global reinsurance - march 2012

BMS chief Carl Beardmore thinks he can beat the broking giants at their own game p20

• Global Market Report: USA in-depth p25

• News Agenda: The rise of collateralised reinsurance p16

IN THIS ISSUE:• Financial Briefi ng: Why poor data could stop reinsurers making better returns p6

Taking on the big guys

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

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GR_OFC.indd i 24/02/2012 12:18

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Leader

GLOBAL REINSURANCE MARCH 2012 1

Reinsurers have not had the best start to 2012, after a

punishing 2011. A tricky 1 January renewals was quickly followed by the Costa Concordia disaster.

Then 2011 came back to haunt them all over again as the full-year results started to roll in. The numbers will no doubt have made very uncomfortable reading for some. While several reinsurers have merely posted much smaller profi ts, others have posted large losses.

PartnerRe has been hit particularly hard – it has made a far worse loss than it did back in 2005 and has been downgraded by both Moody’s and S&P for posting losses that were out of line with its peer group. There has also been a worrying number of increased loss estimates from catastrophes from all sides.

There is also concern about the eurozone. Reinsurers’ global nature will cushion them, but the economic fall-out could hit them, and the sheer uncertainty about the outcome means cedants feel they cannot rest easy.

At times such as these, it is easy to get pessimistic about the industry.

But these events need to be put in perspective. The losses have been mostly within the industry’s capacity. Munich Re shouldered a €4.5bn ($6bn) catastrophe claims bill and still made a profi t.

And the stock market has not lost faith in the industry’s top tier: the largest reinsurers’ stock prices have performed well since the start of the year, terrible 2011 notwithstanding.

Despite its downgrades, PartnerRe is well capitalised, and the fact that rating agencies consider it an ‘outlier’ is a positive comment on how the rest of the industry coped.

That is not to say cedant concerns about the state of the industry should be dismissed. Reinsurers and brokers need to make sure that buyers can get a fair and balanced view of the industry’s fi nancial strength. This will improve trust, and also encourage cedants to share more with reinsurers about their own fi nancial position.

Ben DysonAssistant editorGlobal Reinsurance

The full-year results will

no doubt have made

uncomfortable reading

for some executives

GR_01 Leader.indd 1 24/02/2012 12:17

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

MARCH 2012 GLOBAL REINSURANCE2

News & Analysis1 Leader

4 News

6 Financial Briefi ng Mapfre’s challenge; Solvency II

8 Risk Atlas Fears triggered by huge youth unemployment

10 Risk Atlas Special The world’s worst disasters

12 Global Insurance Index Leaders show optimism

14 News Analysis Taking the hit from Costa Concordia

16 News Agenda The rise of collaterised reinsurance

People & Opinion20 Carl Beardmore The BMS chief offers an alternative

36 Diary Monty spots a priest wearing a Willis fl ag … no, really

Global Market Report: USA26 The big picture How the combination of acts of

God and acts of man – by that read economic woes – have hit

US reinsurers

28 Timeline Regulatory change, hurricanes and terrorism

on an unprecedented scale – the market’s past, present and future

30 Horizon We reveal the good, the bad and the ugly of

incoming US fi scal responsibility reform, the Dodd-Frank Act

32 Market map Key stats, big movers and their share

prices, and insider views on the future of the life insurance market

35 Inside / out XL North America chief exec Seraina Maag

and Sean McGovern of Lloyd’s bring views from inside and

outside the US market on the latest developments

Lost generation, page 8 Playing it safe, page 16 The wild west of regulation, page 30

GLOBAL REINSURANCE MARCH 2012 9MARCH 2012 GLOBAL REINSURANCE8

Risk Atlas Risk Atlas


Youth unemployment rate (16-24-year-olds) 50% and over 31%-49% 21%-30% 10%-20% 0%-9% no data

Youth unemployment in Spain has reached 51.4% among those aged

between 16 and 24, fi gures released in January reveal. A shocking one out of every

two young people in Spain is without a job.

As the map above shows, the situation is not much better in several other parts of the world. High rates of joblessness among

young people is a risk that can easily be correlated with other social problems, such as civil unrest, drug use and crime.

The collective frustration among youth has been a

contributing factor to protest movements around the world this year as it becomes increasingly diffi cult for young people to fi nd anything other than part-time and temporary

The perils of a lost generation● Youth unemployment has reached staggering levels, and disaffected young people can trigger many more risks ● Frustration felt by young people has helped fuel protests movements, such as the Arab Spring uprisings

Risk Atlas: Youth unemployment

work. High rates of joblessness among young men was certainly believed to be a factor in the Arab Spring uprisings that continue to sweep across the Middle East.

In Europe, measures designed to remedy national fi nancial problems are likely to spark further public protests. Greece is expected to make further spending cuts as one of the conditions of its bail-out package from the EU and IMF.

The same could be true in other European countries as governments struggle to ward off a return to recession. French fi nance minister François Baroin has announced austerity measures, while UK chancellor of the Exchequer George Osborne has pledged to continue the country’s fi scal squeeze, despite the fact that unemployment is now at its highest level in 15 years.

Spain and, to a lesser extent, Italy have both seen protests against cuts in spending. There could be a number of disasters waiting to happen as disaffected citizens take to the streets.

Principal of Paris-based Adageo, an independent risk management resource, Chris Lajtha says: “The likelihood of civil commotion is largely determined fi rst by the hardship – real or perceived – felt by various segments of a population, and second by the availability and accessibility of channels to voice discontent/demands for change.

“In countries in both the developing and developed world where there is a high rate of unemployment in the 18-30-year-old category, there is a tendency for discontented youth to take to the streets to try to accelerate change.”

(Re)insurers have been expecting a surge of fi nancial crisis-related claims since trouble started back in 2008. The industry was especially worried that there would be a wave of claims in professional lines, particularly from directors’ and offi cers’ liability policies. This claims wave has yet to emerge, however, leaving many concerned that it will catch the industry unawares.

Despite this, there is evidence that fi nancial crisis and recession-related claims are on the rise. For example, London’s Commercial Court recently ordered 11 insurers to pay a £102m professional indemnity claim brought by Standard Life. The 11-strong group is led by ACE European Group and Liberty Mutual Insurance Europe, and includes the UK divisions of several other big names such as Axis Specialty Europe, Catlin Insurance Company UK and Chartis Insurance UK.

The claim centres on Standard Life’s Pension Sterling Fund, which lost 5% of its value after its investments in asset-backed securities tanked.

There are also other signs that senior (re)insurance executives are taking the potential for recession-related claims seriously. Markel International chief fi nancial offi cer Andy Davies says he is expecting claims activity to increase as a result of the economic environment (see page 6).

The unemployed take to the streets

Recession claimsGoing back further, after the fi nancial crisis in Argentina in 2001, which led to the collapse of the Argentinean economy, large numbers of young people became addicted to the drug Paco (short for ‘pasta base de cocaine’ – a substance created at the early stage of cocaine production).

The highly addictive and cheap drug expanded out of the ghettos to the Argentine middle class. No defi nitive numbers exist on deaths.

Youth unemployment was high on the agenda at the World Economic Forum in Davos, where politicians, economists and bankers said action was essential to stimulate growth and prevent a “lost generation”. This is set against a

youth unemployment in January said: “For the generation entering the labour market in the years of the Great Recession, there is not only current discomfort from unemployment, under-employment and the stress of social

hazards associated with joblessness and prolonged inactivity, but also possible longer-term consequences in terms of lower future wages and distrust of the political and economic system.”

Executive director of the ILO employment sector José Manuel Salazar-Xirinachs said that ultimately the job market will only ever pick up if “obstacles to growth recovery” are removed, “such as accelerating the repair of the fi nancial system, bank restructuring and recapitalisation to re-launch credit to small- and medium-sized enterprises, and real progress in global demand rebalancing”.

As with every risk, there’s an upside too. Countries and companies that are still in a position to offer employment should easily be able to attract the best workers.

Chancellor Angela Merkel only had to mention Germany’s shortage of healthcare professionals at a recent European summit to trigger an infl ux of migrant workers from Spain into her country.

Those companies that are still

Percentage of unemployment in Spain (ages 16-24)

NB: 2011 fi gures

51.4

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UNREST: ON A KNIFE EDGE

backdrop of rising frustration among millions of young people worldwide who are facing high unemployment, increased inactivity and precarious work.

As recent fi gures show, the global economic crisis has led to a substantial increase in youth unemployment around the world. And it’s not just a problem confi ned to poorer countries.

At the peak of the crisis period in 2009, the global youth unemployment rate saw its highest annual increase on record, going from 11.8% to 12.7% between 2008 and 2009 – an unprecedented increase of 4.5 million unemployed youth worldwide.

The average increase of the pre-crisis period (1997-2007) was less than 100,000 young people per year.

A report by the International Labour Organisation (ILO) on

growing should, similarly, be able to pick and choose from a large pool of talented and enthusiastic young people.


News Agenda News Agenda

investors, which set up unrated reinsurance vehicles in domiciles such as Bermuda, the Cayman Islands and Guernsey. The attraction is that catastrophe reinsurance is typically not correlated to wider economic cycles.

“The investment market globally is pretty challenged,” Klein says. “Insurance and reinsurance is an area where there are still good returns and there is the accepted view that the insurance sector operates to a different economic cycle, although it’s under pressure from low interest rates. So it’s diversifying, it’s making returns and within the property cat arena it is now much easier to come up with a quantifi cation of the risk that investors can understand more easily.”

Less of a riskWhile it is not a replacement for traditional reinsurance – and is a more expensive option, refl ecting the fact it is fully funded – collateralised reinsurance protection does offer cedants peace of mind. And with rates rising in the traditional property cat market (by an average of 9.5%, according to Guy Carpenter’s rate on line index), the differential in pricing is not as pronounced as it was.

Collateralised cover eliminates counterparty risk and does not come with the basis risk typically associated with securitised products. This is the risk that a company experiences a loss but that it does not trigger a payout from the (re)insurers’ cat bond or ILW.

While in theory, collateralised cover can be used in any class of business, it is typically purchased to cover property catastrophe risks. But, again unlike cat bonds and ILWs, this is not just at the top end of catastrophe programmes. “Collateralised reinsurance is being used more down in the working layers, which is why the UNL aspect is so important for the buyers,” Klein explains. “You don’t want basis risk at that level, and of course the rates on line refl ect that.”

Increased interest from cedants and investors has led to continued growth in collateralised reinsurance. Helen Yates weighs up the costs and benefi ts in the aftermath of 2011’s catastrophes and losses

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LANCASHIRE DEPLOYS SIDECAR FOR JAPAN RENEWALS

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News Agenda

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Safe and sound

The growing popularity of 100% collateralised ultimate net loss (UNL) reinsurance cover is

testament to several factors in the market: last year’s catastrophe losses, the impending Solvency II directive and the increasing involvement of insurance investors in this space. Capacity is growing and is currently worth around $11.5bn, according to reports, but could grow to $12.5bn by 2014.

Last year saw many examples of cedants complementing their traditional reinsurance purchases with collateralised cover. “Collateralised reinsurance is popular,” Guy Carpenter head of sales operations for the UK and EMEA Chris Klein confi rms.

“We effectively brought a collateralised vehicle to market last year. We were certainly using them as an important source of capacity and have managed to sell all that capacity into the market. It’s an important part of the placement process and is gradually increasing in importance, provided market conditions continue to make it attractive for the investors.”

So what is collateralised reinsurance and why is it increasingly popular? Distinct from catastrophe bonds and industry loss warranties (ILWs), a tradable instrument is not created to facilitate the risk transfer process. Collateralised reinsurance transactions are essentially the same as traditional UNL reinsurance placements, except that the underwriter or investor posts full collateral against the risk.

“From the start, the most attractive feature to the buyer is that it is collateralised,” Klein says. “You buy your cover and then the limit that you have purchased – the potential loss you’ve indemnifi ed – is funded 100%. That money is put into a trust fund so you know that if there is a claim, the money is there – it’s been funded upfront.”

Collateralised cover is typically provided by hedge funds, pension funds and other capital market

KEYPOINTS:01: Money for claims is funded upfront and there is no basis risk, meaning peace of mind for cedants02: Solvency II’s capital requirements have increased the appeal of collateralised cover 03: Collateral reinsurers, typically backed by hedge funds or pension funds, are able to set up without a credit rating


Global market report: USA

HORIZON

Dodd-Frank: it’s the new sheriff in townSet to become law this spring, the Dodd-Frank Act is the US government’s response to the 2008 fi nancial meltdown. But as Lauren Gow reports, it contains much for insurers to be concerned about

The Dodd-Frank Wall Street Reform and Consumer Protection Act, a new

fi scal responsibility regime, is expected to unsettle US fi nancial institutions this year.

The Act is a direct result of the 2008 fi nancial meltdown and will incorporate all US fi nancial institutions including insurers and reinsurers. Many in the industry question the relevance of a regime that puts banks and insurers under the same risk banner, but Federal regulators are adamant that the regime will be fair for the insurance industry.

Part of the new regime is the formation of a committee of regulators, the Financial Stability Oversight Council (FSOC), on which insurers hold three seats. “Although there is no federal insurance regulator, insurance is represented because it is quite clear that insurance is within the defi nition of ‘fi nancial institution’, so it can be studied by this council for potential systemic risk,” Dewey & LeBoeuf partner Charles Landgraf says.

One non-voting seat will be held by a chosen representative of the National Association for Insurance Commissioners (NAIC), currently Missouri Insurance Department director John Huff. A second non-voting seat will be held by the Mike McRaith, director of the new

THE UGLY:Federal powers to override state Under Title V of the Dodd-Frank Act, the Treasury and the US Trade Representative have a new advance authority to negotiate international agreements on insurance prudential matters. That agreement effectively becomes law, without a need to go back to Congress for approval or be ratifi ed like a normal treaty.

Also, the director of FIO will have the power to review any state supervisory measure thought to be inconsistent with any commitment made within such an agreement. The director is then allowed to issue an order pre-empting the state order if certain conditions are met.

One of those conditions is that the state regulation must not treat a non-US insurer or reinsurer less favourably than a US insurer or reinsurer.

This move is popular with foreign insurers and reinsurers who have objected strongly to the collateral obligations forced upon them by state regulators, rules that did not apply to US insurers and reinsurers.

WE SAY: Congress may have put restrictions on the advance authority within Title V, but insurers are right to be extremely concerned. State regulators will have the opportunity to participate in a ‘consultation’ and provide input, but not have any veto powers. State regulators also face the real possibility of having their own regulations trumped by the FIO in order to keep international agreements on track.

THE GOOD:FIO remedies the lack of expertiseThe Federal Insurance Offi ce (FIO) has been created to remedy the lack of insurance expertise at federal level. The scope of the FIO’s oversight extends to all lines of insurance except health insurance, long-term care insurance and federal crop insurance.

Under the present interpretation of the legislation, the FIO has a largely free scope in determining the subject matter of its prepared annual reports to Congress. But there are two compulsory reports whose results should prove to be a useful, refl ective insight of the US market.

The fi rst is due within 18 months of the enactment of the legislation and deals with the modernisation of US insurance regulation, while the second

1 June 2009: The new law on fi scal responsibility was

initially proposed by the Obama administration, with the White House sending a series of proposed bills to Congress. Obama calls it a “sweeping overhaul of the US fi nancial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”.

2 July 2009: A version of the legislation was introduced

in the House in July 2009.

3 December 2009: The Act received its name as revised versions

were introduced in the House of Representatives by Barney Frank, and in the Senate Banking Committee by chairman Chris Dodd.

4July 2010: President Obama signed into law the

Dodd–Frank Wall Street Reform and Consumer Protection Act.

5 Spring 2012: Proposed implementation date for Dodd-

Frank Act.

FIVE STEPS TO DODD-FRANK’S IMPLEMENTATION

WILD WEST OF REGULATION

potentially posing a systemic risk to the US economy.

Insurers will fall under the ‘non-bank fi nancial company’ heading, under which they will be subject to a size test of whether they hold more than $50bn or more in assets in the USA, as well as being assessed on debt levels and how interconnected they are to other fi nancial institutions.

These rules have yet to be fi nalised but give a clear indication that US insurers, particular life insurers, could be designated a systemic risk.

Dewey & LeBoeuf’s Landgraf says: “It is possible that a non-life insurer could be designated but just looking at the way the rule-making is developing, it is more likely to be life insurers. However, very few will be designated and it will be the fi rst time that many of them had anything to do with the Federal Reserve Board. This means the board will be their macro prudential overseer and require information above and beyond what their prudential supervisor does.”

Once an insurer has been declared a systemic risk by FSOC, it is referred to macro supervision by the board, which may impose new, additional capital requirements and conditions on top of its existing prudential supervisor’s requirements.

There is also a second wave of concern at holding company level for those insurers facing designation as a systemic risk in the form of a creation of the ‘Resolution Plan’ for the Federal Deposit Insurance Corporation in case of insolvency.

“The uncomfortable fact is that one of the big headline stories during the fi nancial crisis was American International Group [AIG]. It was very deeply involved in the crisis through credit default swaps, which aren’t a traditional insurance product written by a traditional insurance company,” Landgraf says.

“Because of this disaster, it has been very diffi cult, if not impossible, to argue politically that there is a reason for the insurance sector to be excluded from this new systemic risk supervision mechanism that was being set up.”

WE SAY: The Resolution Plan, or ‘living will’ as it was dubbed during the legislative debate, will be an enormous burden on insurers. Though the idea for a plan dealing with insolvency is undoubtedly useful, the resolution will need to be updated each time there is a change in the structure or condition of the insurer.

Federal Insurance Offi ce (FIO), which has been created within the Treasury by Dodd-Frank. A third voting seat is to be held by an insurance expert appointed by US president Obama and is currently held by Ray Woodall.

The FSOC’s fi nal rules are expected to be delivered in the spring. is a comprehensive look at the US and

global reinsurance market.The FIO may require insurers to

submit data, with the director empowered to issue subpoenas to gain such information. But the legislation requires the FIO to obtain data from federal and state regulatory agencies or publicly available sources, if possible, before requiring insurers to submit such data. There is also an exemption for small insurers.

The FIO’s fi rst report, which was due at the end of January, is to review the uniformity (or lack of) in insurance regulation in the USA.

WE SAY: The need for insurance expertise and representation at a federal level is long overdue. The formation of the FIO is a positive step.

THE BAD:Life insurers to be branded a riskFSOC is ultimately responsible for deciding which fi nancial institutions need heightened supervision by the Federal Reserve Board, as a result of

FIO director MIke McRaith will hold one of three insurance

seats on the Financial Stability Oversight Council

Editor-in-chief Ellen Bennett

Tel +44 (0)20 7618 3494

Email [email protected]

Assistant editor Ben Dyson

Tel +44 (0)20 7618 3480


Markets editor Lauren Gow

Tel +44 (0)20 7618 3454


Group production editor Áine Kelly

Deputy chief sub-editor Laura Sharp

Senior sub-editor Graeme Osborn

Publisher William Sanders

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Business development manager Donna Penfold

Tel +44 (0)20 7618 3426


Senior sales executive Tomas Imrich

Tel +44 (0)20 7618 3432


Group sales director Tom Sinclair

Tel +44(0) 7618 3429


Managing director Tim Whitehouse

Group production manager Tricia McBride

Senior production controller Gareth Kime

Digital content manager Michael Sharp

Head of events Debbie Kidman

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March

GR_02 Contents.indd 2 24/02/2012 12:17

GR_Ad_Page.indd 1 23/09/2011 18:16


News

Euro storms: Lo

PartnerRe, Platinum top 2011 worst-hit list● Both saw 10%-plus drop in shareholders’ equity in second-worst cat year● PartnerRe suffers Moody’s and S&P downgrade due to ‘outsized’ cat losses

Reinsurance groups Platinum Underwriters and PartnerRe have suffered most from the 2011 natural catastrophes out of the global (re)insurers that have reported their full-year results so far. But they are not the only companies that were hit hard during what was the industry’s second-worst year for natural disaster claims.

The results come as fears increase among cedants over the fi nancial stability of the reinsurers they use. PartnerRe posted the largest full-year 2011 loss of its peer group at $520.3m. It also reported the second-largest decline in shareholders’ equity of 10.3%, which was just surpassed by Platinum’s 10.8% reduction.

PartnerRe’s 2011 performance is a sharp contrast to how it fared in 2005, the worst year on record for insured catastrophe losses. The company’s 2005 loss was just $51m, despite the fact that the USA was hit by three major hurricanes – Katrina, Rita and Wilma – that year.

Rating agencies have noted PartnerRe’s underperformance relative to its peer group in 2011. Moody’s downgraded its ratings one notch to A1 from Aa3 on 8 February because of earnings volatility and the drop in equity capital caused by its “outsized” losses from the 2011 catastrophes.

Standard & Poor’s followed suit 10 days later, with a one-notch downgrade to A+, stating that the reinsurer was “a negative outlier among its peers in 2011”.

Platinum and PartnerRe’s catastrophe claims bill relative to 2010 shareholders’ equity were also the largest of those that have reported so far, at 25.9% and 24.8%, respectively.

Catastrophe specialist Montpelier Re’s catastrophe claims were also above 20% of shareholders’ equity, while the rest ranged between 4% and 20%.

The worst combined ratio was posted by Montpelier Re.

Companies with a particularly strong focus on catastrophe business tend to perform worst in tough years like 2011, but much better than their more diversifi ed peers when losses are lower. In 2010, Montpelier Re’s combined ratio was 82% – lower than most of its peers.

Last year there were an estimated $107bn of insured losses. Around $30bn of these losses hit reinsurers. Of the 16 reinsurers that have reported so far, 10 have

reported full-year losses, while even the earnings of the profi table companies were signifi cantly lower than in 2010.

Munich Re posted the biggest profi t of those that have reported so far, at €710m ($945m). But this is a fraction of the €2.4bn profi t the company made in 2010. Munich Re paid out €4.5bn in catastrophe claims in 2011, equivalent to 19.1% of its 2010 shareholders’ equity.

Last year was diffi cult for reinsurers, as the bulk of the losses came from non-peak zones. But, despite the losses and declines in capital bases, reinsurers are still on strong footing and are unlikely to have diffi culty paying claims. PartnerRe may have been downgraded, but it still has total capital of more than $7bn.

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S&P DOWNGRADES PARTNER RE ONE NOTCH

Going global: Peo

2

5

41

3

New York Starr Companies has named Bob Coords head of Starr Specialty Reinsurance, reporting to president Charles Dangelo. Initially, the team will focus on the agriculture sector.

São Paulo Ana Carolina Mello, propertyand engineering director, and Salvatore Lombardi Jr, cargo and marine director, have joined Argo Group’s Brazil division.

Bermuda Former RenaissanceRe Ventures head John Nichols will assume leadership of Axis Re on 2 April and join Axis Capital’s executive committee.

1

3

5

Reinsurer results: effects of a cat-heavy 2011SOURCE: INSURANCE TIMES/GLOBAL REINSURANCE FINANCE DESK DATA: COMPANY ACCOUNTS

0% 5% 10% 15% 20% 25% 30%ACE

XLAlterra

Everest ReEndurance

AspenValidus

RenaissanceReMunich Re

CatlinBeazley

Transatlantic ReMontpelier Re

PartnerRePlatinum Underwriters

-12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8%ACE

XLMunich Re

BeazleyValidusAspen

Everest ReAlterraCatlin

Transatlantic ReMontpelier Re

EnduranceRenaissanceRe

PartnerRePlatinum Underwriters

Net cat loss as % of 2010 shareholders’ equity

% change in shareholders’ equity 2010-11

3.91%7.17%

8.68%15.27%

16.05%16.49%

18.09%18.41%

19.12%19.7%19.85%19.89%

22.39%24.84%

25.89%

6.71%1.47%

-1.01%-1.1%

-1.61%-2.13%

-3.38%-3.74%

-4.35%-4.7%

-4.88%-8.32%-8.4%-10.26%

-10.79%

GR_04-05 news.indd 4 24/02/2012 09:15


News

Loss estimates reach $350m

HARSH BLOWWindstorm Andrea will cost insurers about €267m ($350m), according to initial estimates from European insurance loss index, PERILS. Most of the losses from the storms, on 4 and 5 January, occurred in Germany, with signifi cant losses in the UK, France, Belgium, the Netherlands, Luxembourg and Switzerland as well. PERILS is due to publish an updated estimate on 4 April.

Tokyo quake risk rises – AIR● Likelihood of mega quake in region could hit 93%● Risk modeller says Japan was unprepared for Tohoku

Weblogglobalreinsurance.com

The probability of earthquakes in the vicinity of Tokyo may have increased to between 81% and 93%, according to analysis by risk modeller AIR Worldwide.

AIR’s analysis of last year’s Tohoku earthquake in Japan indicates that the 30-year rupture probability of earthquakes with a magnitude of 6.7 or greater in the Kanto Plain, on which Tokyo sits, may have increased from its previous level of 72%.

AIR Worldwide conducted an analysis of whether – and where – the stresses relieved by the Tohoku earthquake have been transferred to

neighbouring faults in the vicinity of Tokyo.

The analysis also discovered that, while the bulk of the damage from the Tohoku earthquake last year was caused by the resulting tsunami, the 30-metre-high tidal wave was only responsible for 30% of the overall insured losses.

The shake damage was more widespread, and AIR pointed out that shake damage would have been signifi cant in the area that was subsequently hit by the tsunami.

Japan was unprepared for an earthquake of Tohoku’s magnitude, according to AIR, despite its long seismic history.

eople moves Online top fi ve

Not even Sherlock Holmes could have found John Berger after he left Alterra, but the industry was damn sure he was cooking up something big. And, indeed, he launched a Bermuda venture, Third Point Re, in January with $785m of capital and an A rating from AM Best. Topping our web stories this month was Berger’s nabbing of two Aon Benfi eld stalwarts: Rob Bredahl as chief fi nancial offi cer and chief operating offi cer and Dan Malloy as executive vice-president for underwriting.

In claims, nothing seems so bad if it isn’t happening to you. Nearly everyone in the industry who is not at RSA or XL (and even some who are) clicked with glee as losses mounted from the sinking of the Costa Concordia.

In the third spot was more bad news for insurers, as Standard & Poor’s downgraded eight European insurers, including Allianz’s Italian

operation and Ageas’ Portuguese unit. At the time, the ratings agency was still mulling over its decision on some of the big group insurers such as Allianz Group, Aviva Group, AXA Group and CNP Group, but has since put them on a negative outlook.

There was a collective groan in late January at rumours that Solvency II was to be delayed once again to 2015. A spokesman for EU fi nancial services commissioner Michel Barnier said the European Commission “regrets this delay and is still working resolutely toward a speedy introduction”.

Finally, fi ve sharks are circling Hardy. Shore Capital analyst Eamonn Flanagan said its Lloyd’s presence was a key attraction for the likes of US insurer Tower Group and Bahraini reinsurer Arig.

1. BREDAHL AND MALLOY JOIN BERGER AT THIRD POINT REAon Benfi eld pair in senior

posts at Bermuda-based

venture

2. RSA AND XL ON HOOK IN €405M CRUISE SHIP DISASTERAon is the broker for the

ill-fated Costa Concordia

3. S&P DOWNGRADES EIGHT EUROPEAN INSURERSRating still undecided for

major European groups

4. SOLVENCY II ‘DELAYED UNTIL 2015’Latest rumours add two

years to 2013 deadline

5. AT LEAST FIVE SUITORS GUNNING FOR HARDYInterest in Lloyd’s insurer

driven by strong business

and low valuation

To contribute to the website,

email Lauren Gow at

[email protected]

T

6

Madrid Liberty International Underwriters Europe has named Jose Luis Ruiz-Poveda vice-president and Leonardo Villalba senior risk engineer.

Qatar The Qatar Financial Centre Authority has appointed former Merrill Lynch executive Bob Wigley as a non-executive director.

London Longstanding executive Tony Melia has been named chief executive of Willis Re International. He will oversee operations in Europe, Asia, Latin America and emerging markets.

4

6

2

PH

OTO

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EX

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ES

GR_04-05 news.indd 5 24/02/2012 09:15


Financial Briefi ng

● Reinsurers have had another good month, with all of the top companies posting rises. European reinsurers performed best, with Munich Re leading the pack.

● But some reinsurers only posted small rises. PartnerRe’s stock was up 1.9%, as bad news about

12.6%Munich Re was this month’s

biggest riser

*All prices expressed in local currency 17 January-16 February 2012

CFO interview: Andy Davies Q: What is your biggest concern as a chief fi nancial offi cer in the current economic environment? A: The biggest concern I have is the adequacy of the premium rates we are charging on the business today. There are two drivers of that. One is that claims activity is likely to go up because of the economic environment. The other is the fact that buyers have less money and are therefore putting pressure on (re)insurers and brokers on the premium front. So there is a double-squeeze going on.

Q: How are you managing the challenges?A: We are turning away business in sectors we are not comfortable with and giving underwriters all the tools we can to make sure they adequately price business.

Q: What impact is the low interest rate environment having on your investment portfolio?A: We’re unusual because we have a big equity portfolio and our investment strategy is different to others’. In

London, we have about $3bn of invested assets and in the USA, $8bn. We achieved a 6.5% return in 2011. Our investment philosophy on the equities side is to invest in companies we know, we like and whose businesses and cultures we understand. We tend to take long-term views. On the bond side, the bond yields have really come off quite a lot and there is not much juice left in the bond market, so we are trying to shorten the duration of our bond portfolio as much as we can and pushing more into equities.

Marketwatch: European reinsurers lead the way

Andy DaviesMarkel International

The man in charge of Markel International’s money tells us how it is riding the storm

Mapfre hits out at downgrade● Four agencies cut ratings following Spain deterioration

Spanish insurance group Mapfre has spoken out against the rating agencies, following its recent raft of downgrades from the four main agencies.

Mapfre’s ratings were cut after a downgrade to Spain’s sovereign debt ratings as a result of the continuing eurozone crisis. But Mapfre argues that the downgrades do not refl ect the company’s fi nancial strength.

“Rating agencies are in contradiction. They do their job analysing your fi gures, but then they reduce your rating according to the rating of your country,” Mapfre general manager Esteban

Tejera told a press conference for Mapfre’s 2011 results.

Tejera pointed out that Mapfre’s 2011 fi nancial position was stronger by several measures: its equity capital was up 24.8% versus 2010; its interest coverage (the number of times earnings exceed interest payments) increased to 36.5 times from 30.1 times; and its solvency margin increased to 287.2% from 285.7%.

Standard & Poor’s cut Mapfre’s ratings by two notches to BBB+ from A on 17 January. Fitch and Moody’s later followed suit. AM Best downgraded the insurer to A from A+ on 14 December last year.

8090

100110Munich Re

105k110k115k120kBerkshire Hathaway 'A'

34363840Hannover Re

17181920SCOR

48505254Reinsurance Group of America

60626466PartnerRe

75808590Everest Re

40455055Swiss Reits heavy losses was slightly

offset by the annual dividend payment.

GR_06-07 Fin.indd 6 24/02/2012 09:16


Financial Briefi ng

Solvency II data rules could curb investment

Solvency II should not hinder (re)insurers’ ability to invest in higher-yielding instruments, but companies’ ability to meet the regulation’s data demands might, according to asset management powerhouse BlackRock.

(Re)insurers are under increasing pressure to invest in higher-yielding asset classes as persistently low interest rates depress returns in their traditional staple of government and highly rated corporate bonds. Companies that have guaranteed either policyholders or shareholders a specifi c return are feeling this pressure particularly acutely.

A survey conducted by the Economist Intelligence Unit on behalf of BlackRock, which polled 223 insurers across Europe, found that 70% of respondents are expecting changes to their asset allocations to result in higher returns.

“They are worried about a yield environment that is very low. They are worried about guarantees they need to fund, and therefore they will expect to undertake asset allocation changes,” BlackRock’s fi nancial institutions group head, David Lomas, said.

The Solvency II standard model – the capital model that will be used by insurers that have not approved their own internal capital model – imposes a hefty 49% capital charge on asset classes such as hedge funds and private equity.

Despite this, the BlackRock survey found that 32% of respondents expected their private equity and hedge fund holdings to increase under Solvency II. Lomas said this was because insurers using their own internal model rather than the standard model would be able to demonstrate a lower cost of capital of investing in

these asset classes, and thus attract a lower capital charge than they would under the standard model.

“What we’re witnessing here is the desire of the insurers to really refl ect the risk they are running in their asset pools on a more defi ned basis,” he said.

Lomas said that BlackRock ran two of its hedge funds through its Solvency II risk model, and arrived at a capital charge of 10%. Based on this, he estimated that insurers using their own internal model could be looking at a capital charge of between 15% and 20% for hedge funds and private equity, rather than the more penal 49% under the standard model.

But while Solvency II itself might not hold insurers back from pursuing higher-yielding investments, their data might. Lomas explained that data forms the kernel of pillars II and III of the new regulation. Data drives the internal model, which in turn drives a company’s own risk consultancy assessment, enterprise risk management and ultimately corporate governance. In short, if the data is poor, so too is Solvency II compliance,

which could prevent companies taking advantage of the lower risk charges.

The BlackRock survey found that insurers are very concerned about their Solvency II reporting requirements. Although 89% claim to be well prepared for pillar III data reporting requirements, 97% are worried that if they do not get pillar III right, it will prevent them from pursuing high-yield strategies.

“If you have to deliver returns to shareholders and policyholders, and your limitation is the quality of your data, that’s a bad place to be,” Lomas said.

● With the Solvency II deadline now extended to 2014, and some indications that it may be pushed out further, some are wondering whether it will ever happen. But given the amount of expenditure, there is a determination by many to see it through.● Investments in alternatives can be risky, but BlackRock is not advocating that insurers allocate large portions of their portfolios to hedge funds or private equity. As with all fi nancial instruments, understanding what you are buying is critical.

FIND OUTMORE ONLINE

goo.gl/2039E

SOLVENCY II’S ORSA REMAINS A CHALLENGE – WILLIS RE

We say …

PH

OTO

: B

IGS

TO

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Solvency II: mapping insurer confi denceThere is a disconnect between insurers’ confi dence and the understanding of the necessary time and resources required for Solvency II

Q: How is the eurozone sovereign debt crisis affecting you?A: Any exposure we had to some of the problem governments we got rid of about a year ago, and we didn’t have much anyway. There will be more claims activity because the eurozone crisis is putting more stress on companies. We are trying to keep the investments matching our euro liabilities in the northern European countries, which are stronger.

Q: How is Solvency II affecting your job?A: It is taking up a lot of resources. Hopefully we are over the hump. Once it is implemented, it shouldn’t really affect your job – it should be embedded in the way you operate.

● Industry survey reveals (re)insurers concerned about new data requirements● Over two-thirds expect to change asset allocations to achieve higher returns53

545556Transatlantic Holdings

13k14k15k16kKorean Re

Re

Re

LLOYD’S TALLIES UP THAILAND LOSSESLloyd’s is expecting claims of $2.2bn from the severe fl ooding that hit Thailand at the end of 2011. The estimate is based on market share analysis, a review of contracts in place and syndicate estimates, and is consistent with an industry-wide loss of between $15bn and $20bn.

0% 20% 40% 60% 80% 100%

0% 20% 40% 60% 80% 100%

38% 54% 8%

55%

1%2%

42%

VERY CONCERNED SOMEWHAT CONCERNED NOT CONCERNED

NOT AT ALL CONFIDENT

NOT VERY CONFIDENT SOMEWHAT CONFIDENT EXTREMELY CONFIDENT

Q. How confident are you in the quality of your investment governance and risk management in light of Solvency II requirements?

Q. How concerned are you about the prospect of limiting your investment strategy because some assets will not adequately meet data requirements under pillar III of Solvency II?

SOURCE: BLACKROCK

GR_06-07 Fin.indd 7 24/02/2012 09:16


Risk Atlas


Youth unemployment rate (16-24-year-olds) 50% and over 31%-49% 21%-30% 10%-20% 0%-9% no data

Youth unemployment in Spain has reached 51.4% among those aged

between 16 and 24, fi gures released in January reveal. A shocking one out of every

two young people in Spain is without a job.

As the map above shows, the situation is not much better in several other parts of the world. High rates of joblessness among

young people is a risk that can easily be correlated with other social problems, such as civil unrest, drug use and crime.

The collective frustration among youth has been a

contributing factor to protest movements around the world this year as it becomes increasingly diffi cult for young people to fi nd anything other than part-time and temporary

The perils of a lost generation● Youth unemployment has reached staggering levels, and disaffected young people can trigger many more risks ● Frustration felt by young people has helped fuel protests movements, such as the Arab Spring uprisings

Risk Atlas: Youth unemployment

GR_08-09 Risk Atlas.indd 8 24/02/2012 11:49


Risk Atlas

work. High rates of joblessness among young men was certainly believed to be a factor in the Arab Spring uprisings that continue to sweep across the Middle East.

In Europe, measures designed to remedy national fi nancial problems are likely to spark further public protests. Greece is expected to make further spending cuts as one of the conditions of its bail-out package from the EU and IMF.

The same could be true in other European countries as governments struggle to ward off a return to recession. French fi nance minister François Baroin has announced austerity measures, while UK chancellor of the Exchequer George Osborne has pledged to continue the country’s fi scal squeeze, despite the fact that unemployment is now at its highest level in 15 years.

Spain and, to a lesser extent, Italy have both seen protests against cuts in spending. There could be a number of disasters waiting to happen as disaffected citizens take to the streets.

Principal of Paris-based Adageo, an independent risk management resource, Chris Lajtha says: “The likelihood of civil commotion is largely determined fi rst by the hardship – real or perceived – felt by various segments of a population, and second by the availability and accessibility of channels to voice discontent/demands for change.

“In countries in both the developing and developed world where there is a high rate of unemployment in the 18-30-year-old category, there is a tendency for discontented youth to take to the streets to try to accelerate change.”

(Re)insurers have been expecting a surge of fi nancial crisis-related claims since trouble started back in 2008. The industry was especially worried that there would be a wave of claims in professional lines, particularly from directors’ and offi cers’ liability policies. This claims wave has yet to emerge, however, leaving many concerned that it will catch the industry unawares.

Despite this, there is evidence that fi nancial crisis and recession-related claims are on the rise. For example, London’s Commercial Court recently ordered 11 insurers to pay a £102m professional indemnity claim brought by Standard Life. The 11-strong group is led by ACE European Group and Liberty Mutual Insurance Europe, and includes the UK divisions of several other big names such as Axis Specialty Europe, Catlin Insurance Company UK and Chartis Insurance UK.

The claim centres on Standard Life’s Pension Sterling Fund, which lost 5% of its value after its investments in asset-backed securities tanked.

There are also other signs that senior (re)insurance executives are taking the potential for recession-related claims seriously. Markel International chief fi nancial offi cer Andy Davies says he is expecting claims activity to increase as a result of the economic environment (see page 6).

The unemployed take to the streets

Recession claimsGoing back further, after the fi nancial crisis in Argentina in 2001, which led to the collapse of the Argentinean economy, large numbers of young people became addicted to the drug Paco (short for ‘pasta base de cocaine’ – a substance created at the early stage of cocaine production).

The highly addictive and cheap drug expanded out of the ghettos to the Argentine middle class. No defi nitive numbers exist on deaths.

Youth unemployment was high on the agenda at the World Economic Forum in Davos, where politicians, economists and bankers said action was essential to stimulate growth and prevent a “lost generation”. This is set against a

youth unemployment in January said: “For the generation entering the labour market in the years of the Great Recession, there is not only current discomfort from unemployment, under-employment and the stress of social

hazards associated with joblessness and prolonged inactivity, but also possible longer-term consequences in terms of lower future wages and distrust of the political and economic system.”

Executive director of the ILO employment sector José Manuel Salazar-Xirinachs said that ultimately the job market will only ever pick up if “obstacles to growth recovery” are removed, “such as accelerating the repair of the fi nancial system, bank restructuring and recapitalisation to re-launch credit to small- and medium-sized enterprises, and real progress in global demand rebalancing”.

As with every risk, there’s an upside too. Countries and companies that are still in a position to offer employment should easily be able to attract the best workers.

Chancellor Angela Merkel only had to mention Germany’s shortage of healthcare professionals at a recent European summit to trigger an infl ux of migrant workers from Spain into her country.

Those companies that are still

Percentage of unemployment in Spain (ages 16-24)

NB: 2011 fi gures

51.4

FIND OUTMORE ONLINE

goo.gl/pmXQy

UNREST: ON A KNIFE EDGE

backdrop of rising frustration among millions of young people worldwide who are facing high unemployment, increased inactivity and precarious work.

As recent fi gures show, the global economic crisis has led to a substantial increase in youth unemployment around the world. And it’s not just a problem confi ned to poorer countries.

At the peak of the crisis period in 2009, the global youth unemployment rate saw its highest annual increase on record, going from 11.8% to 12.7% between 2008 and 2009 – an unprecedented increase of 4.5 million unemployed youth worldwide.

The average increase of the pre-crisis period (1997-2007) was less than 100,000 young people per year.

A report by the International Labour Organisation (ILO) on

growing should, similarly, be able to pick and choose from a large pool of talented and enthusiastic young people.

GR_08-09 Risk Atlas.indd 9 24/02/2012 11:49


Risk Atlas Special


P A C I F I CO C E A N

I N D I A NO C E A N

CHINA USAJAPAN2004

$28bn

46

1995

$100bn

6,430

1998

$30bn

4,159

2008

$85bn

84,000

2011

$210bn

15,500

1994

$44bn

611992

$26bn

62

2008

$38bn

170

2010

$30bn

520

P A C I F I CO C E A N

I N D I A NO C E A N

1990

$7bn

40,000

2008

$4bn

140,000

2003

$13bn

70,000

1991

$3bn

139,000

2005

$5bn

88,000

2008

$85bn

84,000

2004

$10bn

220,000

2010

$400m

56,000

THAILAND

RUSSIA

The 10 most deadly natural disasters since 1980

Tsunami

Earthquake

Floods

Hurricane

Heatwave

Tropical cyclone

Source: Munich Re

Year

Economic losses

Fatalities

2000

$$$

1,000

Magnitude of event

IRAN

The 10 most costly natural disasters since 1980

GR_10-11 Risk Atlas Special.indd 10 24/02/2012 12:19


Risk Atlas Special

bottom left shows the deadliest disasters of the past 30 years).

Perhaps one of the reasons for the high costs – both in terms of money and human life – is that a growing share of the world’s population and economic activity is being concentrated in disaster-prone places: on tropical coasts and river deltas, near forests and along earthquake fault lines.

Whereas in 1950 only about 30% of the world’s population lived in cities, the United Nations currently puts that fi gure at 50%. It is expected to rise to more than 60% by 2030. Natural disasters are more destructive when they strike large cities.

And most of the world’s megacities (that is, urban areas with eight million or more people) are built in areas where earthquakes, fl oods, landslides and other natural disasters are most likely to happen.

Currently, 280 million people live in at least 25 megacities across the world, three-quarters of which are located in the developing world.

Where on earth The distribution of regional losses in

2011 was also unusual. Around 70% of economic

losses in 2011 occurred in Asia. The most destructive loss event of the year was the earthquake of 11 March in Tohoku, Japan, when a seaquake with a magnitude of 9.0 occurred 130km east of the port of Sendai and 370km north of Tokyo.

Before the tsunami in Japan, there had been an earthquake of 6.3 magnitude in Christchurch, New Zealand, on 22 February. The notable aspect of this event was that an earthquake of 7.1 magnitude had hit Christchurch just six months earlier.

Head of Munich Re’s geo risks unit, Peter Höppe, says: “Even if it seems hard to believe given recent events, the probability of earthquakes has not increased.

“But these severe earthquakes are timely

reminders that the decisions on where to build towns need careful and serious consideration of these risks, especially where certain buildings are concerned – above all nuclear power plants.”

CHILE

2005

$125bn

1,322

10

0bn

0

HAITI

2010

$8bn

222,000

1999

$3bn

30,000

Our worst year yet● Earthquakes are not actually growing more frequent, despite contrary perception● But the cost of catastrophes has hit a new high as populations concentrate in cities

Last year was the costliest year ever for natural catastrophes. At about

$380bn, global economic losses were nearly two-thirds higher than the previous record in 2005 of $220bn, according to Munich Re. The earthquakes in Japan and New Zealand caused almost two-thirds of these losses, as the map top left shows.

Five of the 10 most costly natural disasters were in the past four years (see opposite). But, contrary to popular perception, at around 820 natural catastrophe events in 2011, the number of events was in line with the average of the last 10 years.

Nine out of 10 of the natural catastrophes were weather-related (fl oods, storms, hurricanes and so on), whereas nearly two-thirds of the economic losses stemmed from geophysical events (like earthquakes). Normally geophysical events account for under 10% of economic losses and usually it is the weather-related natural catastrophes that are the dominant loss drivers.

City life Almost 30,000 people lost their lives last year as a result of natural catastrophes (the map

FIND OUTMORE ONLINE

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CATASTROPHES CUT MUNICH RE PROFIT BY 70%

GR_10-11 Risk Atlas Special.indd 11 24/02/2012 12:19


Global Insurance Index

Survey: The views of senior reinsurance leaders

Political unrest in Europe is second only to natural catastrophes as the area

of maximum concern for global (re)insurers. Catastrophes scored on average four out of a possible fi ve for level of concern, followed by European instability with three points. Unrest in the Middle East scored least with two.

The Global Insurance Index tracks business confi dence among a panel of senior (re)insurance leaders each month.

Respondents’ optimism bounced during February with an average score of three out of a possible fi ve on the pessimistic-to-optimistic-o-meter. This was a gain on 2.8 in January.

The outlook for profi tability softened slightly, however, with the average score down 0.1 points to 1.8. This may be because the majority, 55%, expect to have to wait until 2014 or later for interest rates to rise and thus investment returns to improve.

Nearly one-fi fth, 18%, expect an interest rate rise in 2013. The largest minority, 28%, were unable to nail their colours to the mast, choosing ‘it’s impossible to predict’ as the best option.

Taking a (slightly) brighter view● Optimism rose this month among key reinsurance leaders for the economic outlook in 2012● Over half of survey respondents expect to wait until at least 2014 to see a return to profi tability

Q: How do you feel about the global economic outlook for the remainder of 2012?

Q: When do you expect interest rates to rise and thus investment returns to start improving?

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

Q: Please rate the following matters for concern for the global (re)insurance industry in 2012.

Q: Catastrophe prices have increased following the events of 2011. What are the prospects for casualty rate rises in the next two years?

Q: How far will the Eurozone sovereign debt crisis impact on (re)insurers’ capital levels?

Q: What’s your view on the global fi nancial outlook for 2012, and its impact on (re)insurance?

Very optimistic Good Maximum concern

Very pessimistic Poor Minimum concern

1 1

2

Jan Jan

2

1

2

3

3

3

4 4

5 5

3.0

2.8 1.9

Average score

1.8

4.0 Natural catastrophes

Financial fraud or mismanagement 2.2

2.0 Political unrest in

the Middle East

3.0 Political unrest in Europe

2.3 Aviation/marine catastrophes

I expect global fi nancial

instability to continue: high

risk levels on European

and possibly US sovereign

bonds, coupled with erratic

equity markets with overall

gains. The (re)insurance

industry will increasingly

suffer from bond market

instability, with little to zero

ability to participate in equity

market gains. There is strong

possibility for new solvency

capital requirements for

sovereign bonds under a

revised Solvency II regime.

A continued low interest

environment will severely

depress investment income.

Technical margins are not

rising enough to compensate

and there are questions

marks as to catastrophe

activity in 2012.”

The potential

impact of the

sovereign

debt crisis,

and/or the

collapse of

the euro,

would be a

big negative

for the

industry.”

In my view,

2012 will be a

poor year, but

2013 will be

better.”

2013 18%

2014 or later 55%

It’s impossible to predict 28%

H1 2012 9%

H2 2012 0%

Loss 0% to 10% 55%

Loss 11% to 20% 27%

Don’t know 18%

Loss 21% to 50% 0%

Loss 51% or more 0%

No negative impact 0%

No change

They will rise

9%

91%

GR_12 GII.indd 12 24/02/2012 10:51

www.qatarlyst.com

Generatingpositive change

GR_Ad_Page.indd 1 08/02/2012 14:32


News analysis

Maritime disaster

Day of reckoningLosses from the sinking of the Costa Concordia cruise ship will hit reinsurers hardest

and prompt rate hikes, writes Helen Yates

While it is estimated to be insured for up to $513m, losses from the wrecked cruise ship the Costa Concordia could reach $1bn, according to Moody’s senior credit officer

James Eck.Liability claims by passengers, the costs of recovery as well as the

potential for environmental liability claims arising from any fuel spillage – the risk of which has increased with poor weather conditions, are all conspiring to push up the fi nal bill.

“On a net basis, I don’t think this is going to kill anyone but there are certainly people who have big retentions,” says a senior marine liability underwriter. “There are certain syndicates who would have hull, marine liability and also potentially have treaty reinsurance or fac take-outs as well – so some people are going to be a bit unlucky.”

Investment bank Jefferies International has put the loss at $850m, although it is still unclear if the ship will be a total or partial loss.

This early loss range of $850m to $1bn would seem to stack up. The marine liability underwriter reveals that the liability claim is being reserved at $385m, an estimate he believes to be conservative.

Should the stricken vessel be declared a total loss, the cost of removal of the wreck will fall to the liability insurers.

“If the vessel isn’t a total loss then the hull insurers would be responsible for the salvage rather than the liability insurers, so that would change the balance a bit,” he says. “If the underwriters feel they can salvage the vessel then the liability claim would go down a lot and the hull claim would go down a bit as well.

“The surveyors and lawyers appointed by the hull insurers are currently advising them but I suspect it’s going to be a total loss.”

As of 24 January, crews from Dutch salvage fi rm Smit International were preparing to remove the vessel’s 500,000 gallons of fuel. The defueling was due to begin on 28 January, but poor weather has delayed the operation.

After defueling, work on removing the wreck will begin. On 3 February, Italian Civil Protection Authority head Franco Gabrielli said the ship would be refl oated and removed intact, not cut up for scrap.

Still missingThe Italian cruise liner, owned by a subsidiary of Carnival Corporation, ran aground on 13 January on a reef off the Italian island of Giglio, just off the Tuscan coast. Latest reports put the number of fatalities at 17 (including 15 passengers and two crewmen), with 16 people still missing. Passenger claims are likely to be inflated by the cost of accommodation and repatriation.

A lawsuit has been fi led in Florida, where Costa Cruises is based, on behalf of 500 of the passengers who are suing the company for $460m. The legal move follows a compensation offer from Costa Cruises of about $14,600 per passenger, plus the cost of their passage home and a complete refund.

Investigations into the cause of the accident continue. Captain Francesco Schettino was arrested on charges of multiple manslaughter, failure to assist passengers and abandonment of the ship. The vessel’s fi rst offi cer was also arrested.

Market impactReinsurers will be hit harder by the loss than the ship’s insurers, says Moody’s, since marine insurers generally carry significant reinsurance coverage on their marine hull and liability risks with relatively low deductibles. Munich Re says it expects a mid-double-digit

million-euro claims burden, while Hannover Re estimates its loss to be in the region of €30m ($40m) for the company’s net account.

As the marine insurance market is widely syndicated, losses are expected to be spread widely among primary insurers and Lloyd’s syndicates.

Specialty insurer Lancashire is likely to face losses of between $20m and $30m, according to Jefferies. Meanwhile, Validus says it expects its loss to be in the range of $50m to $65m, based on a total industry loss of $845m-$950m, net of reinstatement premiums and reinsurance. It has additional reinsurance in place if the ultimate industry loss increases.

Other insurers affected by the Costa Concordia loss are Generali, RSA and XL, according to Jefferies.

Coming after last year’s sizable catastrophe claims – including the Japan earthquake and tsunami, which resulted in a loss of $450m for marine insurers, and the Thai fl oods at the end of the year – this latest disaster is set to further harden rates in the market.

“I think there’s been an initial hardening on the liability side and hull underwriters are pushing for increases almost straightaway,” says the marine liability underwriter. “Brokers have factored that into their renewals as well – accounts that were expiring are now getting 5%-10% increases. I suspect that on the hull side people will review how much exposure they’ve got out there on certain larger accounts.”

“The majority of the liability side is generally relatively profi table so I don’t know how much longevity [the rate spike] will have, but signifi cant corrections are being made on underperforming sectors,” he added. “There have been some large marine and energy liability losses and some accounts are being hit hard. In my mind it is important to make that point.” IL

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GR_14 NewsAn-Costa.indd 14 24/02/2012 11:15

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GR_16-18 News Agenda.indd 16 24/02/2012 09:33


News Agenda

investors, which set up unrated reinsurance vehicles in domiciles such as Bermuda, the Cayman Islands and Guernsey. The attraction is that catastrophe reinsurance is typically not correlated to wider economic cycles.

“The investment market globally is pretty challenged,” Klein says. “Insurance and reinsurance is an area where there are still good returns and there is the accepted view that the insurance sector operates to a different economic cycle, although it’s under pressure from low interest rates. So it’s diversifying, it’s making returns and within the property cat arena it is now much easier to come up with a quantifi cation of the risk that investors can understand more easily.”

Less of a riskWhile it is not a replacement for traditional reinsurance – and is a more expensive option, refl ecting the fact it is fully funded – collateralised reinsurance protection does offer cedants peace of mind. And with rates rising in the traditional property cat market (by an average of 9.5%, according to Guy Carpenter’s rate on line index), the differential in pricing is not as pronounced as it was.

Collateralised cover eliminates counterparty risk and does not come with the basis risk typically associated with securitised products. This is the risk that a company experiences a loss but that it does not trigger a payout from the (re)insurers’ cat bond or ILW.

While in theory, collateralised cover can be used in any class of business, it is typically purchased to cover property catastrophe risks. But, again unlike cat bonds and ILWs, this is not just at the top end of catastrophe programmes. “Collateralised reinsurance is being used more down in the working layers, which is why the UNL aspect is so important for the buyers,” Klein explains. “You don’t want basis risk at that level, and of course the rates on line refl ect that.”

Increased interest from cedants and investors has led to continued growth in collateralised reinsurance. Helen Yates weighs up the costs and benefi ts in the aftermath of 2011’s catastrophes and losses

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LANCASHIRE DEPLOYS SIDECAR FOR JAPAN RENEWALS

InleHa

The growing popularity of 100% collateralised ultimate net loss (UNL) reinsurance cover is

testament to several factors in the market: last year’s catastrophe losses, the impending Solvency II directive and the increasing involvement of insurance investors in this space. Capacity is growing and is currently worth around $11.5bn, according to reports, but could grow to $12.5bn by 2014.

Last year saw many examples of cedants complementing their traditional reinsurance purchases with collateralised cover. “Collateralised reinsurance is popular,” Guy Carpenter head of sales operations for the UK and EMEA Chris Klein confi rms.

“We effectively brought a collateralised vehicle to market last year. We were certainly using them as an important source of capacity and have managed to sell all that capacity into the market. It’s an important part of the placement process and is gradually increasing in importance, provided market conditions continue to make it attractive for the investors.”

So what is collateralised reinsurance and why is it increasingly popular? Distinct from catastrophe bonds and industry loss warranties (ILWs), a tradable instrument is not created to facilitate the risk transfer process. Collateralised reinsurance transactions are essentially the same as traditional UNL reinsurance placements, except that the underwriter or investor posts full collateral against the risk.

“From the start, the most attractive feature to the buyer is that it is collateralised,” Klein says. “You buy your cover and then the limit that you have purchased – the potential loss you’ve indemnifi ed – is funded 100%. That money is put into a trust fund so you know that if there is a claim, the money is there – it’s been funded upfront.”

Collateralised cover is typically provided by hedge funds, pension funds and other capital market

KEYPOINTS:01: Money for claims is funded upfront and there is no basis risk, meaning peace of mind for cedants02: Solvency II’s capital requirements have increased the appeal of collateralised cover 03: Collateral reinsurers, typically backed by hedge funds or pension funds, are able to set up without a credit rating



News AgendaFollowing the reinsurance industry’s

second most expensive catastrophe year on record, with over $100bn in losses, there is likely to be more concern over the ability of some of the weaker reinsurers to honour claims than would have been the case a year ago. Collateralised cover eliminates many of the counterparty concerns cedants may have with their reinsurers.

“We generally err on the side of caution,” Canopius reinsurance manager Chris Swan reveals. “So I guess it is more of a fl ight to security whenever times get tough. And also we use more collateralised markets than we did before. It is more mainstream than it was 10 years ago.”

A very testing yearWhile the industry arguably proved its resilience once again last year, absorbing the cat losses with minimal erosion of capital, it is feasible that some cedants could be looking for more reassurance in the current environment. There have inevitably been winners and losers from the 2011 catastrophes, with some fi rms disproportionately affected by losses.

The downgrading of Platinum to A- from A by rating agency Standard & Poor’s followed the reinsurer’s revised cat loss estimates in October last year while PartnerRe saw its ratings cut by Moody’s to A1 from Aa3 as a result of its “outsized” losses in February.

“We often have buyers who are looking at a company with an A- rating with a negative outlook and they will say: ‘We’re going to need some sort of security to accept you,’” Klein says.

Aside from instances where reinsurers’ A-range ratings are under threat, he does not think there are too many concerns about reinsurer counterparty strength. “If you think back to the fi nancial crisis,”he says, “we had a couple of scares with a couple of important carriers but they are still trading.

“The industry managed to solve its problems from within its own resources and indeed, one of those companies has been upgraded back to where it was before the crisis … So really the reinsurance industry came through the crisis very well.”

However, cedants could also be further compelled to reduce their counterparty credit exposure in preparation for the Solvency II regime. Particularly for those European insurers planning on using the standard formula to calculate their capital requirements, a bit of collateralised catastrophe capacity could make a big difference.

“Solvency II will give a benefi t to cash collateral vis-à-vis counterparty credit exposure,” Leadenhall Capital Partners chief executive Luca Albertini says. “Solvency II basically says you need to put some capital aside for the counterparty credit risk you take. But if you collateralise the cover with triple-A money market funds, it ought to be better.”

He notes that Leadenhall, which provides collateralised cover to primary insurers and reinsurers, has seen an increased appetite from buyers following last year’s catastrophes. “We are a capital markets fund and that creates some interesting features,” Albertini explains.

“In an environment like 2011 and 2006, where capacity has been volatile, having an open relationship with a pocket of capacity that has different sources of capital than traditional reinsurance is a good way to diversify.”

Cat models kickstart sidecarsAnother potential driver for cedants to purchase more collateralised cover is the cat model releases that came to market last year. RMS version 11 for the USA and Caribbean in particular revealed a much higher exposure for areas inland from the coast, leading to increases of up to 100% for probable maximum losses (PMLs) on some portfolios.

Alterra Bermuda president Andrew Cook credits this – along with last year’s losses – for driving some of the increased interest in the reinsurers’ sidecar New Point IV at the 1 January renewals.

New Point IV writes property catastrophe collateralised retrocessional cover and was one of the vehicles set up in Bermuda during last year’s sidecar resurgence. “As companies moved to RMS version 11 and saw the impact on their US PMLs, we saw a number of examples of buyers looking for US-only cover,” Cook says.

“Overall, the market is still working through the implementation of RMS 11, particularly in Europe, so we believe that this staged implementation will continue to drive demand for retro throughout 2012.

“The third driver of demand was the overall improvement in the underlying property catastrophe market,” he adds. “As companies took advantage of the improving market conditions, it necessitated their purchase of retro to protect their books.”

One of the benefi ts of collateralised reinsurers, of which sidecars is one type of vehicle, is that they do not need a credit rating in order to get started. Compared to Bermuda start-ups, where a minimum rating of A- and start-up capital anywhere between $1bn and $3bn is an essential ‘ticket to the dance’, hedge-fund-backed reinsurers can get to work extremely quickly.

For Albertini’s portfolio, collateralised reinsurance provides wider scope than insurance-linked securities on its own. “The amount of business available through capital markets instruments like cat bonds and ILWs doesn’t yet allow you to build a portfolio across all the perils and the risk layers available in the reinsurance industry,” he explains. “If I do a cat bond-only portfolio fi rst of all, I’m likely to be exposed to the very remote layers and cannot reliably target more than a 6%, 7% or 8% yield.”

“If I want to deliver a 16% yield, I have to go into the private market,” he continues. “Some ILWs are effi cient, particularly for the USA, but if I want to have a good portfolio of European wind exposures or something in Australia and New Zealand, the collateralised markets offer the combination of yield and territorial scope that I need to build a portfolio.”

‘An open relationship with a pocket of capacity which has different sources of capital is a good way to diversify’Luca Albertini Leadenhall Capital Partners

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


Profi leProfi le

BMS chief Carl Beardmore believes that sturdy mid-tier brokers are set for a golden age of opportunity. Expansion in the USA and launching into underwriting at home are part of his plan to square up to the big hitters

‘‘ ‘‘The big guys created an arms race and that has created a problem for them

GR_20-22 Profile.indd 20 24/02/2012 09:19


Profi le

BMS chief executive Carl Beardmore is clearly not one for putting his feet up. “I’m not the best person to talk

to about holiday entitlement – I simply don’t take them,” he says, only half-joking.

He has set himself and the (re)insurance brokerage he runs a huge task: beating the big hitters at their own game. He wants BMS to occupy the space vacated by mid-tier companies such as Benfi eld when they were bought by their larger peers.

“Our vision now is very much to present ourselves as the alternative to the larger players,” Beardmore says. “Speaking to clients and markets, there seems to be a great desire to see somebody fi ll the slot behind the big guys.”

It was the opportunity to fi ll this perceived gap in the market that tempted Beardmore to take the top job at BMS. He became chief executive in September 2010, having worked for the company for eight years as a consultant and non-executive director.

The position was left open following the departure of previous chief John Spencer back in January 2008 – the company’s board, led by chairman Hugo Crawley, had been running the company since then.

“There are too many examples of people putting very good companies together, including the likes of [US (re)insurance broker EW] Blanch and Benfi eld, and then selling out ultimately,” Beardmore says. “The notion of creating a company that is similar in characteristics to those people, but truly sustains itself over time and isn’t snapped up by one of the big people, is a really compelling and attractive ambition.”

To say Beardmore has his work cut out is an understatement. By way of illustration, BMS turned over £50.2m ($79m) in 2010, its 30th year of operation and the most recent year for which fi gures are available. In the same year, Aon’s risk solutions division pulled in $6.4bn, and Marsh & McLennan Companies’ risk and insurance services division reported revenues of $5.8bn.

Chipping away at rivals While Beardmore is clearly not trying to match his biggest rivals’ turnover, the numbers show the vastly superior fi repower of the companies he is taking on. This fi nancial muscle allows the big brokers to invest heavily in analytics and risk modelling, which reinsurance buyers in particular fi nd highly valuable, and which have become differentiators for brokers. Smaller brokers cannot hope to match the top tier’s spending power.

But Beardmore feels that he is chipping away at his larger rivals in small but meaningful ways, even on the analytics side.

“In terms of the modelling and actuarial side of things, we have put together a

GR_20-22 Profile.indd 21 24/02/2012 09:20


Profi le

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BMS OPENS NEW YORK OFFICE

team that has shown itself able to compete with the big boys,” he asserts.

He argues that the bigger brokers’ heavy spending on analytics could be their undoing. “The big guys felt there was a differentiation opportunity by creating an arms race and boasting about who was spending the most per annum on modelling and actuarial,” he says. “I think it has created a problem for them now.’”

Beardmore claims that BMS’s modelling and actuarial analysis is at least on a par with that of the top-tier brokers and that these facilities have helped BMS win “signifi cant business” from its larger rivals in the past six months.

In the USA, which BMS sees as a key battleground, the company is targeting members of the Ward 50 – an infl uential ranking of US property/casualty insurers produced by benchmarking fi rm Ward Group, which, interestingly, is owned by Aon.

BMS has managed to lure three Ward 50 accounts from the big brokers over the past six months and is expecting to tempt over at least another two in 2012. “Those for me are real examples revealing the potential we have to compete at the highest level,” Beardmore says.

From the giants’ tablesThe broking giants’ size can give a leg-up to their smaller rivals. The bigger a broker, the bigger the contract it needs to win to make the effort worthwhile. Beardmore contends that larger brokers are struggling because these big ticket deals are few and far between, while smaller fi rms are fi nding rich pickings and growth opportunities in the scraps from the larger fi rms’ tables.

“The big players will look at clients that have $1m-$2m of brokerage to present and question whether it is viable for them to invest the time and effort to sustain or win that kind of business. Whereas we can justify the time and effort on that account and we still value that kind of business highly,” Beardmore says. “The opportunity at the moment sits with the mid-tier brokers. The bigger challenges sit with the large brokers as they try to keep their sausage machines full.”

Overall, Beardmore is expecting BMS’s 2011 revenues to be 10% up on 2010 levels, based on information currently to hand. He describes 2012 as a year of consolidation, but even so predicts a further revenue boost of between 20% and 25%. This is far more rapid growth than that being reported by the larger brokers. Aon and MMC’s (re)insurance broking divisions, for example, grew revenues by 6.1% and 9.3%, respectively, in 2011.

The company is on track to surpass £100m of revenue by 2016. However, this is not enough for Beardmore. He contends that a broker needs to be pulling in revenue of between £200m and £250m before it can be considered a genuine alternative to the larger players.

Luckily, he has a growth plan of which the main focus is the US market. The company’s US hub in Minneapolis has expanded from four to almost 50 staff in the past year. It also has

offi ces in Chicago and Philadelphia, and added a New York City offi ce in January this year, which will be Beardmore’s base. He will now spend the majority of his time in the USA and expects to expand the US structure over the next year.

Meanwhile, BMS’s wholesale insurance division has offi ces in South Africa, the Middle East, Asia and Australasia. On the reinsurance side, Beardmore says South America is looking increasingly interesting.

Closer to its home market of London, BMS has made inroads into underwriting with the launch of its Pioneer managing general agency. It took the MGA route after its application to set up a Lloyd’s syndicate was refused.

Pioneer has £62m in underwriting capacity from Liberty and a target to write £27.5m of premium in its fi rst year. Beardmore says the MGA is on track to hit its 12-month underwriting goal and will be close to fi lling the full £62m facility over the next 12 to 18 months. BMS has not abandoned its plans to set up in Lloyd’s. “We still have one eye to moving our MGA play into a syndicate play at some point,” Beardmore says.

BMS’s push into underwriting is in keeping with the actions of its peer group. Cooper Gay has Globe Underwriting (recently rebranded from Oliva), Hyperion has DUAL and RK Harrison has Aqueduct. Beardmore says brokers’ underwriting efforts are being driven by the fact that the broking business model is in transition.

“Brutally speaking, it is because overall volumes of business are not increasing, and so if you want to grow your business, you also have to look at the quantity or the extent of the distribution chain you own,” he says.

Only in the M&A game to buyOf course, if Beardmore is to hit his target of revenues between £200m and £250m, he will need to make acquisitions. He expects this will happen in the next two to three years.

But, given the number of unsuccessful mergers in the broking and insurance sectors, he will proceed with caution. “I would like to make sure we do it at a time that’s right for us and we’re properly prepared and resourced to manage a merger or acquisition,” he says. “Two out of every three never add the value that was intended.”

He is adamant that the only part BMS will play in the M&A game is that of buyer. “I know there are regular rumours that BMS is simply polishing itself up ready for a sale. That couldn’t be further from the truth,” he says. “We are polishing ourselves up to make ourselves into a highly attractive and compelling business that can sustain its independence.”

All these plans should keep Beardmore extremely busy over. While taking few holidays, he does allow himself regular visits to the gym. He would be wise to keep this up, as if he keeps taking business from bigger brokers, he could have a fi ght on his hands.

THE COMPANY

Age: 52Hometown: StokeFirst insurance job: Consulting for AmlinInterests: Travelling and sportsIn his own words: ‘One of the fi rst things I always advocate to people is that I’m not a broker, which I think is quite useful because that means I can concentrate on leading as opposed to protecting my client base’

Turnover: £50.2m (full-year 2010)Employees: 267Market view: A solid London-based broker in the traditional wholesale and reinsurance mould, but one that is trying to expand beyond its roots.

THE MAN

GR_20-22 Profile.indd 22 24/02/2012 09:20

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Untitled-1 1 09/02/2012 11:52


Global market report

The big picture: Painful year for the USA

Timeline: Regulating to unify the industry

Dodd-Franks: The good, bad and the ugly

Market map: Making sense of the numbers

Inside / out: A cocktail of challenges ahead

USA4 0 ° 4 5 ’ 2 1 ” N / 7 3 ° 5 9 ’ 1 1 ” W

GOVERNMENT FEDERAL CONSTITUTIONAL REPUBLIC AND REPRESENTATIVE DEMOCRACY

HEAD OF STATE PRESIDENT BARACK OBAMA POPULATION 313,064,000 CURRENCY US DOLLAR

IN ASSOCIATION WITH

GR_25 GMR Cover.indd 25 24/02/2012 12:18



THE BIG PICTURE

The debtdifference● US downgrade fallout

not as bad as feared

● Exposure to eurozone

debt has different effect

Last year, investors were forced to reconsider a stalwart assumption of modern fi nance after rating agency Standard & Poor’s downgraded long-term US debt to AA+ on 6 August, the fi rst time it had ever fallen below its coveted AAA status.

As Congress struggled to put in place a debt deal by the 2 August deadline, broking fi rm Towers Watson said US insurers had voiced concerns over their investment portfolios, short- and long-term interest rates and a decline in equity markets.

According to fi gures from the US Federal Reserve Board, the US national debt is more than $15 trillion, with insurance companies holding a $253.7bn stake in Treasury securities.

S&P said at the time of the 6 August downgrade that it “refl ects our opinion that the fi scal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics”.

At the time of the downgrade, and amid widespread panic and confusion, an AM Best stress test of the capital position of all of the US-based property/casualty companies showed promising results.

AM Best group vice-president John Andre says: “There wasn’t as big a downgrade you might expect. There was no one going from As to Bs. Just movements within the high A range.”

But the nightmare of debt entanglement has continued into 2012, with S&P downgrading the ratings of nine eurozone countries in mid-January.

AM Best senior fi nancial analyst Greg Reisner said US insurers’ long-term portfolios will be affected differently by exposure to

America’s reinsuranceTwo issues worked against the US insurance market in 2011 and both leaving residual effects that have carried on into 2012. Forces of nature are always an expectation for insurers, but in combination with economic forces of man, the results have been painful

ACTS OF MAN

the two different debts.“There are subtle differences

as it regards US debt and European debt. Both European debt and US debt have their risks. The risk and merits can certainly be debated.

“However, with regards to the debt of European countries, given the current structure of the eurozone, individual countries on their own lack some fl exibility as compared to the USA.”

GR_26-27 GMR Big Picture.indd 26 24/02/2012 09:20


US catastrophe bill tops $44bn● But harder market still some way

off despite 2011’s record losses

● US industry’s combined operating

ratio expected to fall 6.5 points

for events that occurred beyond US shores, while the US market has shelled out more than twice the 2010 bill of $19.6bn.

On the home front, the industry faced a record-breaking tornado season, wind storms, winter storms, wild fi res in the southwest and Hurricane Irene. Most domestic losses were as a result of tornadoes that hit the midwest and southwest in April and May.

According to data by AM Best, the industry’s combined operating ratio is expected to deteriorate 6.5 points to 107.5% in 2011 from 101% in 2010.

This poor result is driven by unstable and weak macroeconomic conditions coupled with high catastrophe-related losses, elevated losses in certain non-catastrophe exposed lines and fewer reserve releases from prior years.

Market experts predict US property/casualty insurers face a 24-month wait for a traditional hard market to surface despite the industry’s books suffering a severe underwriting blow in 2011 as a result of natural catastrophes.

Many had hoped for a hardening of the market as the US market picked up about $44.1bn of the $105bn total global natural catastrophe bill for 2011, says rating agency AM Best.

Most of 2011’s record-breaking insured losses bill was

ACTS OF GOD

Combined operating ratio in 2011 (%)

US national debt clock

GR_26-27 GMR Big Picture.indd 27 24/02/2012 09:20


TIMELINE


Unifying the industry

Insurance in the USA has always been an amalgamation of rules and

precedent that has remained just on the right side of effective. In principle, there is good reason for each state to govern its own insurance practices, with each state having a vested interest in what is best for its citizens.

But policyholders in catastrophe-ridden states such as Florida argue that they pay above the odds in comparison to neighbouring states because of this fragmented approach.

The National Association for Insurance Commissioners (NAIC), a voluntary association of state insurance commissioners, made headway in solving this issue in November with the adoption of revisions to the Credit for Reinsurance Model Law and Regulation.

“The real key for supervisors is to stay on top of change and understand how risks are emerging in the companies they supervise. The NAIC’s view is:

don’t get a false sense of confi dence because you’ve got some rules and therefore you have solved the problem. Rules only go so far. Systems have to be built and supervisors have to work together and really share information,” NAIC chief executive Therese Vaughan says.

These changes, as well as those stemming from the impending Dodd-Frank Wall Street Reform and Consumer Protection Act, will unify all US state insurance commissioners and streamline the industry.

But the biggest unifi er of the market came in the form of the single biggest terrorist attack on US soil, the September 11 attacks. The attacks singlehandedly changed the course of insurance in the USA and abroad.

What the industry has faced since the attacks has not only forced issues such as terrorism risk to the surface, but has also made an example of the issue of contract certainty in insurance.

2005-06Property insurers raised statewide average rates, causing some policyholders’ premiums to double or triple; outgoing governor Jeb Bush and governor-elect Charlie Crist held a special meeting to discuss rate hikes.

1752The fi rst American insurer created – Philadelphia Contributionship for the Insurance of Houses from Loss by Fire with the assistance of Benjamin Franklin. Franklin also established the fi rst life insurer.

2001Property developer Larry Silverstein sought to claim $7.1bn, double the face value of World Trade Center buildings 1, 2, 4 and 5 by arguing separate plane strikes on two separate

buildings constituted two occurrences within the policy defi nition.

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Individual states’ long-established rights to regulate the insurance industry could be about to change. Lauren Gow reports

Red tapeState versus federal control and the NAIC● The US insurance market has traditionally been governed on a state level, which in reality means each insurer must obtain a permit to write cover in each state, slowing down regulation changes and causing unnecessary work.

FloridaLarge-scale hurricanes change the market forever● In 2004 and 2005, Hurricanes Charley, Frances, Ivan, Jeanne, Katrina, Rita and Wilma made a direct hit on US shores, resulting in more than $132bn total damages (indexed to 2010).

TerrorismSeptember 11 and contract certainty● Four co-ordinated suicide attacks using hijacked planes targeted New York City and Washington, DC. Nearly 3,000 people died in the attacks, which were attributed to Middle East terrorist cell al-Qaeda headed by Osama Bin Laden.

THE STORY

➤ ➤

➤ ➤

GR_28-29 GMR TimeL.indd 28 24/02/2012 09:24


● The tug-of-war between Florida lawmakers, US-based insurers and reinsurers, foreign insurers and reinsurers and policyholders will continue.

● Ironically, all parties are actually looking for the same answer, which is a fair price for insurance that covers the cost of any claims. But the defi nition of ‘fair’ differs widely.

● The NAIC has taken the fi rst real steps towards unifi ed state regulation but the Dodd-Frank Act will force insurance regulation into the federal scope.

● Rapid changes will be diffi cult to swallow, but hopefully a big picture focus will outweigh any localised politics.

● Despite the huge loss, the September 11 attacks led to a positive change in the international insurance market in the form of contract certainty. The lack of contract certainty at the time of the acts, and in the decade since, has drawn together the UK and US markets to seek resolutions.

● Further improvements could be made with technical innovations, like e-trading, to speed up processes.

2007A law was passed to expand a state programme selling catastrophe back-up coverage to insurers, allowing them to pass savings to consumers.

2008Florida’s lawmakers froze Citizens Property Insurance Corporation’s rates until 2010, while extending provisions allowing regulators to block insurance rate hikes.

1871NAIC formed after the US Supreme Court decision in Paul v Virginia [1868], which established state supremacy over the insurance industry. It ruled that insurance policy contracts were not in commercial contracts and that insurance was not subject to federal regulation. This established state-based regulation.

2002Congress enacted the TRIA (Terrorism Risk Insurance Act) and the Insurance Information Institute released loss distribution information for September 11 attacks.

2009Governor Charlie Crist signed into law a bill allowing Citizens Property Insurance Corporation to raise premiums by up to 10%. The law also made it easier for insurers to hike rates as much as 10% to meet rising

reinsurance costs. Crist also vetoed a bill that would deregulate property insurance rates.

1995NAIC offi cially declared itself a ‘private trade organisation’ – US district judge PeterLeisure stated that the NAIC was not a government body but “a private trade association composed of government regulators from different states”.

2004 A jury found in favour of 10 insurers that will be subject to a ‘one occurrence’ defi nition, meaning their liability was limited to the face value of the towers. A second case found nine insurers were subject to a ‘two occurrence’ defi nition and therefore liable for a maximum of double the face value or $2.2bn.

WHAT’S NEXT

2011Florida governor Rick Scott signed into law SB 408, which was deeply unpopular with policyholders but a small victory for the insurance industry. The bill allowed insurers to pass reinsurance costs onto policyholders and limited the window and scope for sinkhole claims.

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

2007 President Bush extended TRIA requiring the Treasury to establish a process for the allocation of pro-rata payments if terrorism-related insured losses exceed the government’s annual $100bn cap.

➤ ➤ ➤ ➤

➤ ➤ ➤ ➤

Other liability$4.9bn (12.9%)

Property (World Trade Centers)$5.6bn (14.4%)

Property (other)$6.6bn (17%)

Business interruption$12.1bn (31.1%)

Total insured losses

estimate:

$38.8bn

Aviation liability$4.3bn (11.1%)

Event cancellation$1.3bn (3.3%)

Aviation hull$0.6bn (1.5%)

Workers’ compensation$2.2bn (5.7%)

Life: $1.3bn (3.3%)

GR_28-29 GMR TimeL.indd 29 24/02/2012 11:16



HORIZON

Dodd-Frank: it’s the new sheriff in townSet to become law this spring, the Dodd-Frank Act is the US government’s response to the 2008 fi nancial meltdown. But as Lauren Gow reports, it contains much for insurers to be concerned about

The Dodd-Frank Wall Street Reform and Consumer Protection Act, a new

fi scal responsibility regime, is expected to unsettle US fi nancial institutions this year.

The Act is a direct result of the 2008 fi nancial meltdown and will incorporate all US fi nancial institutions including insurers and reinsurers. Many in the industry question the relevance of a regime that puts banks and insurers under the same risk banner, but Federal regulators are adamant that the regime will be fair for the insurance industry.

Part of the new regime is the formation of a committee of regulators, the Financial Stability Oversight Council (FSOC), on which insurers hold three seats. “Although there is no federal insurance regulator, insurance is represented because it is quite clear that insurance is within the defi nition of ‘fi nancial institution’, so it can be studied by this council for potential systemic risk,” Dewey & LeBoeuf partner Charles Landgraf says.

One non-voting seat will be held by a chosen representative of the National Association for Insurance Commissioners (NAIC), currently Missouri Insurance Department director John Huff. A second non-voting seat will be held by the Mike McRaith, director of the new

THE GOOD:FIO remedies the lack of expertiseThe Federal Insurance Offi ce (FIO) has been created to remedy the lack of insurance expertise at federal level. The scope of the FIO’s oversight extends to all lines of insurance except health insurance, long-term care insurance and federal crop insurance.

Under the present interpretation of the legislation, the FIO has a largely free scope in determining the subject matter of its prepared annual reports to Congress. But there are two compulsory reports whose results should prove to be a useful, refl ective insight of the US market.

The fi rst is due within 18 months of the enactment of the legislation and deals with the modernisation of US insurance regulation, while the second

1 June 2009: The new law on fi scal responsibility was

initially proposed by the Obama administration, with the White House sending a series of proposed bills to Congress. Obama calls it a “sweeping overhaul of the US fi nancial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”.

2 July 2009: A version of the legislation was introduced

in the House in July 2009.

3 December 2009: The Act received its name as revised versions

were introduced in the House of Representatives by Barney Frank, and in the Senate Banking Committee by chairman Chris Dodd.

4July 2010: President Obama signed into law the

Dodd–Frank Wall Street Reform and Consumer Protection Act.

5 Spring 2012: Proposed implementation date for Dodd-

Frank Act.

FIVE STEPS TO DODD-FRANK’S IMPLEMENTATION

WILD WEST OF REGULATION

Federal Insurance Offi ce (FIO), which has been created within the Treasury by Dodd-Frank. A third voting seat is to be held by an insurance expert appointed by US president Obama and is currently held by Ray Woodall.

The FSOC’s fi nal rules are expected to be delivered in the spring.

GR_30-31 GMR Horiz.indd 30 24/02/2012 09:25


THE UGLY:Federal powers to override state Under Title V of the Dodd-Frank Act, the Treasury and the US Trade Representative have a new advance authority to negotiate international agreements on insurance prudential matters. That agreement effectively becomes law, without a need to go back to Congress for approval or be ratifi ed like a normal treaty.

Also, the director of FIO will have the power to review any state supervisory measure thought to be inconsistent with any commitment made within such an agreement. The director is then allowed to issue an order pre-empting the state order if certain conditions are met.

One of those conditions is that the state regulation must not treat a non-US insurer or reinsurer less favourably than a US insurer or reinsurer.

This move is popular with foreign insurers and reinsurers who have objected strongly to the collateral obligations forced upon them by state regulators, rules that did not apply to US insurers and reinsurers.

WE SAY: Congress may have put restrictions on the advance authority within Title V, but insurers are right to be extremely concerned. State regulators will have the opportunity to participate in a ‘consultation’ and provide input, but not have any veto powers. State regulators also face the real possibility of having their own regulations trumped by the FIO in order to keep international agreements on track.

potentially posing a systemic risk to the US economy.

Insurers will fall under the ‘non-bank fi nancial company’ heading, under which they will be subject to a size test of whether they hold more than $50bn or more in assets in the USA, as well as being assessed on debt levels and how interconnected they are to other fi nancial institutions.

These rules have yet to be fi nalised but give a clear indication that US insurers, particular life insurers, could be designated a systemic risk.

Dewey & LeBoeuf’s Landgraf says: “It is possible that a non-life insurer could be designated but just looking at the way the rule-making is developing, it is more likely to be life insurers. However, very few will be designated and it will be the fi rst time that many of them had anything to do with the Federal Reserve Board. This means the board will be their macro prudential overseer and require information above and beyond what their prudential supervisor does.”

Once an insurer has been declared a systemic risk by FSOC, it is referred to macro supervision by the board, which may impose new, additional capital requirements and conditions on top of its existing prudential supervisor’s requirements.

There is also a second wave of concern at holding company level for those insurers facing designation as a systemic risk in the form of a creation of the ‘Resolution Plan’ for the Federal Deposit Insurance Corporation in case of insolvency.

“The uncomfortable fact is that one of the big headline stories during the fi nancial crisis was American International Group [AIG]. It was very deeply involved in the crisis through credit default swaps, which aren’t a traditional insurance product written by a traditional insurance company,” Landgraf says.

“Because of this disaster, it has been very diffi cult, if not impossible, to argue politically that there is a reason for the insurance sector to be excluded from this new systemic risk supervision mechanism that was being set up.”

WE SAY: The Resolution Plan, or ‘living will’ as it was dubbed during the legislative debate, will be an enormous burden on insurers. Though the idea for a plan dealing with insolvency is undoubtedly useful, the resolution will need to be updated each time there is a change in the structure or condition of the insurer.

is a comprehensive look at the US and global reinsurance market.

The FIO may require insurers to submit data, with the director empowered to issue subpoenas to gain such information. But the legislation requires the FIO to obtain data from federal and state regulatory agencies or publicly available sources, if possible, before requiring insurers to submit such data. There is also an exemption for small insurers.

The FIO’s fi rst report, which was due at the end of January, is to review the uniformity (or lack of) in insurance regulation in the USA.

WE SAY: The need for insurance expertise and representation at a federal level is long overdue. The formation of the FIO is a positive step.

THE BAD:Life insurers to be branded a riskFSOC is ultimately responsible for deciding which fi nancial institutions need heightened supervision by the Federal Reserve Board, as a result of

FIO director MIke McRaith will hold one of three insurance

seats on the Financial Stability Oversight Council

GR_30-31 GMR Horiz.indd 31 24/02/2012 12:22


MARKET MAP


PROPERTY/CASUALTY2011 was a catastrophe-fraught year for US property/casualty insurers, with 37% of the total $105bn natural catastrophe bill accounted for on US shores. According to data from the National Association of Insurance Commissioners, the top 10 US property/casualty insurers suffered various levels of economic blows according to their diversity to catastrophe-exposed lines. Nine of the top 10 are likely to have suffered pronounced exposure, with only the Progressive Group escaping unscathed.

KEY STATS

12.6%0.6%

= US reinsurers

TOP 50 GLOBAL REINSURERS

The top 50 global reinsurers, listed annually by rating agency AM Best. As the statistics show, US reinsurers

take nine top places but their total GWP only just surpasses the market’s biggest player, Munich Re.

LIFE INSURANCEEMERGING MARKETS GREW ANNUALLY BY

INDUSTRIALISED COUNTRIES ONLY GREW

$150bn

$120bn

$90bn2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Projected life premium rankings

Country 2011 2021 est USA 1 1 China 5 2 Japan 2 3 France 3 4 United Kingdom 4 5 India 8 6 Italy 6 7 Germany 7 8 Taiwan 10 9 South Korea 9 10 Canada 11 11 Brazil 17 12 Australia 13 13 South Africa 12 14 Luxembourg 14 15 Belgium 19 16 Sweden 15 17 Spain 16 18 Switzerland 18 19 Hong Kong 21 20

➤➤

➤➤

➤➤

➤➤➤

➤➤

➤➤

➤➤➤

➤

➤

➤

➤

US TOTAL GWP MUNICH RE GWP

$31,280m$32,246m

DROUGHT AND WILDFIRESDrought ongoing; Wildfi res April/Sept

$5.2bn

Total life insurance premiums in the US market

15 SEPTEMBER 2008: The collapse of the Lehman

Brothers bank sends world

fi nancial markets into meltdown,

with life insurance premiums

spend dropping just as quickly.

GR_32-34 GMR Market map.indd 32 24/02/2012 09:25


Sta

te F

arm

Zuric

h

Alls

tate

AIG

Libe

rty

Mut

ual

Trav

eler

s

Ber

kshi

re H

atha

way

Nat

ionw

ide

Pro

gres

sive

Gro

up

Uni

ted

Ser

vice

s A

utom

obile

Ass

ocia

tion

Fire

Allied lines

Multiple peril crop

Federal fl ood

Farm owners’ multiple peril

Homeowners’ multiple peril

Total commercial multiple peril

100%

80%

60%

40%

20%

0%

LIFE INSURANCEUS market insiders, who wished to remain anonymous, told Global Reinsurance they fear the USA could lose its number one spot in the next decade, though Swiss Re economists have argued differently (see table, far left). The sharp rise of life insurance premiums, in conjunction with strong, growing economies in the emerging markets, has signifi cantly dwarfed the sluggish growth in US life premiums. The most notable fall in premiums was felt by the market post-global fi nancial crisis, with many life insurers reporting little improvement in the intervening years.

DA

TA

: N

AIC

; C

OM

PA

NY

RE

PO

RT

S;

SW

ISS

RE

; M

UN

ICH

RE

SEVERE STORMS, TORNADOES

22-28 April

$7.3bn

FLOODSApril-May

$5bn

SEVERE STORMS, TORNADOES

20-27 May

$6.7bn

HURRICANE IRENE22 Aug-2 Sept

$4.9bn



MARKET MAP


MARKET MAP

$60

$50

$40

$30

$20

$140k

$120k

$100k

SHARE

PRICE

BIG MOVERSFour of the USA’s biggest listed insurers battled fl uctuating share prices in 2011. The Transatlantic saga saw Berkshire Hathaway’s price hit a year low after its failed $52 per share offer in August, while the merger deal with Alleghany saw Transatlantic’s shares peak. For AIG, a sharp slide in the fi rst fi ve months ended with May’s news of its combined public offering with the US treasury. Meanwhile, an AM Best affi rmation in January 2012 renewed investor interest in Allstate.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

BERKSHIRE HATHAWAY 14 March:

In one of its biggest-ever deals, Berkshire

Hathaway agreed to purchase 100% of

The Lubrizol Corporation for $135 per

share in an all-cash transaction. The deal,

unanimously approved by each company’s

directors, was valued at about $9.7bn.

ALLSTATE 18 May: White Mountains

announced a deal to sell auto

insurance arm Esurance and

Answer Financial businesses to

Allstate for an amount in cash equal

to $700m plus the tangible book

BERKSHIRE HATHAWAY 8 August:

Transatlantic Holdings confi rmed that it

had received a proposal from National

Indemnity, a subsidiary of Berkshire

Hathaway, to acquire all of Transatlantic’s

outstanding shares of common stock for

$52.00 per share.

BERKSHIRE HATHAWAY 25 August:

Warren Buffett bought $5bn worth of

shares in Bank of America. The deal

included warrants for Berkshire Hathaway

to purchase 700 million shares of Bank

of America common stock at an exercise

price of $7.14 per share.

TRANSATLANTIC 21 November:

Transatlantic agrees to a merger

with Alleghany Corporation, with

Transatlantic stockholders receiving

aggregate payment currently valued at

$59.79 per share in stock and cash, or

about $3.4bn.

ALLSTATE 26 January 2012: AM Best

affi rmed Allstate Insurance Group’s

fi nancial strength rating of A+, refl ecting

its “favourable operating performance

and signifi cant market presence”.

TRANSATLANTIC

16 September: Allied World

Assurance Company and

Transatlantic mutually

terminated their previously

announced merger

agreement, with Allied World

to receive a termination fee

of $35m plus $13.3m of

merger-related expenses.

TRANSATLANTIC 28 July: Transatlantic’s

board rejected Validus’s offer to buy all

outstanding common shares of

Transatlantic, which says it “remains

committed to the terms of the merger

agreement that it entered into with Allied”.

ALLSTATE 23 June:

Allstate began a court battle to

recover more than $1m in its third

insurance fraud lawsuit of 2011.

AIG 31 March: AIG reorganised its

non-life insurance arm Chartis, naming

Peter Hancock as chief executive.

Reuters reported the move could be

a sign that AIG chief executive Robert

Benmosche, battling cancer, was

grooming Hancock as a successor.

BERKSHIREWarren Buffett

TRANSATLANTICBob Orlich*

ALLSTATEThomas Wilson

AIGBob Benmosche

* replaced by Michael Sapnar in January 2012

AIG 23 May: AIG announced it had completed a

registered public offering of 300 million shares of

AIG common stock at $2.50 per share, by AIG and

the US Treasury as the selling shareholder.



INSIDE / OUT


A potent cocktail of challenges Lauren Gow talks to industry leaders to get their views on the latest market developments

ECONOMIC

INSTABILITY

LLOYD’S-

STYLE

MARKET IN

NEW YORK

The current economic instability has meant that insurers and reinsurers, wherever they are in the world, are worrying as much about the asset side of the balance sheet as they are about the liability exposure side.

We have had a period of signifi cantly low interest rates for four years and continued fi nancial market volatility, particularly in the eurozone. That’s creating an environment where insurers need to be focused on preserving their capital position. It’s certainly creating some headwinds in terms of being able to preserve that capital.

Clearly the economic environment has had a depressing effect on the side of demand and put an infl ationary effect on claims. When you combine that with the catastrophe losses of 2011, you have a pretty potent cocktail of challenges for the global industry and I’d include the USA in that.

Last year is expected to be a record cat year for the industry, with losses of over $100bn, including major events in the USA costing $20bn, and yet there is talk only of improving rates, not hardening rates. The industry is well capitalised but that, in a sense, is the problem – there is too much capital.

While it has been talked about a lot, we don’t see much in the way of [Lloyd’s-style marketplace] activity, and my sense is there isn’t really any demand for it from the industry. If there was, it would have happened by now – it would have happened a long time ago.

There was a lot of talk about it being a competitor to Lloyd’s, and it clearly would be if it was established, but our position is that Lloyd’s isn’t afraid of competition. We’ve been watching for developments, we haven’t seen any and I am not expecting any in the near future.

Sean McGovernLloyd’s general counsel and North America director

OUTSIDE VIEWINSIDE VIEW

The impact of the global economy and the political environment (they are so intertwined these days) on the industry in general is pretty signifi cant. You just have to look at the impact that fi scal policies are having on the interest rate environment, which in turn has a signifi cant impact on our business.

Then we have the impact of the European sovereign debt crisis and the slowdown in Asia, both of which have an impact on the US economy and US insurers. At XL, we are more optimistic about our growth prospects because of what we’ve done over the past 12-18 months. We’ve made signifi cant investment in our business, including adding new lines of business like surety.

Catastrophes had a big impact in 2011. It was the fi fth-largest year on record. Personal lines was hit much more than commercial lines, but what we have started seeing is that it is beginning to help the market in terms of rates.

We are clearly in a transition. From what we have observed and what you hear consistently throughout the market, even from our competitors, is that property-related rates have gone up, in particular where you are insuring properties in a catastrophe-prone location or that have had prior losses. It has defi nitely helped the market transition into a more rate-hardening environment.

My personal view is that a Lloyd’s-style market would be really hard to do, as we have a really well-entrenched marketplace. They have been trying to do it for years, so I think that if people really want that, they would have been able to do it by now.

Also, with the excess and surplus lines market and the way it operates over here, we have an avenue for placing these tough risks through the wholesale market. I don’t really see a need for it and there doesn’t seem to be a desire in the marketplace for change.

Seraina MaagXL chief executive, North America property and casualty

CATASTROPHES

GR_35 GMR Views.indd 35 24/02/2012 09:26


Rewind

Could our man make a move into politics, or would previous email banter catch up with him?

doubt plenty of explaining to do. What worries me is that if the good people out there on the internet got all hot under the collar about that, what would they make of some of the emails that I send out?

Knowing sweet F(S)A about brokingNo matter which market you’re from, no one ever has a good thing to say about the regulators. They’re either too soft, too tough or, in the case of the US insurance industry, too abundant. And

they don’t make themselves easy to like. A broking mate told me that someone from the FSA here in the UK asked him if it was normal for a broker to accept commission!

That said, given the wafer-thin margins we’re all being driven to by the tough economy and crazy competition, maybe it does look to the outside world like we want to work for free.

Couldn’t have put it betterRegular readers will know I have a taste for good old London market wisdom, and so I had to pass this one on. I know underwriters out there will be familiar with that horrible feeling when you realise the reserves you booked a bit carelessly a few years ago don’t cut it in the real world when the claims bill comes in. One of the people I broke to regularly summed this feeling up really nicely as “the turd of destiny

hitting the fan of reality”. It’s times like this that I remember why I’m in broking.

Next stop, the White HouseThis industry has had its fair share of people who have ended up here after doing something far more exciting. Take Third Point Re’s John Berger, who used to be a professional basketball player. But there are few examples of people who stopped by on their way to bigger and better things. So it surprised me to learn that Zurich used to employ none other than former US president Franklin D Roosevelt, who worked for Zurich forebear Fidelity & Deposit in the 1920s.

MontyKnockin’ on Cameron’s doorThe London market’s great. I get to dabble in global business without having to stray too far from the things I know and love. Of course, that means that we’re sometimes a bit distant from the action. So it was nice to see that the UK insurance market was recently at the centre of political intrigue, when several chief execs had an audience with prime minister David Cameron. Of course, this lot are not used to rocking up to Number 10 Downing Street, and it showed. One chief, AXA UK’s Paul Evans, had been told the door would open for him when he got there. When nothing happened, Paul was left standing on the doorstep, until the copper on duty leaned over and said: “You have to knock on the door, mate.”

Insurance from on highOne of the other great things about London is taking the tube into work (there’s no way I’m putting my Aston Martin at risk in rush-hour traffi c). I thought I’d seen it all, but even I was surprised by what I saw the other day. A Catholic priest got onto my carriage in full get-up, and there, pinned on his robe in pride of place, was the distinctive blue fl ag of Willis. I wasn’t quite sure what to make of it. Perhaps he’s the broker who deals exclusively with Ecclesiastical Insurance, or maybe Joe Plumeri is taking broking in a whole new direction.

Heading for an inbox incidentSpeaking of Willis, I had a nasty ‘there but for the grace of God go I’ moment the other day. Many of you will no doubt have read about the hapless young lad from Willis who sent an email to his mates about a planned trip to Dubai. The email contained lots of gory details about compulsory chants on how rich they were, and other such japes, and the bloke ended up with a very red face and no

What would the internet

hotheads make of some

of the emails I send out?

GR_36 Monty.indd 36 24/02/2012 09:26

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Up here, Challenges are Crystal Clear

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global reinsurance - march 2012

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