shares drop after chief executive Ed Noonan makes hostile bid for fellow reinsurer Transatlantic.

VALIDUS HOLDINGS 29 Nov 2011 Shares rise after Noonan bows out of race for Transatlantic.

ARCH CAPITAL 15 Mar 2011 Arch issues a profi t warning for its 2011 fi rst-quarter results indicating it will be negatively impacted by claims in the range of $35m-$70m from the New Zealand earthquake in February.

FLAGSTONE RE 2 Aug 2011 Flagstone Re reported a net loss of $181.4m for the fi rst half of 2011, down from $44.8m profi t in H1 2010.

BIG MOVERSWhat happens when you take four Bermudian companies’ share prices over the course of the worst year on record for natural catastrophes? Interesting pictures come to light, including two of the most profi table companies at third-quarter 2011 results, Arch Capital and ACE, are also two of the oldest companies on the island. Two members of the Class of 2005, Validus and Flagstone Re, may have had a bumpier ride, but they can learn lessons from their older rivals.

ACE 2 Feb 2011ACE acquires New York Life’s Korea operations for around $75m in cash.

FLAGSTONE 21 Mar 2011 Shares drop after rating agency Moody’s puts Flagstone Re’s A3 fi nancial strength rating under review for a possible downgrade under the belief that fi rst-quarter catastrophes will result in a material loss for the insurer.

DATA: COMPANY

REPORTS, DELOITTE

ARCH CAPITAL 26 Jul 2011Market confi dence in the group remains high despite Q2 GWP falling 51% to $911,939, from $1.88m during the same period in 2010.



INSIDE / OUTGlobal market report: Bermuda

Surfi ng a wave of changeLauren Gow talks to industry leaders to get their views on what the future holds for Bermuda

SOLVENCY II

DOMICILES

M&A

Solvency II has been a long-running saga and moving target. What has impressed me over the past 12 months has been fi rst, the level of engagement between Bermudian regulators and companies, and European regulators. There appears to be a strong dialogue and mutual respect. Secondly, if you look at the work Bermuda has done putting in place the regulatory framework, I think we are most of the way there. There are gaps to be fi lled but it appears to me that European regulators are prepared to work with us to see that done.

When I think about insurance and reinsurance in Bermuda, I don’t see domiciles changing. It is hard for some of these domiciles to match Bermuda in terms of critical mass of professionals and companies. What we have clearly seen in Bermuda is that the government is prepared to make adjustments to the work permit regime to make the island more competitive. Longer term, the things that would change Bermuda’s competitiveness is where (re)insurance is purchased. That is less about the market and more about where the buyers come from. If the Asia-Pacifi c area becomes a larger buyer, perhaps we’ll see Bermudian companies put more resources into a market like Singapore to access those markets.

There will be more consolidation, although it does appear it will depend on the terms of the company that is being acquired. That is one of the lessons that has come out of the Transatlantic saga. I think there will be pressure on companies that are not diversifi ed and don’t have the ability to compete outside Bermuda through their own infrastructure; I think there will be pressure on companies like that to be consolidated. Additionally, you will start to see some of the Bermuda companies that have been around for a while, like Endurance, looking for small to mid-size acquisitions. I think companies will have this as one of their strategies for growth going forward. Mergers and acquisitions won’t shrink, though it probably will not happen to the degree that people imagine unless we see real distress in Europe.

You can’t have a discussion about this market without discussing Solvency II equivalency. I think Bermuda has done a good job of being well positioned to be in the fi rst wave of equivalence, along with Switzerland and Japan. That is particularly the case for Class 3 and 4 (the major reinsurers). When I speak to Bermuda reinsurers, it is very clear that they see equivalence as absolutely critical for Bermuda, hence the focus by the Bermuda Monetary Authority.

Trends are developing around how businesses will be structured going forward. If you looked at Bermuda fi ve or six years ago, it was the location of choice for your holding company and principal reinsurance carrier. But what we are seeing now is that it is much more fl uid. Bermuda will remain a critical reinsurance centre; it will now depend on where individual businesses seek to base themselves. I think businesses are now looking at this on a much more regular basis than they have historically, because things are moving from a tax perspective and a regulatory perspective. Bermuda will remain a hub but it may not be a location dominated by holding companies like it has been.

If you look at both the Bermuda and the Lloyd’s market, you can see that there is a clear correlation between size and valuation and it is very clear that bigger businesses generally are being valued higher than their smaller peers. With a few exceptions I think that size really does matter when it comes to scale of reinsurance businesses. It used to be the case that if you had $1bn in shareholders’ funds, you were in the game. But now, we are seeing that number increasing up to $3bn. That is going to be an important driver and that is why I think there is going to be a lot of consolidation in the market, particularly around those smaller players.

Stephen RossDeloitte insurance partner

David CashEndurance chief executive

OUTSIDE VIEWINSIDE VIEW

GR_35 GMR Views_v2.indd 35 08/02/2012 11:30


Rewind

Renewals – a tough job but someone’s got to do it … as long as it’s not our man, naturally

apparently used to recreate the Esprit in Xbox 360 game Forza Motorsport 4. So not only has he got some cracking cars, but one of them’s featured in a top console game. How can I compete with that? Maybe I should be working at a stock broker rather than as a Lloyd’s broker.

Keeping it simple, stupidOne of the things I love about this industry is the nuggets of wisdom that get handed down from

the old guard to the upstarts like me. Markel International president Jeremy Brazil fondly recalls: “My fi rst underwriting boss said to me: ‘Boy, always remember, insurance is

half common sense and half luck and all anybody will ever try and do is over-complicate it for you.’” Surely he can’t have been talking about brokers. We only ever make underwriters’ lives easier. Honest.

Putting the north on the mapThe north of England is famous for a lot of things, or so I’ve heard – never ventured up there myself. One thing it’s not typically renowned for, though, is being the birthplace of reinsurance broker chief executives. It seems BMS boss Carl Beardmore, who hails from Stoke-on-Trent, is on a one-man mission to put the north on the reinsurance map. Apparently he appeared in an industry

publication wearing a fl at cap and toting a whippet. Not sure how much Carl’s northern roots will count in New York, where he is now going to be spending most of his time.

Now that’s what I call musicI’m a music fan but telephone hold music has never been my cup of tea: it fl ounders somewhere between white noise and Eurovision. So I tip my hat to Chris Stroup and his Wilton team for their entertaining on-phone Flamenco. It amused me no end that a life insurance company would choose a type of music that is well known for its ties to the life-endangering matador sport. GR

MontyIt’s all about teamworkYou’re probably all sick of hearing right now how fraught the 1 January renewals were, but what will probably make you even sicker is that I left it to the other folks back in the offi ce and swanned off to the Caribbean for Christmas. Such a shame that I couldn’t get any reception on my phone, as I’d have loved to help out. It’s good to note that it wasn’t just the little guys feeling the pain, though. Despite being co-chief executive of the world’s biggest reinsurance broker, Aon Benfi eld’s Dominic Christian, a retro broker by trade, rolled up his sleeves and got stuck in. How was his break? “Crap Christmas and New Year” came the reply.

Some things can’t be fi xedSpeaking of Aon executives, many of you will have no doubt noticed London market big-hitter Dennis Mahoney’s reappearance in the industry’s collective consciousness in the past couple of months. Despite being retired, our Dennis is a busy chap. He was named chairman of risk analytics fi rm Sciemus in November, and more recently has been appointed to Ironshore’s board. So what’s he been up to in between? Turns out he’s been doing a spot of scuba diving and even entered the Mille Miglia Italian rally a couple of years ago. One thing he hasn’t done, though, is improve his golf. His instructor once told him to give up golfi ng for six weeks, and then consider stopping full time.

The spirit of Essex I’m a pretty cool customer, even if I do say so myself. But even I have to admit I’ve got nothing on top insurance analyst Barrie Cornes from Panmure Gordon. He’s got a small collection of Lotus sports cars, of which pride of place goes to his beloved ‘Essex’ Esprit. Said motor was

Always remember,

insurance is half common

sense and half luck

GR_36 Monty.indd 36 08/02/2012 11:26

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