global reinsurance september 2011

How the industry has changed ten years onRemembering 9/11

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Leader

GLOBAL REINSURANCE SEPTEMBER 2011 1

All eyes will be on Transatlantic Re at this

year’s Monte Carlo Rendez-Vous, as its three suitors – Allied World, Validus and National Indemnity – slug it out in the fi nal round of the three-way fi ght. The prize is anyone’s to take, but few people would bet against Warren Buffett.

Meanwhile, merger and acquisition activity remains high in the Lloyd’s market, with the Omega sale rumbling on and Novae tipped as the next one to go.

The huge losses sustained by the market in this half-year’s results will only add to the pressure, as will Solvency II.

The new European regulatory regime has been put back yet again – an unwelcome move that will nevertheless provide (re)insurers with the time they need to prepare adequately for the new world. There will undoubtedly be more M&A to come. ■ As the industry heads to Monte Carlo, many people’s thoughts will be turning to that fateful

September day 10 years ago, when the world changed forever.

For many members of the industry, the memory of 9/11 is intensely painful on a personal level, given the devastating loss of life in the Twin Towers. That will never be forgotten.

The 10th anniversary also provides an opportunity to refl ect on how the market has changed in response to the unimaginable.

From new companies and capital models to the introduction of specifi c terrorism cover, it has responded with intelligence and fl exibility, and is a more professional and fi t-for-purpose industry than it was 10 years ago.

As Ben Dyson points out in his extensive piece on pages 18-25, the biggest remaining question is: what next?

Ellen BennettEditor-in-chiefGlobal Reinsurance

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As the industry heads to

Monte Carlo, thoughts

will turn to that fateful September

day, 10 years ago

GR_01 Leader.indd 1 19/08/2011 17:03

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

SEPTEMBER 2011 GLOBAL REINSURANCE2

News1 Leader

4 News

12 News analysis The race is on to take over Transatlantic;

the long road to Solvency II could lengthen even further; USA

farmers and (re)insurers face losses from drought-stricken land

18 News agenda Ten years after the tragic events of 9/11,

we look at the dramatic impact on the insurance industry and

hear the personal stories of those who lived through it

People & Opinion28 Mike Wilkins A man known for his ‘slash and burn’

approach, IAG’s chief on why he’s sticking with Equity Red Star

40 Diary Born gossip Monty can’t wait to head to Monte

Claims32 Swept away The Queensland fl oods late last year caused

record levels of destruction and loss of life. But it’s not the

fi rst time this area has suffered, so why were the lessons of

previous fl oods not heeded to prevent these losses?

Cedants34 Q&A XL Insurance’s global head of ceded reinsurance

thinks some reinsurers play it ‘fast and loose’. Reliability and

transparency is more important qualities for Rob Andrews

Country Focus37 A tough proposition India is making changes to try

to attract overseas reinsurers. But is it enough to make the

market there worth investing in?

IAG’s Mike Wilkins, page 28 The Queensland fl oods, page 32 Rob Andrews at XL, page 34

Editor-in-chief Ellen Bennett

Tel +44 (0)20 7618 3494

Email [email protected]

Assistant editor Ben Dyson

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Finance reporter Lauren Gow

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Group production editor Áine Kelly


Deputy chief sub-editor Laura Sharp


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September

GR_02 Contents.indd 2 19/08/2011 17:08

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

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

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

NOT IF, BUT HOW

GR_Ad_Page.indd 1 19/08/2011 14:42


News

Japan: Prefecture

Catastrophes leave trail of destruction at Lloyd’s● Hiscox hardest hit with £87m loss, while Brit and Beazley suffer …● … but Lloyd’s highlights underlying robustness and potential for rates rises

The Lloyd’s market was left reeling from one of the most intense periods of catastrophe losses in history during the fi rst half of 2011. Many big players turned in multimillion-pound losses just months after reaping healthy profi ts.

Hiscox was one of the hardest hit, reporting an after-tax loss of £87m in the fi rst half of the year, compared with a profi t of £78.6m year on year. Its combined operating ratio deteriorated signifi cantly to 116.9% from 93.6% year on year.

The insurer attributed the loss to the toll of catastrophes including fl oods in Australia in January, followed by earthquakes in New Zealand in February and in Japan a month later. It said it was “a reasonable result in the circumstances”.

Fellow Lloyd’s insurers Brit and Beazley also felt the pain. Beazley made a loss after tax of $14.1m in the fi rst half, compared with a profi t of $97.9m in the same period last year. Lower revenues and higher operating expenses added to cat claims to push the insurer into loss.

It paid out $154m for the events in Australia, New Zealand and Japan, with US tornadoes adding about $39m. Beazley’s COR climbed to a loss-making 108%, compared to 90% in that period last year.

Brit, which went private in April following its acquisition by private equity consortium Achilles, made a profi t of £6.4m. But this was 90.5% down on the £67.4m it made in the same period of 2010. The fi rm made an underwriting loss for the fi rst half, posting a COR of 104.8%, compared with 96.5% in 2010’s fi rst half.

Elsewhere in Lloyd’s, Catlin

made a net operating loss of $220m, down almost 500% on the $57m profi t it posted during the same period last year. Its COR rose to 116.5%, from a profi table 97.5% at 30 June 2010.

Novae turned in a net loss attributable to shareholders of £24.9m, down from £10.8m profi t at 30

June 2010. Its COR was 111%, 20% of which was put down to fi rst-half major catastrophe losses.

Despite the losses, Lloyd’s insurers retained an underlying robustness, with analysts predicting that rates could rise as insurers pump more capacity into the market.

The few Lloyd’s underwriters without large exposure to the cat losses continued to perform well. Lancashire made a profi t after tax of $97.5m in the fi rst half, up 5% on the $93m it made in the same period last year.

The company’s combined ratio came in at 69.5%, down from 77.4% in the fi rst half of 2010. In the second quarter of 2011 alone, Lancashire’s combined ratio was just 41.2%.

“After the considerable losses in Japan, Australia

and New Zealand, the second quarter saw further industry losses arising from a series of US tornadoes, which caused signifi cant but localised damage,” said Lancashire chief executive Richard Brindle. “We are pleased to report that these have had a minimal effect on Lancashire.”

He added: “We were also one of the few companies to avoid reserve strengthening for recent natural catastrophes.”

● Lloyd’s insurers have suffered from an unprecedented string ofcatastrophes, but despite their heavy losses, the underlying robustness of the market remains unscathed. Given last year’s solid results (93% COR,£2.2bn profi t), underwriters were relatively well positioned to take the hit. ● Any additional fi nancial pressure will only add to the drivers for M&A, particularly as the deadline for Solvency II creeps ever closer. Expect more action here soon.● Given the surplus capacity in the market, rates are unlikely to rise signifi cantly outside specifi c areas of catastrophe risk.

We say...

Combined operating ratios

FIND OUTMORE ONLINE

goo.gl/tDlwz

WHAT BEAZLEY’S RESULTS SAY ABOUT LLOYD’S PROSPECTS

First-half results (from company fi nancial statements)

Going global: Peo

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Bermuda Alterra chief executive of reinsurance and board member John Berger has resigned to “pursue a new opportunity”.

London Chartis has appointed Nicolas Aubert UK managing director, taking over from James Shea, who has become president of global specialty lines.

New York Hedge fund AQR Capital Management has formed a reinsurance group, hiring former Pulsar Re head Andrew Sterge to lead the new business.

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40% 50% 60% 70% 80% 90% 100% 110% 120%

Hiscox 116.9% (2011)

93.6% (2010)

Beazley 108%

90%

Brit 104.8%

96.5%

Catlin 116.5%

97.5%

Lancashire 69.5%

77.4%

100% COR

30%

GR_4-6 news.indd 4 19/08/2011 15:26


News

ure storm

WIND DAMAGETyphoon Ma-on hit southern Japan on 19 July as a strong tropical storm, intensifying to a category 1 typhoon as it brushed Honshu. Gusts of 160km/h and 12cm of rainfall prompted authorities to warn of landslides and fl oods. Around 11,000 households lost power and fl ooding was reported in the prefectures of Hyogo, Kochi and Shiga, but EQECAT has put insured losses at less than $250m.

Bank action hitsAIG share price● 5% fall after suit against Bank of America proposed● Insurer chasing £38bn in mortgage security losses

Weblogglobalreinsurance.com

Shares in AIG fell by 5% at close of trading on 8 August, after its announcement of plans to sue Bank of America over residential mortgage-backed securities (RMBS).

AIG shares opened at $23.74 and hit a low of $22.10 shortly after the announcement, before closing at $22.58.

Bank of America shares also fell by 14% to a $6.51 closing price, after opening at $7.40 and hitting a day’s high of $7.70.

The AIG suit, seeking more than $10bn in losses and $28bn of investments, is said to be the largest mortgage security-related action by one investor.

AIG claims Bank of America

and its Merrill Lynch and Countrywide Financial units fraudulently induced AIG to invest in nearly 350 RMBSs for more than $28bn.

In papers fi led at the Supreme Court in New York, AIG claimed Bank of America was “driven by a single-minded desire to increase its share of the lucrative RMBS market and the considerable fees generated by it”.

AIG is reportedly preparing similar suits against other large fi nancial institutions, including Goldman Sachs, JPMorgan Chase and Deutsche Bank, to recover some of the billions lost during the fi nancial crisis.

eople moves Online top fi ve

Round and round they go, where they’ll stop nobody knows. Bidding for Transatlantic Re has become a merry-go-round of activity, with Allied World, Validus and National Indemnity vying for victory. Grabbing all fi ve spots in our web top fi ve, the industry is clearly watching this one closely.

Reinsurers love a good people story. So when Ed Noonan lashed out at Transatlantic’s board after it rejected his “superior” offer, reinsurers clicked feverishly to fi nd out why board members were “wilfully burying their heads in the sand”. We can count on Noonan to say what he thinks.

Not one to walk away from a fi ght, our second most popular story involved Allied World chief Scott Carmilani hitting back at Noonan’s proposal, describing it as “inferior” and accusing Noonan of attempting to acquire

the reinsurer at a “signifi cant discount to book value”.

In at third is a comment from Global Reinsurance assistant editor Ben Dyson, examining why the Transatlantic and Validus business models are a good fi t.

News that Transatlantic’s board had rejected Noonan’s offer took fourth place, Noonan fi ring up a few days later with his “heads in the sand” comment.

And fi nally, Transatlantic chief Bob Orlich sent a letter to clients and brokers titled: “Nothing without you” to reassure them he had their best interests at heart. As the three-way battle continues, perhaps everyone should take a tip from his letter: “We have faced uncertainty before and business, like life, must go on.”

1. NOONAN: TRANSATLANTIC DIRECTORS ‘BURYING HEADS IN SAND’Board says offer is

not superior

2. WAR OF WORDS ERUPTS AS ALLIED HITS BACKValidus proposal ‘inferior’

3. COMMENT: WHY VALIDUS AND TRANSATLANTIC ARE A GOOD FITA merger would have a

number of compelling

features in its favour

4. TRANSATLANTIC REJECTS VALIDUS BIDOrlich remains open to

renegotiations

5. TRANSATLANTIC CEO MOVES TO REASSURE CLIENTSOrlich writes to clients and

brokers

To contribute to the website,

email Lauren Gow at

[email protected]

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Hannover Wolfe Becke, head of Hannover Re’s life and health reinsurance business, is to retire from the company on 1 January 2012.

Hong Kong Swiss Re has appointed Robert Burr managing director and head of life and health in Asia.

Sydney QBE Australia Asia-Pacifi c chief Vince McLenaghan has quit the insurer after 16 years, following a series of reporting structure changes.

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Find our more online

globalreinsurance.

News

View from

View from StrategicRISK:

Emerging markets

AEGON Moody’s affi rmed the A1 rating of the US life subsidiaries,

changing the outlook to stable from negative after the sale of Transamerica to SCOR.

New Zealand Local Government Insurance Corporation AM Best downgraded its rating to B++ from A after the accumulated impact of

the Christchurch earthquakes.

Alterra Bermuda AM Best has revised the outlook to negative from stable and affi rmed the

A rating following the departure of reinsurance chief John Berger.

Hurricane model update brings cat bond caution● Four new cat bonds in Q2 contrasts with eight-strong issuance last year● Willis remains upbeat, predicting deals once revised RMS model beds in

The market for cat bonds had a slow second quarter, with four new issuances compared with eight in the same quarter last year. The issues added $592m of risk capital – just over a quarter of the $2.1bn in Q2 2010.

The market was hit by the release of the RMS v 11 US hurricane model, which prompted Standard & Poor’s to lower the ratings of six cat bonds on 12 July. It affi rmed its ratings on the remaining four.

Standard & Poor’s said: “Although modelling companies periodically update their models, the impact on the profi tability of attachment is typically minimal. However, in this instance the probability of attachment increased signifi cantly.”

Despite the relative lack of activity, Willis remained optimistic about the cat bond market.

Willis Capital Markets Advisory’s head of insurance-linked securities, Bill Dubinsky, said: “Investors have cash to invest and remain keen on risk in cat bond form, but are somewhat starved of new issuance, particularly non-US wind-exposed deals.

“The cat bond market should see an uptick in deals in the second half as investors get more certainty on how the new RMS hurricane model will affect pricing. It will also benefi t from the increase in ex-US cat reinsurance pricing.”

But with 71% of outstanding cat bond limit exposed to US hurricane risk of some form, Dubinsky warned that market performance in the rest of 2011 rests on what happens in the current US wind season.

The slow second quarter followed an active Q1, when the market environment was attractive. Predictions for cat

Brazil’s protectionist policies represent a worrying trend in developing areas.

In recent months, Europe’s risk managers, led by Ferma, have lobbied the Brazilian government to change its policies on reinsurance companies. One rule mandates placement of 40% of business with local reinsurers, which Ferma believes will reduce capacity and increase exposure for fi rms operating in Brazil.

Brazil recently abolished tax for labour-intensive industries such as clothing and software to favour domestic manufacturers. Procurement rules will be overhauled to give a “25% margin of preference in the bidding process for Brazilian manufactured goods and services”. And import rules are tightening up, with the number of investigators rising from 30 to 120.

For risk managers in Brazil, competition will soar overnight and exposures will change. Brazil’s policies could represent a developing trend of protectionism in emerging markets just when many companies in Europe are turning to them for business growth.

For risk managers, BRIC countries are ever more complex, underlining the need to be aware of regulations.Nathan Skinner, editor, StrategicRISK

RATINGS WATCH

bonds as a whole have been optimistic, with Munich Re predicting in January that up to $6bn of bonds could be issued this year.

The four bonds issued in the second quarter are as follows:● Allianz sponsored a fourth takedown from its Blue Fin shelf facility. A single $40m tranche was placed, providing

two-year term aggregate coverage against US hurricanes and earthquakes. Allianz chose not to seek a rating for this small tranche size.● The North Carolina JUA/IUA returned to the market for the third time with an additional takedown from its Johnston Re vehicle, which provides $202m of per occurrence coverage against hurricanes in two tranches. As with the 2010 transaction, Munich Re provides a traditional indemnity cover to the sponsor and retrocedes the risk to the cat bond market. The cat bond features an indemnity trigger and uses treasury money market funds as collateral.● USAA sponsored a catastrophe bond issue for the 15th consecutive year with the Residential Re 2011 transaction. Res Re 2011 provides $250m of

indemnity-triggered protection against US perils including hurricane, earthquake, severe thunderstorm, winter storm and California wildfi re. For the fi rst time, USAA chose to place this year’s transaction for a four-year term. The transaction will reset each year to the latest AIR model. ● Argo Re entered the market as a new sponsor. Loma Re provides $100m of second event coverage over 18 months on a per occurrence basis for any combination of US hurricanes and earthquakes, European windstorms and Japanese earthquakes.

● The cat bond market is well established, so a slow Q2 is not a major setback. Activity is likely to pick up again later this year as traditional reinsurance companies look at whether cat bonds could make sense for them.● In the third quarter, the market will have digested the new information provided by the RMS v 11 hurricane model, which could lead to more activity.● All predictions depend on a relatively quiet US hurricane season. If this doesn’t happen, and there’s a major US loss, all bets are off.

We say...

Cat bond issuance

FIND OUTMORE ONLINE

goo.gl/MNXhv

CAT BOND ISSUANCE FALLS SHORT OF MARKET APPETITE

Q1 2008 to Q2 2011 (from the WCMA Transaction Database)

Q1 Q2* Q3 Q4

$2,500m$2,250m$2,000m$1,750m$1,500m$1,250m$1,000m

$750m$500m$250m

$0m NA

2008 2009 2010 2011

$0 NA

*2010 Q2 excludes $250m Merna Re III private issuance

GR_4-6 news.indd 6 19/08/2011 15:36

www.hannoverlifere.com

EXOTIC FINANCIAL SERVICES PROVIDERS HAVE A CERTAIN APPEAL.

OR SHOULD WE SAY “HAD”?

GR_Ad_Page.indd 1 10/08/2011 10:03



globalreinsurance.

News

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Numbers Champagne corks popped as big reinsurers’ second-quarter results came in.

Swiss Re achieved a 15.6% return on equity after a strong Q2. Its property and casualty

unit reported a combined operating ratio of 78.4% (102% last year). Munich Re returned to profi t with €738m ($1.07bn), but posted a consolidated loss of €210m for the year so far.

Spender Warren Buffett won international acclaim with his call on the US government to charge him and his super-

rich friends more tax. Yes, you heard that right: writing in The

New York Times, Buffett outlined the case for a more

equitable tax system.

Optimist Flagstone Re chief David Brown remained sanguine in the face of a net loss of $181.4m for the fi rst half after heavy cat losses.

“Some markets in which we are active are benefi ting from signifi cant rate increases. We

continue to believe our operational platform can

access the markets we fi nd attractive,” he said.

Texas: Scorched earth

INDEMNITIES SET TO INCREASETexas farmers are struggling under the pressure of the worst drought since record-keeping began 116 years ago, with more than 78% of the state now considered to be in “exceptional drought”. Although the US Department of Agriculture has paid $693m in indemnities on crop insurance, it anticipates the number of claims to grow signifi cantly before year-end.

>>> see News

Analysis, page 16

Lloyd’s gets go-ahead for collateral cut in USA● New York Insurance Department approves reduction to 20% from 100%● Non-US reinsurers also making collateral progress across other US states

Lloyd’s has been granted permission to hold only 20% collateral for the reinsurance business its members write in New York.

The New York Insurance Department has approved Lloyd’s as a Secure-3 reinsurer, reducing its collateral requirements to 20% from 100%.

“Foreign reinsurers play an important part in supporting the US insurance industry, and steps taken by states to reduce collateral requirements are to be welcomed,” said Lloyd’s North America director Sean McGovern.

Lloyd’s has joined a growing list of non-US reinsurers able to

hold lower collateral in New York. Several, such as Hannover Re and Tokio Millennium, have

also won lower requirements in Florida.

Reduced collateral status came into law in Indiana on 6 April in life, property and casualty lines, and similar laws came into effect in New Jersey on 22 June.

Illinois, Texas and Louisiana are likely to enact similar cuts in 2012, and the remaining states should start considering similar legislation.

According to US law fi rm Mayer Brown, states have been prompted to act in part because of proposed amendments to the NAIC (National Association of Insurance Commissioners).

● 100% collateral requirements have long been a bone of contention for non-US reinsurers, so it is good to see many positive steps● With more states joining Florida and New York in reducing their collateral status, what is holding back the others?● The global debt crisis could make states more reluctant to lower reinsurers’ collateral requirements, as defaults or downgrades could weaken company balance sheets.● US reinsurers must be heard in any debate about collateral cuts for non-US reinsurers because this infl uences potential business and premium pricing.

We say...

‘Steps taken by states are to be welcomed’Sean McGovern,

Lloyd’s

‘Transatlantic’s board have a lot to consider, but a winner should

emerge soon’>>> see News Analysis, page 12

GR_8-10 news.indd 8 19/08/2011 15:20

Assessing Risk – A Fine BalanceWe are in the business of assuming risk. In this business, risk management does not equal risk avoidance. That is why we focus relentlessly on our risk evaluation process. We started 18 years ago with the idea that rigorous, state-of-the-art analytics could be incorporated into the broader underwriting process. Ever since, we have assessed risk at the individual deal level while achieving capital-efficient portfolio optimization across the entire organization. We are pleased to be one of the few companies in our industry to receive an ERM classification of “Excellent” from Standard & Poor’s, year after year. Which means consistent risk-based pricing, balance sheet strength and ratings security for you.

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AA- by Standard & Poor’s

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Renaissance Reinsurance Ltd.

A+ by A.M. Best

AA- by Standard & Poor’s

Renaissance Reinsurance of Europe

GR_Ad_Page.indd 1 19/08/2011 14:45



globalreinsurance.

News

Broker Jardine Lloyd Thompson has bolstered its mergers and acquisitions team as it looks to grow its business, according to chief executive Dominic Burke.

Speaking about JLT’s fi rst-half results, Burke said: “There is no part of our business that is not open for growth or acquisitions activity. We have recruited a greater resource in our corporate fi nance department and look forward to hearing more news from them in the coming months.”

Burke said that acquisitions were a key part of JLT’s strategy. The broker would look for bolt-on rather than transformational deals.

“We have the fi repower, we have the balance sheet and we have the pipeline,” Burke said. “We are active on acquisitions internationally, as well as here in the UK and the London market.”

Burke was unequivocal about JLT’s position as a takeover target. Responding to rumours that Aon is looking to buy the fi rm, Burke said: “This organisation is not for sale to Aon. It’s not for sale to anybody.

“Our shareholders are delighted with what’s been achieved by this management team. I don’t think there is an acquisition that makes any sense where JLT would be not the leader.”

JLT made a profi t before tax of £76.4m in the fi rst half of 2011, up 9% on the £70m made in the same period last year.

The broking group’s revenues were up 9% to £411.3m from £377.8m. Of this, £408.7m was attributed to fees and commission (the fi gure was £375.6m in the fi rst half of

2010), with the remainder of revenues coming from investment income.

The company’s retail broking business reported the biggest revenue boost in the fi rst half, rising 18% (14% on an organic basis) to £156.3m.

London market revenue grew 4% (3% organic) to £171m. This put total risk and insurance

revenue up 10% (8% organic) to £327.3m.

JLT posted a slump in profi t after tax to £53.6m in the fi rst half, down from £58.6m in H1 2010. The company said a one-off tax credit of £10.3m had boosted the H1 2010 after-tax result.

While profi ts and revenues were up, one-off expenses associated with JLT’s cost-cutting programme have increased to £24m from the forecast £19m. But JLT expects the cost savings derived from the programme to increase to £20m a year, up from £16m.

The cost-cutting programme, in which JLT is streamlining its back-offi ce processes, is to be completed by 30 June 2012.

JLT beefs up takeovers team ● Profi t and revenues up 9% as cost-cutting continues● JLT chief dismisses Aon takeover rumours … again

● JLT’s deal in June to acquire a 50.1% interest in Alta SA – the holding company of Chilean broker Orbital Corredores de Seguros and reinsurance broker Alta Re – as well as its earlier deal in January to take over Oslo-based real estate broker Tripol AS, demonstrates JLT’s keen appetite for offshore acquisition targets. ● With JLT on the lookout to make further acquisitions, we predict that Aon will need to batten down the hatches – more team poaches could be on the cards as JLT aims to secure its best possible team going forward.

We say...

Bid&Ask

12 June: Transatlantic Holdings and Allied World Assurance Company sign a merger agreement. The combined entity would have total invested assets of $21bn, total shareholders’ equity of nearly $7bn and total capital of $8.5bn.

14 June: Standard & Poor’s places Allied World’s A fi nancial strength ratings on credit watch with positive implications, but leaves Transatlantic’s unchanged. Moody’s rates Transatlantic’s fi nancial strength A1 and Allied World’s A2.

15 June: Transatlantic Re’s biggest (23.8%) shareholder, Davis Selected Advisers, says it may oppose the proposed merger with Allied World, citing “serious concerns” about the transaction.

13 July: Bermuda-based (re)insurer Validus makes a counter-offer for Transatlantic Holdings. Under the offer, Transatlantic shareholders would receive 1.5564 Validus shares and a pre-closing dividend of $8 in cash.

5 August: Berkshire Hathaway-owned (re)insurer National Indemnity trumps Validus and Allied World with an offer that values Transatlantic at $3.25bn.

5 August: National Indemnity offer is valued at $52 per share in cash.

5 August: Allied World’s stock-for-stock offer values Transatlantic at $44.22 a share. Validus’s cash-and-stock offer values it at $46.37 a share on the same day.

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STOCKWATCH

Lancashire +0.37 (676p) The London-listed (re)insurer bucked the trend of stock losses with a small

gain. The rise follows positive fi rst-half results – profi t after tax $97.5m, 5% up on the $93m last

year – which comes as many peers report losses or much-reduced profi t

after fi rst-half catastrophes.

Berkshire Hathaway -6% ($107,839) Warren Buffett’s bid for Transatlantic Re has shaken the

parent fi rm’s share price.

Munich Re -10% (€92.66) A fi rst-half loss of €210m coupled

with global debt concerns has rattled Munich’s investors.

DATA AS OF 16/08/2011 SOURCE: COMPANY REPORTS

$21bn

23.8%

$3.25bn

1.5564 shares

$44.22 per share

$52 per shareValidus chief Ed Noonan

Berkshire Hathaway’s Warren Buffett

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JLT AND AON POACHING WAR CONTINUES

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The battle for Transatlantic

GR_8-10 news.indd 10 19/08/2011 15:20

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GR_Ad_Page.indd 1 19/08/2011 14:47


News analysis

Mergers

The race is onCompetition for Transatlantic Holdings broke into a sprint in August with the entry of

Warren Buffett’s National Indemnity. Ben Dyson weighs up the merits of each bid

Billionaire investor Warren Buffett took the battle to take over Transatlantic Holdings up a gear in early August by offering $52 a share in cash for the reinsurer.

Three fi rms are now in the race to buy Transatlantic. The company had already signed an all-share merger agreement with Allied World Assurance in June, under which Transatlantic shareholders would receive 0.88 Allied World shares per Transatlantic share. In July, rival Bermuda-based (re)insurer Validus muscled in with an offer of 1.5564 Validus shares and $8 in cash per Transatlantic share. Then National Indemnity, a part of Buffett’s Berkshire Hathaway run by renowned reinsurance underwriter Ajit Jain, topped them all – at least in terms of offer value.

It is still far from clear who will emerge the victor. There is little doubt that National Indemnity’s entry is strong. The $52-a-share offer values Transatlantic at $3.25bn. At the time of going to press, the Allied World offer valued Transatlantic at $2.96bn ($47.33 a share) and the Validus offer $3.03bn ($48.44 a share).

All offers are a discount to Transatlantic’s stated book value of $67.76 a share, as at 30 June 2011.

Aside from its higher value, one benefi t of the National Indemnity offer is that, as cash, its value cannot change as a result of fluctuations in the stock market. Allied World’s offer was worth $3.05bn on 13 June (the first day of trading after the merger was announced), while Validus’s was worth $3.24bn on 13 July (the day after it made its offer).

Another benefi t is that Transatlantic – yet to hit its stride as a standalone reinsurer since controlling shareholder AIG sold its stake – could be more comfortable in a larger group, particularly with the cachet of National Indemnity. General Re, another former standalone US reinsurer, has thrived since Buffett bought it in 1998.

Furthermore, unlike Validus, National Indemnity is in discussion with Transatlantic’s board. This could make its path to victory smoother than the adversarial route of Validus chief Ed Noonan, who objected to Transatlantic’s terms for discussion.

Indemnity downsideOn the minus side, as the offer is all cash, Transatlantic shareholders will not be able to participate in any post-merger benefi ts. The $52 a share is effectively all they will get from the deal.

It is also unclear what will happen to Transatlantic after a deal with National Indemnity. Berkshire Hathaway typically buys companies and lets them run themselves, but there’s no guarantee Jain will do the same. News reports suggest Jain is driving the deal

with little if any input from Buffett. And it is rumoured that National Indemnity, a known acquirer of run-off books, will put large portions of Transatlantic into run-off – although this remains unconfi rmed.

Validus tacticsWhile Validus is taking the trickier route of trying to bypass Transatlantic’s board, Noonan has succeeded before. His hostile bid for IPC Re triumphed, despite an already agreed merger between the target company and Max Capital, now known as Alterra. Then, as now, Validus coped with a legal battle as well as a war of words between the parties and an insistence that its bid was inferior.

This time round, Noonan has again presented a strong case for his bid: the share portion of the offer would be tax-free to

Transatlantic shareholders and Validus has made a shareholder return of 55% since its IPO, compared with 24% for Al l ied World over the same period. Validus also had market capitalisation on 10 June of $3bn, as against Allied World’s $2.2bn.

The deal also includes $500m of reserve strengthening, which could calm investor jitters over Transatlantic’s reserving status.

But hostile takeovers are notoriously tough, not least because they lack the information-sharing and board discussion of a friendly takeover. Validus has said it still wants to talk to Transatlantic’s board.

A deal with the incumbent, Allied World, is favoured by Transatlantic, though it took a while for Allied World to show why its bid was superior. Its August presentation showed that Transatlantic shareholders would only retain 48% ownership under the Validus bid, yet 58%

under the Allied World offer, and that the cash portion of Validus’s bid would limit shareholders’ participation in future. It also argued that, on a book-for-book exchange ratio basis, the Allied World bid was worth more than Validus’s: $66.10 a share versus $61.24 a share.

While the face value of the deal is not everything, it will be a strong consideration for shareholders, and on this score Allied World’s is the weakest bid. There have also been concerns raised about a TransAllied deal. Transatlantic’s largest shareholder, Davis Selected Advisers, which has a 23.8% stake in the fi rm, said it had “serious concerns” and that it may encourage Transatlantic to explore other strategic options to maximise shareholder value.

Transatlantic’s board and shareholders have a lot to consider, but a winner should emerge soon. In a letter to clients and brokers, Transatlantic chief executive Bob Orlich wrote: “We expect to have greater clarity by conference season and well before our major renewal season.” GR IL

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GR_12 Transatlantic.indd 12 19/08/2011 15:19

GR_Ad_Page.indd 1 19/08/2011 16:13


News analysis

Solvency II

Test of timeAs the timetable for Solvency II is stretched yet again – this time to 2014 – David Blackman

looks at the hurdles encountered so far and the many still to be faced

There has been unparalleled turbulence in the eurozone economies in recent months. But those hoping for a swift political solution to the sovereign debt crisis, which threatens the still fragile

global recovery, will draw scant comfort from the EU’s agonisingly slow process for hammering out Solvency II.

Fresh delays have hit what has already been a long drawn-out process. Originally timetabled for introduction in 2010, the deadline for the directive’s implementation has been put back repeatedly. Last year, EU internal market commissioner Michel Barnier set it at new year’s day 2013.

But by the beginning of this year, concerns were mounting that even this new deadline was hopelessly optimistic. While insurers and regulators in some EU countries such as the UK have made good progress in ensuring they are Solvency II-compliant by the end of 2012, other member states have been less prepared.

Regulators and insurers in some of the smaller and southern European member states have found the European Commission’s timetable challenging. And for smaller and medium-sized insurers, which tend to make up a bigger chunk of the market in less mature economies, complying with the new regime’s provisions is especially onerous.

A hugely complicating factor is the Byzantine nature of the EU’s decision-making process. This has become even more convoluted since the passage of the Lisbon Treaty, which gave the European parliament a bigger voice in the production of directives such as Solvency II. It means that, as well as having to pass muster with member states through the Council of Ministers, any EU legislation must also be approved by the European parliament.

Legislative logjamIt may be a more democratic process, but the result is a legislative logjam in which Solvency II is caught up. The full implementation date now looks set to be pushed back a whole year to the beginning of 2014 under a new timetable to be agreed when the eurocrats return from their summer breaks.

But while member states will be required to formally transpose the directive into their national legislation by the earlier deadline, regulators and companies will not be obliged to comply with it. Existing capital and solvency requirements will continue to apply throughout 2013.

The intervening year will see the phasing in of the directive’s detailed provisions, and insurers will be required to provide their national regulators with an implementation plan.

European Insurance and Occupational Pensions Authority (Eiopa)

chairman Gabriel Bernardino, in a recent interview with Global Reinsurance’s sister title Insurance Times, was anxious to deny that the new timetable was a delay. “You can’t start to enforce a system before implementing it,” he said.

Putting systems in placeBut PricewaterhouseCoopers global Solvency II leader Paul Clarke says insurers should not take their foot off the preparation pedal. “Despite the delay, insurers cannot afford to be complacent with their plans, as they will still be required to fi le Solvency II information over the course of 2013 to prove their readiness. This means insurers will need to have systems and processes in place by the end of next year.”

Lloyd’s fi nance director Luke Savage adds: “If insurers have 18 months instead of six months, the work will stretch out. You won’t end up with a better solution, but you will spend more money and take more time.”

European insurers in general are more relaxed about the new deadline, according to a survey by Aon Benfi eld. A straw poll of European insurer delegates at a conference held by the reinsurance broker in the wake of the EU’s announcement revealed that 60% thought 2014 a better starting date for the new capital regime.

And given the lack of clarity over the Level 2 measures – which spell out how Solvency II will be implemented – it is hard to see EU decision-makers had any option but to postpone.

Many of these measures are being thrashed out by working parties set up to examine the thorniest issues, such as whether insurers should be allowed

to hold capital in the currencies of the countries where they are insuring risks.

The overarching issue is that the existing implementation framework requires insurers to adopt an “overly conservative approach” to the level of capital they should hold, according to a letter sent earlier this year by leading insurance bodies to Barnier.

Lloyd’s estimates its members would need to raise an additional £25bn in order to comply with the existing standards. A number of working parties have been set up to iron out these issues.

All this means that the Level 2 rules won’t be fi nalised until well into 2012 under the existing timetable.

Light was shed on one key issue last month, when Eiopa published its thoughts on equivalence. While the insurance regimes in Japan and Switzerland meet the criteria for equivalence under the Solvency II regime, it said, Bermuda still has work to do.

This is a becoming an all-too familiar story: progress is being made on Solvency II, but nowhere near fast enough. GR

June 2006: Consultation starts The European Commission begins consulting on the Solvency II proposals.

June 2007: DELAY European Commission insurance chief Karel von Hulle is reported as saying that the original Solvency II deadline of January 2010 will be pushed back to 2012.

July 2007: Draft framework published After years of talking, the commission publishes the wording of the draft Solvency II directive.

November 2007: Results of QIS3 The third quantitative impact study shows that 98% of the 1,027 participating insurers have enough to cover the minimum capital requirement.

April-July 2008: Insurers submit to QIS4 The fourth study looks at the effect of Solvency II on the funds of individual insurers and groups.

December 2009: Directive becomes law Solvency II becomes EU law following its publication in the Offi cial Journal.

May 2010: DELAY The decision is made to push back the original 2012 deadline by a couple of months to align with year-end.

March 2011: Results of QIS5 The latest study shows that most insurers’ capital levels exceed the directive’s solvency capital requirement.

June 2011: DELAY Several countries aren’t ready and French participants call for an extension.

Solvency II: The delays so far

GR_14 SolvencyII.indd 14 19/08/2011 15:21

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GR_Ad_Page.indd 1 19/08/2011 14:48


News analysis

Drought

High and dryAs America remains in the clutches of one of the worst droughts in history, Lauren Gow

looks at the relief available to (re)insurers and the farmers who are losing everything

Disappointment stemming from tropical depression Don is palpable. There were high hopes that the lacklustre storm that hit Texas on 29 July would bring much-needed rain for the

drought-stricken southern regions of the USA. But the storm dropped less than an inch of rain before blowing over, dashing the hopes of thousands of farmers and leaving (re)insurers trying to count the cost of yet more catastrophe pain.

The USA is in the midst of one of the worst drought periods in its history. According to the National Drought Mitigation Center (NDMC), over one-tenth of the United States fell into the ‘exceptional’ classifi cation during July, peaking at 11.96% on 12 July. “That level of exceptional drought had never before been seen in the monitor’s 12-year history,” said University of N e b r a s k a – L i n c o l n a s s i s t a n t geoscientist, and climatologist at the NDMC, Brian Fuchs.

In Texas, the drought has now hit catastrophic levels. US Department of Agriculture (USDA) spokesman Kent Politsch said: “In Texas, between January and June of 2011, the state received the lowest amount of rainfall and had the highest temperatures on record. Record-keeping began 117 years ago. We obviously have a serious problem.”

By 1 July, USDA secretary Tom Vilsack had declared 14 states primary disaster areas due to drought. By mid-July, a further nine counties in Colorado and 16 counties in New Mexico were declared primary disaster areas, as well as 213 of the 254 counties in Texas.

“Declarations are important, because they allow farmers to apply for low-interest loans, fi le a claim on their crop insurance and seek additional assistance, such as from the SURE – Supplemental Revenue Assistance Payment – programme if they qualify,” says Politsch.

Paying upThe USDA federal crop insurance programme has paid out $173m to farmers with reported losses in 13 states because of the drought so far this year. Drought has affected more than two million acres in those 14 states and drought-related loss payments represent 58% of all loss payments paid in 2011 to date.

The most adversely affected crop is cotton, although all crops including corn, soybeans, some wheat, rice and numerous vegetables are also affected. “More than 40% of the cotton crop in the four major cotton-growing states – Texas, Oklahoma, Georgia and Alabama – is currently rated as ‘very poor’ or ‘poor’ as a result of the drought,” Politsch adds.

More than 90% of New Mexico’s cotton is now rated poor-to-very-poor by the USDA, with Texas following closely behind at 86%. Overall national fi gures from the USDA show cotton farmers have abandoned about 30% of their cotton crops because of the drought.

Calculating the costThe drought will impact two lines in the US (re)insurance industry: crop insurance and property and casualty. However, unlike other natural disasters such as windstorms, there is an innate diffi culty in calculating exact losses from drought because losses occur on an individual basis, covering large distances for an indefinite time period.

Specialist broker BMS vice-president Eric Hubicki says: “It is possible to calculate the crop losses in an area like Texas, where it has record levels of drought. But when it comes to property and casualty, it is more difficult. A tornado hitting a farm building, you know the loss bill pretty quickly. But when you bring in drought, it brings in an economic factor.

“Farmers might not have the margins that they are used to but, due to the drought, does that mean their equipment is not as well maintained? Things start to get neglected and that’s hard to put a fi gure on. Also, owing to the lack of moisture, there isn’t a windstorm risk. However, wildfires become an issue.”

Reinsurance specialist and vice-president at BMS Jim Botsis agrees that it is too early to tell what impact

the weather will have on crop production and the insurance industry. However, he says the losses for insurers may be mitigated by recent scientifi c developments.

“The other thing to keep in mind here is genetically modifi ed crops. This is new technology that has been evolving over the past few years. The crops are certainly a lot hardier and can sustain drought-like conditions,” says Botsis. “What farmers will go out and discover in terms of yield levels over the next few weeks will be different to what they would see 20 years ago without the technology that we currently have in place.”

There is a ray of hope on the horizon, according to Hubicki: “One area where a nationwide underwriter of insurance may be able to make up drought losses is when the northern states come through their cycle. It’s probably safe to say the margins that the insurers will report won’t be as large as in the past. But at this point, it might still be possible to make an underwriting profi t.” GR IL

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GR_16 Drought.indd 16 19/08/2011 14:39

There is a space between the moment ideas are born, and when they become a reality.

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GR_Ad_Page.indd 1 10/08/2011 09:51


News Agenda

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GR_18-25 Agenda 911.indd 18 19/08/2011 16:56


News Agenda

‘In terms of industry-reshaping events, 9/11

was probably the most transformational of

the last decade’Just as the absence of the Twin Towers has left an indelible mark

on the Manhattan skyline, the infl uence of 9/11 can clearly be seen today in the (re)insurance industry’s relationships and practices.

Ten years on, Ben Dyson looks at an industry changed forever

It is difficult to find anyone who escaped the effects of the September 11 2001 terrorist

attacks in New York City.But, in terms of both business

a nd per sona l losse s , t he insurance industry arguably bore the biggest brunt. Not only did it have to pay out $40bn – the second-biggest insured loss on record – but a huge number of the industry’s own executives lost their l ives in the event. Brokers Aon and Marsh had a large presence in the World Trade Center, and both lost hundreds of people. Most in the industry know someone who lost their life that day.

While the event was a sudden and dramatic shock for the industry, both financially and emot iona l ly, it a lso had a signifi cant lasting effect. In fact, out of the tragedy of September 11 has come a series of key

changes to the i nsu rance industry that can still be seen today. It resulted in something of a rebirth for the industry, both affi rming its worth and bringing about a purge of the poor practices it had slipped into during the soft market.

Looking at the event 10 years on, it is also a stark reminder that while it is stil l the most costly terrorist attack to date, the threat of future attacks is still very strong. And, despite the advances in model l ing, exposure management and risk management that have been made over the past 10 years, the i ndu s t r y cou ld ea s i l y be surprised by another unforeseen event.

Know your exposuresIn the immediate aftermath of the event, the fi rst surprise for the industry was the loss itself.

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GR_18-25 Agenda 911.indd 19 19/08/2011 16:56


News Agenda

Almost everyone in the industry, from brokers to insurers to reinsurers, was surprised by the sheer number of lines that could be hit by a single event. Until this point, large market-changing events had been natural catastrophes, which predominantly affected the property book.

“Nobody imagined or had really thought through the possibility that almost every line of insurance could be involved in a loss,” Guy Carpenter chairman Britt Newhouse says. “Life, workers’ comp, accident and health, property liability, professional liability, surety – there was virtually no line of business in the insurance world not involved in that loss and, as far as I know, that had never happened before.”

“Everything changed after September 11 and our market is certainly no exception,” Allied World Assurance chief operating offi cer David Bell adds. “From an underwriting perspective, 9/11 was in many ways a knock-out punch to the capital positions of certain carriers, and had a cascading effect over multiple lines of business.”

The complexity of the event is still being unravelled. For example, in its fi rst-half 2011 results, Lloyd’s (re)insurer Hiscox announced that it had received $9m after a successful subrogation action against the airlines whose planes hit the Twin Towers in 2001.

The 10 years since September 11 have hardly been quiet. The industry has been through several other transformational and teaching

experiences, among them the collapse of Enron and WorldCom in 2001 and 2002, respectively; the severe North Atlantic hurricane season of 2005; and the fi nancial crisis of 2008. And the terrorist attacks were not the biggest insured loss: the combined losses from Hurricanes Katrina, Rita and Wilma in 2005, expressed in 2010 amounts, are more than double the September 11 losses.

Yet the impact of the World Trade Center’s destruction had a far more marked impact on the global (re)insurance industry. One of the most noticeable effects was a sharp rise in rates in almost all lines of business. “It was the most signifi cant multiline rate-hardening trigger event the industry has ever seen,” reinsurance broker Aon Benfi eld’s chief strategy offi cer Bryon Ehrhart says.

The evidence of this sharp increase is still visible today. “The pricing cycle that occurred after the event is still contributing materially to reported profi ts today for many insurers and reinsurers through substantial favorable reserve development,” Ehrhart says.

Risks you hadn’t counted onSeptember 11 also changed the industry’s view of risk. “In terms of reshaping perceptions of risk and how insurers manage risk, 9/11 was probably the most transformational event of the last decade,” says New York-based Insurance Information Institute (III) president Robert Hartwig.

As a result of this new picture of risk, insurers had to re-evaluate their exposures and re-assess their view of risk aggregation in particular zones. While, prior to September 11, risks in various business lines were not seen in isolation, the losses from the terrorist attacks highlighted more links than were previously visible. “It caused insurers to become aware of risks in their portfolio that they hadn’t imagined might exist before the events

of 9/11,” Endurance Specialty Holdings chief executive David Cash says.

Furthermore, the attack forced the global (re)insurance industry to come to terms with a risk it had paid little attention to before: terrorism.

Some countries did have a concept of terrorism insurance before the World Trade Center destruction. One example was the UK, which has had a government-funded terrorism scheme, Pool Re, in place since 1993 as a result of a string of Northern Ireland-related terrorist attacks in the UK.

our building on the

our building on the

‘Vivid memories’Britt Newhouse, chairman, Guy Carpenter

“I was in the South Tower in the 52nd fl oor when the second plane hit our building on the 76th fl oor. I have pretty vivid memories. There is not a day goes by when I don’t think about how lucky I am. I walked down and out of the South Tower and the building came down about 10 minutes after I got out.

“We didn’t know the building was going to fall down at the time. In the South Tower, we had 20 minutes between

when the fi rst plane hit the North Tower and when the second plane hit us. Because we had been in the building during the previous attack in 1993, we didn’t have to tell people to leave.

“The vast majority of the Guy Carpenter people got in the elevators and out of the building in that 20 minutes. Being the senior person in the offi ce at the time, I shut the offi ce down and sent everybody home. Most of the people Guy Carpenter lost were working in the North Tower because we had run out of space. A few people were killed on the streets by debris.

“While we were walking down the 55 fl ights of stairs to the ground level, the thing I remember most was that it got hotter and hotter because the building basically behaved like a toaster – the heat from the fi re ran through the metal frame. We were more concerned about the fi re than collapse.”

‘It was the most signifi cant multiline rate-hardening trigger event the industry has ever seen’ Bryon Ehrhart, Aon Benfi eld

GR_18-25 Agenda 911.indd 20 19/08/2011 17:08


News Agenda

But large parts of the global market, and the USA in particular, did not explicitly provide terrorism cover. It was covered under property policies simply by virtue of the fact that it was not explicitly excluded. The concept of terrorism underwriting was therefore virtually non-existent.

“At the time, 9/11 was the largest insured loss in global history and the irony was that not a penny had been charged in premium for this type of risk,” Hartwig says. “A large-scale terrorist attack of this kind had never been conceived of before and was not priced into property insurance or reinsurance programmes.”

The government steps inAfter 11 September 2001, terrorism exclusions very quickly became standard in insurance and reinsurance policies; a situation that remains today.

Businesses now needed terrorism coverage more than ever, but were unable to get it, as many companies deemed it uninsurable because of their inability to measure the risk. They had little historical data, and barely any way of predicting the likelihood of another attack.

Therefore, the US government had to step in, and the Terrorism Risk Insurance Act (TRIA) was born in 2002. The act was the USA’s answer to Pool Re, though it was initially intended to be temporary. It pays terrorism losses after the individual company or industry-wide losses reach a certain point, and up to a limit of $100bn. The act does not cover personal lines.

The knowledge that the US government would step in to pay losses above a certain point gave insurers the confi dence to start offering terrorism cover to businesses. Its usefulness and popularity is such that its expiry date has continued to extend. After being renewed in 2005, TRIA was replaced in 2007 by the Terrorism Risk Insurance Program Reauthorization Act, which expires in 2014.

But at each step the Federal participation in terrorism risk has been reduced, leaving the industry to take an increasing share of the burden. Although the US government-backed terrorism insurance programme is still intended to be temporary, with its 2014 expiry date, many in the industry hope it will become a permanent fi xture.

“Almost everybody in the insurance industry feels this legislation needs to be permanent,” Starr Indemnity & Liability Company and Starr Surplus Lines Insurance Company president and chief executive Charles Dangelo says. “There are scenarios that are potentially far too big for any one company, and arguably for the industry, to take on themselves when you think about what could happen in a very severe terrorism event.”

Terrorism fi nally coveredWhile September 11 prompted some companies to exclude terrorism risk, the heightened knowledge of its existence, coupled with a strong demand for cover, led several carriers to start offering cover independently of TRIA – so-called standalone

‘With my own eyes’Robert Hartwig, president, Insurance Information Institute

“My offi ce is three blocks from ground zero. I was here. I watched it with my own eyes. I was working at my desk and I heard a loud roar. Then I heard a muffl ed boom sound. I’m on the 24th fl oor and my window faces north. I didn’t know what it was. The woman in the offi ce next to me came out and asked what it was. We went to a west-facing window and we saw on the top of the North Tower what was at that time, within two minutes of it happening,

a small fi re. We assumed that a small plane had accidentally fl own into the tower. That didn’t surprise me because I have a pilot’s licence and I have fl own up and down the Hudson river near the towers. Quite frankly, I was surprised that no one had ever crashed into them.

“With the second strike, we knew that it wasn’t an accident. I watched both towers fall with my own eyes and felt it and smelt the debris – our building was hit by debris. One of our employees suffered minor injuries and was cut by debris on the ground as she was coming to work when the tower was struck. We were lucky in that respect.

“It was surreal. You have watched it on television but to be less than a kilometre away, it is a different experience because not only was it visual, it was close up and then you felt it, you smelt it, you heard screams.”

September 11 loss estimates

Biggest terrorist acts

Insured loss estimate $40.02bn (as at 2010)

By insured property losses (as at 2010)

$4.4bn Property (WTC)

$7.4bn Property(other)

$13.5bn Business

interruption

$2.2bn Workers’ compensation

$600m Aviation hull

$1.2bn Event cancellation

$4.3bn Aviation liability

$4.9bn Other liability

$1.2bn Life

11 SEP ’01 USA Hijacked aircraft crash into $23.14bn NYC World Trade Center

24 APR ’93 UK Bomb explodes near $1.117bn London’s NatWest Tower

15 JUN ’96 UK IRA car bombing in $917m Manchester shopping mall

10 APR ’92 UK Bomb explodes in $826m fi nancial district

26 FEB ’93 USA Bomb explodes in garage $770m of NYC World Trade Center

24 JUL ’01 Sri Lanka Rebels destroy 14 aircraft $491m

9 FEB ’96 UK IRA bomb explodes in $319m Docklands, London

23 JUN ’85 Irish Sea Bomb explodes on Air India $199m Boeing 747

19 APR ’95 USA Government building bombed $179m in Oklahoma City

DATA: SWISS RE

DATA: INSURANCE INFORMATION INSTITUTE

GR_18-25 Agenda 911.indd 21 19/08/2011 17:08


News Agenda

terrorism cover. While this type of cover was not new, some contend that the events of 9/11 were a catalyst for growth of this market.

“There was a very small standalone terrorism market prior to 9/11, to deal with troubles in places like Sri Lanka with the Tamil Tigers, the Colombian FARC and the IRA in Northern Ireland,” Liberty Syndicates terrorism, fi ne arts and specie underwriter Mike Burle says. “The unprecedented attack of 9/11 really did kick-start what we see today is a very mature standalone terrorism and political violence market.”

Class of 2001It was not only terrorism cover that was tough to fi nd in the aftermath of September 11. Because of the event’s far-reaching effects on the insurance market, prices jumped in all lines of business, and companies reduced or withdrew coverage. The effect of 9/11 was exacerbated by the fact that the industry was emerging from the throes of a long soft market, and was heavily weakened by years of under-pricing and underwriting losses, particularly in US casualty.

Private equity companies saw an opportunity to invest in the industry, and a raft of new companies was formed to pick up the slack.

In all, around 10 new companies were formed, and were dubbed the class of 2001. Many of the number still survive and thrive; notable examples being Endurance, Allied World Assurance and Montpelier Re,

which have made the transition from start-ups to core members of the global (re)insurance establishment.

These companies quickly deployed the capital their backers supplied to help plug the coverage and capacity holes that 11 September punched into the market. “The class of 2001 played a very meaningful role in the capital market’s ability to help Main Street rebuild itself quickly,” Allied World’s Bell says.

The formation of the class of 2001 also cemented Bermuda as a

worldwide reinsurance hub. Bermuda was already fairly well established, with ACE and XL setting up there in the mid-1980s to plug gaps in the US casualty market, and a string of property-catastrophe underwriters – notable survivors being PartnerRe and RenaissanceRe – establishing themselves in Hurricane Andrew’s wake in 1993. But the arrival of the

class of 2001 took the island to the next level.

“The capacity crunch was focused primarily on catastrophe and large corporate risk products where traditionally risk has been syndicated,” Endurance’s Cash says. “Syndication happens most effi ciently in global insurance marketplaces and there were only two places where capacity could have formed to respond at that period of time. One was London, the other was Bermuda.”

He adds: “Before that time, Bermuda wasn’t a marketplace in the same sense that it is today. But Bermuda was able to emerge as one of the two major marketplaces in the world primarily because of the demand for large syndicated risk after 2001.”

Contract certainty nailed downAs important as underwriting and fi lling coverage gaps was, the payment of claims was vital. One of the most memorable claims – and indeed claims disputes – from September 11 was that for the property of the Twin Towers themselves.

The leaseholder of the World Trade Center site, Silverstein Properties, argued that the destruction of the Center’s twin towers by two passenger jets constituted two events and so they could expect a payout of $7bn from insurers. Insurers, on the other hand, insisted it was only one, and Silverstein was only entitled to half that amount.

The dispute ran for fi ve years, with the verdict that the wording in some

‘Just one degree of separation’David Cash, chief executive, Endurance Specialty Holdings

“I was scheduled to fl y from Bermuda to New York at lunchtime that day and my travel agent alerted me that the fl ights were all grounded. That’s when I, like others, watched the events unfold on TV and as I watched the Towers collapse, I was simply staggered by the images.

“Once air traffi c opened up a few days later, I fl ew over New York and we passed over the World Trade Center site at night. You could see the fl oodlights and look down into

the site, which made the reality of the situation even more striking.“About a month later, I travelled to the site. There was a pile of scrap metal

literally six-stories high – like a building in itself. Our industry is quite small and in that downtown New York area there were many, many insurance professionals who are not with us now. Many people in our industry can say that they have a one degree of separation relationship with what happened on that day. We all, myself including, know someone who was killed.

“At the moment I witnessed the events on TV, it was clear to me that things were going to be different both politically and in our industry. All of us saw it. It was visually stark. When I look back, while it was clear to me and to many others that it was a turning point, it was hard for any of us to imagine the full impact of what would unfold for our industry.”

‘9/11 kick-started what we see today is a very mature stand-alone terrorism and political violence market’Mike Burle, Liberty Syndicates

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News Agenda

policies required payment only for a single event, but the wording in others put insurers on the hook for a two-event payout.

Part of the reason for the length of the dispute was the fact that wordings had not actually been fi nalised when the Towers fell. This sparked a global effort to achieve contract certainty – to have fi nalised wording in place either on the date of coverage inception or within a set timeframe thereafter.

This dispute and the issue of contract certainty also had a strong bearing on how insurance and reinsurance coverage was secured for the redevelopment of the World Trade Center site (see ‘A leap of faith’, overleaf).

(Re)building bridgesBut the Silverstein dispute was a rarity, and the industry earned plaudits for paying claims promptly. So much so, in fact, that many believe faith in insurance was restored.

“In the immediate aftermath, there was a sudden and newfound appreciation for insurance and the critical pillar it represents in the economy,” recalls public policy consultancy Park Strategies managing director Gregory Serio, who was New York State’s insurance superintendent at the time of the attacks. “Prior to that, there was almost no recognition of insurance as a critical element of either the monetary system or the broader economy.”

He adds: “Those dollars that fi rst fl owed after 9/11 were not government or banking dollars, they were insurance dollars, fl owing very quickly into the marketplace to stabilise both the geographic area of New York City, and Lower Manhattan, as well as sending out a message that there was this signifi cant safety net.”

The events also allowed the industry to build new bridges and strengthen existing ties. One of the many diffi cult situations in the aftermath of the attacks was that collateral for non-US reinsurers had to be swiftly

replenished so they could continue providing coverage for US insurers. One such reinsurer was Lloyd’s.

Under the collateral rules, Lloyd’s and other non-US reinsurers would have had to pre-pay its entire reinsurance gross loss of any reinsurance

recovery into trust within 45 days. Instead, the New York insurance department gave the market additional time to recapitalise its collateral accounts, which it successfully did.

As a result of the greater interaction, Lloyd’s lost a lot of its mysticism, and thus gained greater trust of US regulators. “The relationship with Lloyd’s changed dramatically. Until 2001 it was an arms-length regulatory relationship, borne out of a crisis itself – reconstruction and renewal,” Serio says, referring to the reserve plan, completed in 1996, that saved Lloyd’s from the brink of collapse. “9/11

allowed people to see how Lloyd’s had changed, how this new entity that had emerged from reconstruction and renewal was able to operate in the event of a global disaster. It was the fi rst big test for that new marketplace. But I think what it also did was to break down a lot of those barriers that develop in an adversarial relationship.”

On 28 July this year, Lloyd’s had its 100% collateral requirement in New York reduced to 20%. “I don’t think any of that would have happened if the fundamental relationship between Lloyd’s and the American regulatory community hadn’t changed after 9/11,” Serio says. “This is a direct

byproduct of how Lloyd’s addressed the 9/11 situation.”

In addition, the work on TRIA and other federal matters helped bring the insurance industry and the US government closer together. “You had a whole new set of relationships

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‘Like it was yesterday’Gregory Serio, managing director, Park Strategies and former

New York State insurance superintendent“I remember everything about that day like it was yesterday. I remember the blueness of the sky, the blackness of the smoke. I remember worrying about where my employees were and I remember sleeping on my sister’s fl oor that night. And I remember going into the site.

“At the time, I was also the volunteer fi re chief in Albany. When I was the deputy superintendent, I worked on creating

an urban search-and-rescue team for New York, located in Albany. That team was the fi rst team with a signifi cant cache of equipment at Ground Zero that afternoon.

“Unusually for an insurance regulator, I managed to get a glimpse of the horrifi c extent of this event by actually working on the site that night – and the next night and the night after. I was working there until I simply couldn’t do two jobs working 20 hours a day.

“It helped me immeasurably to understand both the size of the disaster by standing in the midst of ruins and to understand the human toll. It’s almost impossible not to have an appreciation for the human toll watching them take out fi re fi ghters, police offi cers and civilians who were trapped and died in the wreckage, as well as understanding more the macro implications of it. It provided an insight I would never have had if I was merely the insurance commissioner.”

‘Those dollars that fi rst fl owed after 9/11 were not government or banking dollars, they were insurance dollars’ Gregory Serio, Park Strategies

GR_18-25 Agenda 911.indd 23 19/08/2011 16:56


News Agenda

being used for the fi rst time,” Serio says. “That helped to set the stage for what has become a regular and institutionalised relationship between the Feds and the National Association of Insurance Commissioners.”

An industry rejuvenatedJust as the public began to see insurance in a better light, the industry also gained an opportunity to re-evaluate itself. The industry in general had slipped into bad habits during the soft markets, with sloppy

underwriting and excessive competition taking their toll. Some executives report that there was a disillusionment with the industry, but this lifted when 9/11 banished the bad practices from the market.

Some say the industry is now more professional in many respects. “Most reinsurance brokers are now emphasising a technical approach compared to the more aggressive approach to risk placement that was

Just as the insurance industry underwent a rejuvenation after the September 11 terrorist

attacks, so too has the site that the atrocities laid to waste.

The site’s leaseholder, Silverstein Properties, has used the insurance claims money it recouped from the loss of the World Trade Center’s iconic Twin Towers to rebuild the area. One of the buildings, WTC 7, is already complete, and the company plans to develop three more: WTC 2,3 and 4.

The rebuilding would not have been possible without insurance money. But it would also not have got off the ground without still further support from the industry in the form of a comprehensive insurance and reinsurance programme.

And, as Silverstein’s vice-president of risk management, Shari Natovitz, explains, putting together such a programme was no mean feat. The fi rst challenge was the sheer amount and breadth of the coverage required. “The project needed to be protected, which meant engaging the entire global insurance community,” Natovitz says.

“We were looking at a $6bn build and in order to get capacity for that we needed insurance from all over the world because we are also looking at carriers to produce signifi cant limits for the protection of our workers under workers’ compensation, as well as the protection of the public passing by this project every single day.

“All told, when you start adding those dollars up, just for my projects alone you have a total property/casualty capacity approaching the $10bn mark.”

Moving on from the pastThe next problem was attracting the insurers and reinsurers to take the risk. The highly publicised, sometimes fractious legal dispute between Silverstein and its insurers in the years that followed the terrorist attacks did not serve as a great starting point. And given what they had learned from the events of September 11, companies were reluctant to take large chunks of exposure in Manhattan, especially on the very site that had yielded them heavy losses last time.

Natovitz admits that, while most carriers were eventually willing to assist, there was some initial scepticism. “Many of them were reluctant to reach out to us, perhaps in part because of the litigation but

employed in the late 1990s,” Endurance’s Cash says.

“This change in perspective has made them more successful in selling to their clients, but it has also made them more successful in working with reinsurers.”

In many ways, the industry is a far better place as a result of the changes wrought by the terrible events of 11 September 2001. It certainly has a greater appreciation of both terrorism risk and how to manage large accumulations of risk. But the threat of terrorism has not gone away. There is a sense that the death of Osama Bin Laden could spark retribution from his followers, for example.

“One thing that 9/11 and other catastrophic events remind insurers of is that they don’t know everything. No matter how good your models are or how you underwrite and engineer against things, stuff happens. You have to put something into your thinking and the management of your business to deal with that,” Guy Carpenter’s Newhouse says.

“The industry has got much better at being able to understand what the exposure is if something happens in a particular place at a particular time. But it is still very diffi cult, if not impossible, to predict where and when it is most likely to happen.”

Though it has clearly learned many lessons over the past 10 years, there is still plenty of scope for the industry to be caught off-guard by a future event. GR

‘We had to function’Charles Dangelo, president and chief executive, Starr Indemnity & Liability

Company and Starr Surplus Lines Insurance Company“The attack struck very close to home. At the time, my offi ce was in downtown New York on the East River. I was having a staff meeting when the fi rst plane hit. A number of people were looking at World Trade Center 1 out of the window of our offi ce building and saw the plane hit World Trade Center 2. We told everybody to go home and watch the news. We told them to come into work the next day if the offi ce

was open or if not to go to an alternative site if they were able to do so. We knew, being an insurance company, that we had a lot of work ahead of us and we had to function. We needed to be there for our policyholders.

“We had an alternative site in New Jersey where I was up and running by 8am the next day. We were contacting brokers and our accounts, saying: ‘Let us know if we can be of assistance, let us know what we can do,’ but at that point, nobody really knew. They were still assessing whether they had people in the building.

“Because of the presence of Marsh, Aon and others in the building, all of us had friends and associates we knew were there. As news came in, we heard that some did make it out. We heard that others did not. In our business, we see serious events that create signifi cant property damage and loss of life; but it really struck home when these were people we worked with day in, day out who didn’t survive.”

‘One thing that 9/11 and other catastrophic events remind insurers of is that they don’t know everything’ Britt Newhouse, Guy Carpenter

GR_18-25 Agenda 911.indd 24 19/08/2011 16:56


News Agenda

It was no mean feat to convince insurers and reinsurers to come on board with the rebuild of the 9/11 site, but leaseholder Silverstein knew it would be worth the fi ght

on this insurance programme,” she said.

Insurers were also attracted by the safety measures built into the new existing and planned properties. These include a bunker-like construction of the central lift shaft and stairwells, wider-than-required stairwells to ease escape for occupiers and access for fi rst responders in the event of a disaster, and dedicated communications networks to circumvent the problem immediately after 9/11 where cell phones and land lines failed, rendering communication between emergency teams almost impossible.

Getting it rightA big feature of Silverstein’s post-9/11 disputes with its insurers was the lack of clarity in the policy wordings, and the fact that fi nal wordings were not in place for the entirety of the coverage. This had a big infl uence on how negotiations were conducted with insurers when putting the new WTC programme together.

Natovitz says Silverstein and Willis were at pains to ensure consistent wording across the programme and a complete understanding on all sides of the meanings of the wordings. “I’m very pleased to say that the entire industry learned from that softness of wording associated with 9/11. We went into the initial submissions to the market with the single strong objective, when we approach coverage, of having absolute contract certainty.”

After ensuring consistency and comprehension, Natovitz said Silverstein then went one step further. “We added a designated adjuster to the property programme so we would have somebody who understood the coverage and the intent representing the programme. We also added a forensic accountant to the project as well, so all those issues would be upfront.”

Natovitz praised the individual brokers in Willis for helping the fi rm to achieve contract certainty. She also credited the carriers for their support.

“This has truly become a project that sought and received the support of the entire insurance and reinsurance community,” she said. “Without them it would be a challenge to be able to rebuild, so we look at them as our partners and we look forward to continuing to work with them because they have been an extraordinary help to us.” GR

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CLAIMS: LAYING NEW FOUNDATIONS

also because we were an unknown quantity in terms of building a mega-project at that point,” she says.

“There was also reluctance on the part of any carriers to want to step into the World Trade Center site because they were concerned about their own aggregations.”

She adds that a handful of carriers refused to do business with Silverstein at all. “There were some carriers that stepped away from us as a result of the litigation,” Natovitz says. “We have spent the last fi ve years trying to suggest to them that doing business together would be a good way for them to get to know us and also recoup some of the losses in premium dollars that they felt they paid out. We have had limited success with that, but it is only about four or fi ve carriers.”

Bringing insurers on boardSilverstein got around the problem of reluctant insurers by setting up meetings between senior insurance executives and Silverstein’s project and design managers, as well as the fi rm’s president of World Trade Center properties, Janno Lieber.

“Through the litigious era of 2001 to 2006, the underwriters knew us by the headlines in the newspapers and what was happening in the courts,” Natovitz says. “They didn’t really know who we were. Nor did they know what our capabilities were in terms of being able to develop and manage a construction project of this magnitude. The fi rst step in us being able to meet the insurance demands that were put on us was to re-introduce ourselves to all the major markets.”

It paid off. The company’s insurance programme, covering a wide range of risks, is placed with 45 carriers though its broker, Willis. The programme also includes a

captive insurer, the Greenwich Street Insurance Company, which provides terrorism cover.

While she stresses that all carriers had an important role to play in the programme, Natovitz mentions that particularly signifi cant parts were played by Chartis and its subsidiary Lexington, ACE, XL, Munich Re and a range of Lloyd’s syndicates.

“Ultimately, we met with markets from London, Lloyd’s, Bermuda, the USA and Europe. All of those markets are participating

A leap of faith: the WTC rebuild

GR_18-25 Agenda 911.indd 25 19/08/2011 16:56

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‘‘Profi le

Mike Wilkins is seven minutes late. In this rare interview, the press-shy chief executive of Australia’s largest general insurer, Insurance Australia Group (IAG), makes no bones

about his time and patience being limited. With typical Australian swagger, he begins the interview saying: “I need to be somewhere in 23 minutes.”

Time is indeed of the essence for Wilkins. When he took hold of the reins at IAG in June 2008, he gave himself one year to turn the business around. Within fi ve weeks of taking over as chief executive, Wilkins wielded his axe, slashing 600 local jobs as part of his so-called ‘effi ciency programme’, which aimed to save A$130m (US$134.6m). But more controversially, the Australian insurer decided to retain the calamitous UK business – a decision he is still vehemently justifying.

Now, after three years in the job, with a wildly fl uctuating share price and a ratio of seven profi t downgrades to one upgrade, it would be safe to say Wilkins’ mission has not been successful.

But Wilkins is like a bulldog with a bone when it comes to overseeing IAG. He wholeheartedly embraces the motto: ‘There is no ‘i’ in team’ and swiftly bats away every question asked directly of himself. He

answers instead with “we” or “us”, seemingly in an effort to share responsibility for both the successes and failures of the insurer.

Former IAG UK chief executive Neil Utley, who worked with Wilkins for three years, describes him as a “typical insurance guy”. “Sometimes that can make someone less interesting but that is not the case with Mike,” Utley says. “At fi rst, he comes across as reserved, which makes him seem very serious. But he’s got a great sense of humour and is a warm person.” When relayed this character verdict, Wilkins laughs self-consciously and promptly moves the focus away from himself and back to business.

Far from being demoralised by continuously disappointing results, Wilkins is adamant that IAG is making progress. “I am pleased with what we have been able to achieve as we have sought to reposition the business,” he says. But when pushed, he falters slightly: “Yes, we have had some disappointments along the way. But, generally speaking, I think we have achieved most of what we set out to achieve.”

Without skipping a beat, Wilkins swings the conversation back to positive territory. “Certainly in this part of the

‘‘We have had disappointments along the way, but we achieved most of what we set out to IAG’s Mike Wilkins pulls no punches when talking about his company’s unstable past, which just makes him more resolute about the future, fi nds Lauren Gow

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Profi le

GR_28-30 Profile.indd 29 19/08/2011 15:37


Profi leworld, we have laid a very solid platform for the

next stage of our development. What we are looking to do now is just a logical extension from the platform that we have laid.” Smiling briefl y, he adds: “And I am quite excited about the future.”

That future was announced by Wilkins at an investor briefi ng in Sydney on 14 June and includes plans for organic growth and acquisitions in the Asia-Pacifi c region.

IAG’s Asian growth initiative is not remarkable in itself as the insurance giant has had placements in the region for more than a decade. But Wilkins’ decision to go full throttle into the region is a marker of his determination to produce hardier economic results at a faster rate.

“The Asian economies are the fastest growing economies in the world and we certainly believe that is going to continue for the next decade or more,” Wilkins says excitedly. “With the combination of the geographic and time zone location, together with technical expertise and the growth of those emerging markets, Asia seems like a sensible place for an organisation like IAG to go.”

On 15 August, IAG announced it had agreed to acquire a 20% strategic interest in the motor-heavy Chinese general insurer, Bohai Property Insurance, for a price of RMB687.5m (approximately A$100m, or US$103.5m).

A healthy appetiteWhen questioned about his rationale for Asian growth impetus over other emerging markets like Latin America, Wilkins answers with his tongue fi rmly planted in his cheek. “The time zone difference is better,” he says bluntly, before laughing to himself.

But Wilkins’ plans for the region are surprisingly undefi ned. “We are open-minded as to whether we start greenfi elds operations in those areas or whether we go into joint venture or buy into existing players. Likewise in Australia and New Zealand.”

One example of Wilkins’ acquisition appetite was the purchase of West Australian health insurer HBF in June, which added about A$100m to IAG’s overall Australian premium pool. Wilkins agrees almost too eagerly that this is the company’s future footprint. “It will be that type of thing that we are looking at. We are very open to those opportunities.”

Wilkins moves on to speak frankly about the scope of the Australian (re)insurance market. “I think Australia is a relatively small economy and reinsurance is a global business. If you look at the major players, they are global in their scale. Several years ago, there was an attempt to create a reinsurance market in Australia but I just think the available domestic business wouldn’t support a serious reinsurance market.”

For now, he says, IAG is satisfi ed with the reinsurance opportunities available in the region. “We think that Australia and New Zealand continue to be attractive diversifi cation opportunities for reinsurers because they can then defray some of their Northern Hemisphere risks into the Southern Hemisphere. It’s unfortunate that in the last couple of years there have been a series of events in this part of the world that have affected reinsurers. But

go back a few years and the reverse was true. That’s what a diversifi cation strategy is all about.”

Away from home shores, Wilkins has his eye fi rmly on the horizon following an eventful three years in offi ce. In June 2010, IAG announced plans to drastically revamp its UK Lloyd’s business Equity Red Star, shedding 175 of its broker partners in the UK and withdrawing almost entirely from its aggregated motor business after suffering considerable losses from bodily injury claims. In April 2011, a further 185 job cuts were announced in what was shrewdly described as “a widespread consultation”.

So when Wilkins stood before investors at the 14 June briefi ng and said: “We aim to return the UK business to profi tability by 2012,” gasps could be heard from the audience in Sydney’s Westin Hotel. Famous for his slash-and-burn mentality, many market makers were expecting Wilkins to abandon the heavily fl awed Equity Red Star business in favour of focusing solely on home soil. Rumours continued to circulate in August about the imminent sale of its UK business, which IAG continues to deny.

Making the right movesInterestingly, when asked about IAG’s UK plans, Wilkins bristles slightly. “We think we have taken all the actions that are necessary. We dropped a lot of business, we re-priced our portfolio and we strengthened a number of our internal disciplines. What we have said is that we expect to make a loss in the UK in the second half of our fi nancial year.”

And there is one point Wilkins will not budge on – analysts need to keep their ladles out of the pot. “While I respect analysts, they don’t always appreciate how long it takes for price increases and other remedial actions to work their way through a portfolio.”

Wilkins’ defensiveness of the troubled UK arm is akin to a parent with a rebellious teenager – not surprising considering the state of the business that was left to him when former chief executive Michael Hawker quit in May 2008. Hawker, who hired Wilkins as chief operating offi cer in late 2007, resigned after reportedly losing the confi dence of shareholders following the rejection of a fi nal merger offer from potential suitor and fellow Australian insurer QBE Insurance.

Since then, Wilkins has battled to revive IAG’s fortunes using his own unique management style. While some would expect the parent of an unruly teen to restrain and control, Wilkins, by his own admission, prefers to keep things at arm’s length. “I believe you need to have decision-making as close to the end user as possible. I try to give as much authority and autonomy as I can to the leaders of the individual businesses within an agreed set of parameters.”

Wilkins pauses momentarily before adding: “I think it’s about creating the right environment for our people to succeed and to monitor the progress we are making against that.”

And on that note, Wilkins says “thank you” and ends the interview. Exactly 23 minutes are up and he has somewhere else to be. GR

Age: 54Hometown: Canowindra, New South WalesFirst employer: Yarwood Vane (now Deloitte)Interests: Rugby, golf and most sportsIn his own words: ‘I am quite excited about the future’

Ranking: Australia’s largest general insurerGWP: A$7.78bn (US$8.05bn)Employees: 13,500Market view: Feared and revered, the IAG umbrella of companies has some of the oldest and most successful GI brands in its stable, but falters in thehomestretch of results.

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Claims

“We’re nearly drowning. Hurry up!” Thirteen-year-old Jordan Rice screams down the phone as he

begs triple-0 emergency operators for help. Seconds later, he and his mother Donna are swept to their deaths, while 10-year-old Blake Rice clings to the roof of the family’s Mercedes as it is swept down the main street of Toowoomba in the worst fl oods in living memory in Queensland.

The senseless deaths of Donna and Jordan Rice, alongside 35 others, as well as more than A$2.55bn (£1.62bn) in insured losses as a result of the fl oods in late December 2010 and January 2011, has sparked one of the largest independent government inquiries in Australian history.

The results of the Queensland Floods Commission of Inquiry, which began on 17 January 2011, are not due to be handed down until 24 February 2012. But insurers, consumers and local, state and federal governments are already learning lessons that could prevent the same magnitude of losses recurring in future.

There is a single word that continues to be raised from all three perspectives: disclosure. The need for full disclosure on all fronts appears to be the single most important technique in the prevention of future losses.

Defi ning the termsOne area that requires full disclosure is the term ‘fl ood’, of which a defi nition has never

been offi cially agreed upon by government and insurers. In 2008, the Insurance Council of Australia (ICA) put forward a proposal for a common defi nition of inland fl ooding, but it was denied authorisation from the consumer watchdog Australian Competition and Consumer Commission (ACCC) on the basis that the proposal may actually create more confusion, rather than provide clarity for consumers.

ICA general manager of risk and disaster planning Karl Sullivan says the government needs to defi ne the term urgently, as policyholders and insurers have been left

equally vulnerable in the recent fl oods by the lack of clarity.

“It is vital that we don’t use other compound terms like ‘fl ash fl ood’ or ‘storm fl ooding’, as those terms confuse the picture,” says Sullivan. “The insurance industry has agreed to a common defi nition and is now just waiting on the government to make a decision and roll that out as solution.”

Suncorp’s executive manager of personal insurance Stephen Jeffery agrees with this view. “The ICA and all insurers are in support of that move, as it will help consumers understand what a fl ood is and what it is not. In the current environment, insurers have different interpretations of how their policies respond to various conditions. But everyone being treated on the same basis would certainly help the claims process.”

Encouragingly, submissions to the inquiry so far have all highlighted the need for government, consumers and the insurance industry to work in unison to mitigate fl ood risk. Each has an interlinked role to play, which Sullivan says is one of the core principles of the inquiry. “Insurance doesn’t cause houses to fl ood. A failure by all to mitigate and plan properly and do something about the fl ood issue in the fi rst place causes fl ood damage.”

While a second round of hearings at the Commission of Inquiry is due to begin on 29 September, for the moment, there appears to a universal calm ahead of the next storm season in December.

Worst affected areas

Lockyer ValleyLockyer Creek - 18.9m (62ft)

RockhamptonFitzroy River – 9.2m (30ft)

GayndahBurnett River – 18.25m

(59.9ft)

IpswichBremer River 19.4m (64ft)

CondamineCondamine River – 14.25m (46.8 ft)

BrisbaneBrisbane River – 4.46m (14.6ft)

GympieMary River 8.5m (28ft)

ToowoombaGowrie Creek8m (26ft)

Swept Queensland has suffered its worst fl oods in living memory, but it’s not the fi rst time the AWAY

area has been devastated. As Lauren Gow fi nds, many of the consequences of the disaster could have been avoided, but where does responsibility lie?

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GR_32-33 Claims.indd 32 19/08/2011 15:43


Claims

Knowledge saves livesLack of awareness regarding fl ood risk became a matter of life and death for residents in Queensland, with many registering offi cial complaints with the ICA and government following the fl oods.

Sullivan says: “A lot of people were not in the position to make an informed decision about whether they required fl ood insurance because they simply did not know they were at risk.”

Jeffery says the inquiry has drawn out a vital lesson that the insurance industry must understand from a consumer perspective – policyholders need their policies detailed in plain English.

“There has been a lot of focus around disclosure regimes and how transparent it is for people to understand the product and whether they are covered,” he says. “There are measures proposed through government that we support, such as a summary of facts statement on the front of the product that highlights what key areas they are covered for and not covered for.

“There is a need for consumers to understand the products fully so they can make an informed decision of what they want.”

Chief executive of Australia’s largest general insurer IAG, Mike Wilkins, agrees. But he also argues that the debate needs to be wider than just understanding insurance cover when discussing fl oods and policyholders.

“One of the issues with fl oods is that people were allowed to build in high-risk areas, sometimes being unaware of that,” Wilkins says. “The debate that we think needs to arise should include what governments and consumers can do together to help mitigate further fl ood damage.”

GOVERNMENT

CONSUMERS

A change of mindsetAccording to ICA reports, insurers largely support the need for government-led mitigation as it will assist in alleviating the burden facing the industry in times of catastrophe.

“The ICA is urging the government to have a fundamental rethink. Fix mitigation, fi x land use planning, fi x fl ood mapping and fi x building codes,” Sullivan says. “Make sure people who are living in fl ood risk zones are informed. Once all of that is fi xed, insurers will be in a position to insure correctly and properly.”

The last large-scale fl ood event in Queensland was in Brisbane in 1974, with more than 7,000 homes and businesses destroyed and 14 fatalities. Amazingly, building codes in the intervening years between then and now have not prevented residential and commercial buildings being built in known high-risk areas.

Jeffery says he is fl abbergasted at the lack of government planning. “When we talk about mitigation, clearly dams and levees are a factor, but the most important thing is ensuring people do not build in those areas. The minister for environment in 1974 said: ‘Flood plains are for fl oods, not houses.’ I think we have forgotten this in the intervening time.”

In its submission to the government inquiry, Suncorp has requested the government increase focus on planning and building codes, particularly in terms of how high homes are built and what fl oor height is necessary in certain areas.

A$2.55bn

35total insured lossesDec 2010-Jan 2011

deaths reported in

recent fl oods

At what cost?For insurers, the biggest lesson to come out of the Queensland fl ood inquiry is the pricing of risk, which comes back to the availability of accurate data.

For fi ve years, the ICA has battled local governments to make all fl ood maps available to insurers. All local councils in Australia, barring some in Queensland, have made their fl ood maps available for use in the centralised ICA National Flood Information Database.

But insurers are fi ghting an uphill battle in forcing Queensland local governments to disclose fl ood maps. “The reason they resist handing over the maps is some don’t believe that insurers should be given that data because they might price the product accordingly,” says Sullivan.

“Other councils believe they might have liability issues from property owners who suddenly discover they are on fl ood-prone land, and others are concerned that they would be held accountable by insurers for errors or mistakes in the fl ood mapping.”

Sullivan argues that while there is some validity to these concerns, the excuses are largely baseless as the ICA indemnifi es local councils for any liability for fl ood maps once they have been handed over.

While Suncorp provides fl ood cover in Queensland, Wilkins says without fl ood-related data, IAG is unable to follow suit. “In Queensland, with the data that was available to us, we just feel we cannot quantify the risks appropriately for us to be able to offer fl ood cover.”

Jeffery says insurers can only work within the boundaries they have been given. “We need everyone

else to come to the party around risk management. We can provide products to rebuild people’s homes, but the best case is for the house to not be fl ooded in the fi rst place.” GR

INSURERS

7,000homes and business

lost in 1974 Brisbane fl oods

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GR_32-33 Claims.indd 33 19/08/2011 15:44


Cedants

PHOTO: YIANNIS KATSARIS

Rob Andrews started his insurance career in claims at US insurance heavyweight Liberty Mutual. He later switched to underwriting to broaden his horizons.

Before long, Andrews’ talents were noticed by the ceded reinsurance department. As is often the case, one thing led to another, and today he manages the global ceded reinsurance department for XL Insurance, the global primary insurance division of the Bermuda-based XL Group.

As might be expected with a company that writes a full range of business lines in 20 countries, the job of buying reinsurance is diverse. Andrews’ division operates out of offi ces in the USA, the UK, Switzerland and India to support XL Insurance’s underwriting around the world. It should come as no surprise, therefore, that Andrews has never experienced what many would describe as an ‘average’ day.

WITH

‘Pricing grabs most

of the headlinesbecause it’s the one element to

which we can all relate’

Rob Andrews

Q A&With some reinsurers playing it ‘fast and loose’, XL Insurance’s global head of ceded reinsurance explains why he prefers a more traditional approach

GR_34-35 Cedants QA.indd 34 19/08/2011 14:07


CedantsA. For 2011 we’re estimating a treaty spend of around $600m.

Q. To what extent do you make use of alternative reinsurance structures, such as catastrophe bonds?

A. We evaluate all alternatives when developing reinsurance solutions. In fact, we considered a cat bond this year, but ultimately determined that a more traditional reinsurance approach provided us with a better balance of coverage, basis risk and pricing.

Q. What do you most look for in reinsurers?

A. Alignment. That sounds simple enough and you’ll see it mentioned in various marketing literature, but it is actually more elusive than you would think.

Fundamentally, reinsurance is a trade of underwriting risk for credit risk. Ensuring success means we need to be fully transparent about the exposures we wish to cede and reinsurers must convince us they’ll fully execute on the promise they make even if that doesn’t occur until years later.

Reinsurers that are truly aligned are in sync with, and support, what the company is trying to accomplish and are therefore consistent in their capacity, services, pricing and terms. Nothing frustrates the process more than when we observe reinsurers playing fast and loose with their support or taking arbitrary positions on contract terms such that it causes non-concurrency in coverage or increases processing costs.

Q: How is the success (or otherwise) of your reinsurance purchasing measured?

A. The truest measure is the one you would prefer never to test: did the covers perform as you expected after a loss? XL Insurance is a specialty commercial underwriter, so many of the products we sell are long-tailed. Consequently, our primary measuring stick is assessing whether the covers model such that they achieve our objectives.

As you would imagine, we don’t rely on a single metric or model, but rather employ a blended approach to account for intricacies.

Based on the losses that have emerged to date, we are comfortable that we are on target. GR

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XL HUNTS NEW P&C HEAD

Here, he explains to Global Reinsurance why XL chose traditional reinsurance over catastrophe bonds and describes the disruptive infl uence of “fast and loose” reinsurers.

Q. How would you describe the current pricing situation in the reinsurance market?

A. We are in a soft market but it’s slightly different from others we’ve historically witnessed. To my mind, we’re embedded in a soft market when we see stepped erosion in pricing, limits management and terms. In this cycle, reinsurance rates have been steadily declining across the market for the past fi ve years, and I have seen some loosening of limits, but contract terms have remained largely stable.

Notable exceptions over this period have been in marine immediately following Deepwater Horizon and, more recently, when property rates began rising in May in response to the plethora of worldwide losses in 2010 and early 2011.

Q. How do you approach deciding what to buy and structuring your reinsurance programmes?

A. Central to our buying philosophy is maintaining a balance between our capital strength, risk management and business objectives. In practical terms, that means fully understanding our exposures so we can construct programmes that protect our capital, dampen volatility and support our business heads’ ability to compete successfully in their market segments.

Q. What in particular is important to your company as part of this process?

A. Dialogue, diligence, the right tools, determination and a commitment to the company’s objectives. And, depending on the market cycle, a fair amount of stamina and good humour doesn’t hurt either.

Building articulate reinsurance solutions requires a team of highly skilled reinsurance professionals who work closely with the business units, risk management, actuarial, fi nance and others to understand the risk being assumed and to fi nd the best approaches and structures.

Q. How has the current pricing affected your buying strategy?

‘Alignment is more

elusive than you’d think. Fundamentally, reinsurance is a trade of underwriting risk for credit risk.

Ensuring success means we need to be fully transparent’

A. Pricing grabs most of the headlines because it’s the one element to which we can all relate. As a buyer, low prices certainly beat the alternative, but they’ve not caused us to depart meaningfully from our normal buying practices.

As ever, we balance market pricing with our capital strength to achieve the best landing spot in terms of retentions and limits. What I have observed is how it has encouraged the market to develop new products and /or bring previously unattractively-priced products back to the table for discussion. This is a positive trend that I hope continues.

Q. What impact will Solvency II have on the purchase of reinsurance?

A. While there are still details to be fi nalised by the regulators, my initial impression is that Solvency II should be broadly similar to what we experienced after the fi nancial crisis.

From an operational standpoint, we have well-documented processes and procedures, and we routinely audit our key fi nancial controls. Procedurally, our ceded underwriting team employs catastrophe, risk and capital models to help them assess our exposures, which fi ts nicely with our focus on protecting capital and executing on XL’s enterprise risk management strategies.

While we purchase treaties on a global basis, we are always mindful that they equally must meet the regulatory needs of our various legal entities. I expect that Solvency II may require some minor adjustments to ensure we continue to hit the mark.

Q: How much premium do you cede to reinsurers?

GR_34-35 Cedants QA.indd 35 19/08/2011 14:07

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THE SIXTH ANNUAL MULTAQA QATAR CONFERENCE

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

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Promoting thought leadership in (re)insurance

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QatarVI_GR_19Aug.indd 1 19/08/2011 14:25


Country Focus

A tough propositionInsurance in India is booming. But many obstacles, not least the continued dominance of state-owned behemoth GIC, make the reinsurance market a nerve-wracking prospect for foreign entrants. Mark Leftly reports

INDIACOUNTRY FOCUS

GR_37-39 Country.indd 37 19/08/2011 12:49

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Country Focus

thing. If anything, it is very slow,” he says.

Willis Re’s managing director of Asia, Middle East, Turkey & Africa, Maurice Williams, agrees, adding: “Really it is the unions within the reinsurance sector that feel threatened by foreign ownership.”

Not enough freedomWhen the law is passed, it will also change the level of ownership that foreign insurers can have of an Indian venture, from 26% to 49%. The balance has to be owned by a domestic insurer.

So, even if reinsurers are granted a foothold in the market, they will still own less than half of their venture. Worse still, this business would have a distinct credit rating to that of the parent company.

“None of the reinsurers would be happy with their name on a separately rated entity,” Williams argues. “They would have to put a lot of capital into it to get the same rating [as the group].”

Also, reinsurers would only be permitted to invest in government bonds. While it is true that the bonds pay out reasonably well at 7%-9%, reinsurance companies like to invest in a wide range of fi nancial products to spread their risk.

For an insurer, a population of 1.2 billion in what is still an underdeveloped market, despite being the 10th biggest for the industry globally, plus that near doubling of permitted ownership, is an exciting prospect.

But for a reinsurer looking to maximise its balance sheet, it might as well keep its capital and write business through its intermediaries in the liaison

India has proven remarkably resilient during the economic downturn. While virtually every

western nation has counted the pennies hoping to fi nd even the barest hint of economic growth, the International Monetary Fund found that India had increased gross domestic product by an average of 8.3% in 2005-10.

This has helped the insurance sector to continue its powerful rise since the liberalisation of the market under the Insurance Regulatory & Development Authority Act in 1999, when the government monopoly was smashed and brokers were permitted to operate. General insurance is growing around 20% year-on-year, boosted by a growing middle class and a youth that is more aware of the benefi ts of such policies than previous generations.

No less than Warren Buffett has noted the opportunities in the Indian market, his Berkshire Hathaway empire agreeing to become a corporate agent of Bajaj Allianz General Insurance Company earlier this year.

The growing strength of the primary market has piqued the interest of foreign reinsurers. The likes of Swiss Re, Munich Re, Hannover Re, SCOR and private equity-owned Asia Capital Reinsurance Group (ACR) have opened representative offi ces in the country in recent years.

This is despite the presence of government-owned General Insurance Corporation of India (GIC), its market dominance demonstrated by the fact that it had net earned premium of Rs8,076 crore ($1.79bn) in 2010. To put the fi gure in context, that is more than one-fi fth of SCOR’s global net earned premium last year.

This is not in fact an open market for foreign reinsurers. They are not allowed to set up branches in India: their teams on the ground effectively act as intermediaries to help primary players access reinsurance in other territories.

And even a raft of proposed regulatory changes is unlikely to prove attractive enough to entice reinsurers to set up shop in India any time soon.

The wait for changePrior to the 1999 act, GIC was an amalgamation of 107 general insurers that were nationalised 27 years earlier. Upon privatisation, GIC was charged with developing the reinsurance market.

A domestic insurer can go to the liaison offi ce of a Munich Re or an ACR, where their local representatives

will act as a conduit to underwriting offi ces in nearby countries.

The long-awaited Insurance Laws (Amendment) Bill 2008 would change this, meaning that foreign rivals could formally set up in India. Lloyd’s of London would also be recognised as a branch of a foreign reinsurer.

“This system will eventually change,” broker RFIB’s divisional director for India, Kishor Gohil, says. “GIC has given its blessing, as they feel that a wider choice of reinsurer will be of benefi t to the market.”

GIC can hardly protest at foreign competition, given that the group has expanded overseas to the extent that, by last year, 43% of premiums came from outside India, with presences as far afi eld as Brazil and Russia. In 2008, GIC also indicated its willingness to work with potential new entrants to the market by signing a tie-up to develop life reinsurance with Hannover Re.

But Gohil warns that the law may still not come into force for a few years yet, despite hopes that the bill might fi nally be passed by the end of 2011. “India is not very quick at this kind of

‘Really, it is the unions within India’s

reinsurance sector that feel threatened by

foreign ownership’Maurice Williams, Willis Re

GR_37-39 Country.indd 38 19/08/2011 12:49


Country Focus

offi ces. Even if a reinsurer looked at using India as a regional hub, particularly as a way into the Middle East and North Africa, Williams says that the opportunities might not be enough to offset these problems.

State barriersGIC, with its in-built monopoly, remains a huge obstacle. Head of the analytics team at the Asia Pacifi c division of rating agency AM Best, MoungMo Lee, points out that GIC has made efforts to act more like a private sector group, saying: “Recently, reinsurers tried to introduce some discipline to steer the market into the right direction – that of commission, capacity.”

For example, GIC has reduced ceding commission – the amount paid to primary insurers in compensation for placing business with the reinsurer – to as little as 3%-5%.

Regulators have also tried to create a more market-driven insurance market, which in theory should entice reinsurers. For example, the fi xed tariffs for the lines that made up the bulk of general insurers’ business, including fi re and workers’ compensation, were removed in 2007 and prices allowed to fl oat according to demand.

But this has been undermined by the third-party motor insurance pool, which was introduced that same year. Even though more than 80% of motor business was with four state-run insurers, private groups had to sign up to this pool.

Rather than losses being split among those that provided motor cover, they were divided proportionately to that business’s share of the overall

IndiaCOUNTRY FOCUS

Reforms of India’s non-life insurance market has produced substantial progress in all lines since the turn of the

century. The market received another boost in 2007 with the detariffi cation of key classes of business. India’s

motor insurance has 46% of total market share. Property insurance and health sectors have 18% each.

Population: 1.21 billion

GDP: $4.060 trillion

GWP: $6.4bn

Major exports: petroleum products, precious

stones, machinery, iron and steel, chemicals,

vehicles, apparel

insurance market. Private companies were effectively subsidising massive losses made by state-run entities in a sector to which they had actually limited their exposure. “With the creation of the third-party motor pool, the private sector slowed their growth,” Lee says.

The GIC administers the pool. Couple that with the feeling that the GIC’s more disciplined terms are still not as market-conditioned as major reinsurers would like, there remains nervousness over the way the industry is run in India.

The 10% ruleWhat compounds these concerns is that private and public insurers are obliged to place at least 10% of their business with GIC. In fairness, this has reduced from 20% and is common to some other emerging markets.

Senior director in the Asia Pacifi c insurance team at Fitch Ratings Jeffrey Liew says: “As the country opens up, eventually that fi gure will become zero. Primary insurers will have the option to go with other reinsurers.”

Even if that happens, Liew’s colleague Terrence Wong points out that any reinsurer that does decide to set up in India faces having far less accurate data than GIC. Much of the data on policyholders will be out-of-date, particularly in the vast rural areas.

“The Indian market is in line with some of the developing markets – it is diffi cult to verify the data properly,” Wong explains.

“Some reinsurance companies have tried to use IT as a tool to improve data quality. But it is about what has been

captured in the past. You need to verify the data, but people have usually entered it manually.”

The GIC has long relationships with insurers, so will have been able to ask questions and update its records. The quality of the data will be far better than that which reinsurers possess when they fi rst establish an offi ce in India, which could lead to decisions that look safe on paper actually leading to losses.

Blind to concerns?Open to competition though it might be, GIC does not seem to understand the fears of its potential rivals. In an interview this summer, GIC chairman Yogesh Lohiya argued that his organisation was losing out.

“The market is open,” Lohiya was quoted as saying. “Every other country specifi es some guarantee or some restrictions.”

Because foreign reinsurers can set up liaison offi ces, they are indeed not subject to the same regulation as GIC, and they also do not have to pay a portion of their premium, as is the case in other countries, like Malaysia. Foreign reinsurers, then, have their own advantages over GIC, and there are aspects that make the market more attractive than others in Asia.

Lohiya is, of course, going to defend GIC and indeed makes some valid points. His logic might well still be compelling when that bill is fi nally passed – it may be better to just have a few intermediaries on the ground rather than to go through the potentially risky business of establishing operations in India. GR

FIND OUTMORE ONLINE

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1 APRIL RENEWALS: ACTING LOCAL

GR_37-39 Country.indd 39 19/08/2011 12:49


Rewind

Champers, money, gossip, tactless remarks … Some things never change. Or do they?

Speak your mindLoose lips sink … insurers. Rumour has it that US insurer Allstate unceremoniously sacked Joseph Lacher, president of its home and motor insurance arm Northbrook, after an unfortunate case of loose lips. After months of in-fi ghting between Lacher and Allstate chairman Tom Wilson, Lacher let his true feelings about Wilson be known, describing

him as a “f**king a**hole” to a group of Allstate brokers in a bar at the Ritz-Carlton, Florida. With just two words, Lacher lost his $3.2m job and ended a

20-month career at Allstate. Let’s raise a glass to the one man in our industry who has done what some of us only dream of.

Gardening leaveTo those not stationed there, working life on Bermuda must seem cushy. But it’s not all sitting about in shorts in a tropical paradise making lots of money; there are hurricanes too. The guys there were reminded of this when tropical storm Gert nearly hit the island in mid-August. But some were pretty stoic about it. One Bermuda-based reinsurance exec told me: “I’d sooner clean up my back garden than my balance sheet.”

Beats living in Florida, I guess, where you might end up having to do both.

Taxing timesAs regular readers know, I’ve been a bit worried about Warren Buffett losing his touch. After seeing his article in The New York Times about the super-rich paying more tax, I’m convinced he’s gone soft. I thought the idea of being rich was that no one could tell you what to do, especially the tax man. Perhaps I should rethink my career. Not so long ago you could buy t-shirts declaring “greed is good” from the Berkshire website. These are now conspicuously absent. Ah, the good old days … GR

MontySeason’s greetingsAh, Monte Carlo, the longed-for September Rendez-Vous. I can almost hear the sounds of champagne corks popping, old chaps chatting, underwriters talking up rates, brokers talking ’em down. Even more than the fi rst sip of fi zz at the Guy Carp bash, I love the rumours that do the rounds. Ajit Jain spotted hobnobbing with Mike McGavick? There’ll be a merger in the works. Grahame Chilton shooting the breeze with Dominic Burke? Watch this space. This year, though, I reckon the most frenzied speculation will centre on M&A in Lloyd’s – and quite right too. It’s only a matter of time before more deals are done in Lime Street, many of them cut in the Café de Paris. One thing’s for sure – Matthew Fosh won’t be buying his own drinks.

Alterra fi rmaTalking of Monte, I wonder whether my old friend John Berger will put in an appearance? It’s not like John to miss a gathering of the great and the good, and this could be the perfect opportunity to make his next move. Because whatever the talk of a ‘merger of equals’, it seems Berger stayed at Alterra for only as long as was strictly necessary after the sale of Harbor Point. And now? To oceans new …

Mine’s a ginger aleThat insurance tradition of long, boozy lunches has just been broken, and I for one am not happy. I recently met with a member of a London market insurance broker that has banned its staff from drinking during offi ce hours. The gent told me, while ruefully sipping European mineral water, that apparently the banning of all drinking was seen as a better alternative to setting limits. At least there’ll be a lot of cheap dates in these tough economic times.

The insurance tradition of

long, boozy lunches has

just been broken

GR_40 Monty.indd 40 19/08/2011 14:08

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global reinsurance september 2011

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