PCI Reporter 2014 Day One

PCI REPORTER
SUNDAY | 26 October 2014
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PCI | OCTOBER 26-29 2014 | SCOTTSDALE, ARIZONA
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Reactions PCI Reporter
PCI with Reactions welcomes
delegates to Scottsdale
The leading luminaries of the US
re/insurance industry were
welcomed to Scottsdale this
morning as delegates gathered for
the Property Casualty Insurers
Association of America’s (PCI)
annual conference.
More than 1,000 people are
expected to attend this year’s
conference, which brings together
insurers, reinsurers and brokers, as
well as service providers such as
lawyers and claims companies, all of
whom will be keen to listen to and
discuss the most pressing issues
facing the industry.
TWO WORDS:
PROFITABLE
GROWTH
PCI_Day1.indd 1
The theme of this year’s
conference is “Leading in an Age of
Disruptive Transformation”, and
over the next few days the event’s
agenda will give attendees plenty of
opportunity to debate how the
wider re/insurance industry will
deal with the challenges it currently
faces, as well as those looming on
the horizon.
“There are two things we hope
to get out of the conference,” David
Sampson, the president and chief
executive of PCI, told Reactions.
“We hope to facilitate contacts
and transactions between our
member companies – the primary
insurers and then the brokers and
reinsurers. That’s always a very
important part of this annual event
and we greatly value and appreciate
all of the brokers and reinsurers
who participate in it. We think it’s
efficient and effective for our
members first and foremost, but
hopefully it’s good for the reinsurers
and brokers as well.”
The other element of the
conference that Sampson believes is
key relates to the education and
information that PCI provides its
members. The conference offers ➢
David Sampson
Learn more at guycarp.com
25/10/2014 15:11
CONSIDERED DECISIONS?
OR SPEED OF RESPONSE?
WE’RE EXPERTS AT JUGGLING BOTH.
We empower our underwriters to make decisions,
without going round and round the circles of
a hierarchy. We can do this because our
underwriters are acknowledged experts in their
spheres. Experts who can make decisions where
– and more importantly when – they matter,
based on a thorough understanding of your
markets, their risks and your needs.
Contact us at qatarreinsurance.com or better
still meet us in person at one of the industry
conferences.
PCI_Day1.indd 2
25/10/2014 15:11
#PCIAM2014
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ISSN 0953-5640
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PCI_Day1.indd 3
Continued from page 1
➢ attendees the chance to learn
about the issues affecting the
market, as well as a platform
for discussion.
“[At the meeting] we always
try to help our members and
CEOs look over the horizon and
anticipate what’s next. What’s the
world of risk transfer going to
look like in the years ahead and
what are the major factors that
could impact that on a day in,
day out basis?
“These CEOs are very
engaged in their companies and
executing on their business
plans, and we always try to make
the conference an opportunity to
step back from that micro look
at running their companies and
go up on the mountain top and
survey everything that’s going on
at a macro level to look at what’s
coming at them.”
As to what those challenges
are, Sampson believes there are
several issues at the top of the
priority list for many of those
in attendance.
The future economic growth
potential for the US and the
wider global marketplace
remains a concern, because, as
Sampson explained, “that’s
ultimately the driver of increased
risk in the marketplace that
needs to be transferred”.
“Everyone is still very
skeptical about the strength of
the US economy, but also the
slowdown globally that’s roiled
the markets in the last couple of
weeks,” he added.
The turmoil currently
affecting the Middle East is
another issue for the re/
insurance industry to contend
with, especially when considered
in light of terrorism risk.
This in particular links in to
another concern for the US re/
insurance industry and the
reauthorisation of the Terrorism
Risk Insurance Act (Tria)
which expires at the end of
this year.
“People are perplexed that
something which has such broad
bipartisan support in both
houses of Congress is coming
down to the wire in the lame
duck session of Congress to be
reauthorized,” said Sampson.
“[That is creating]
uncertainty in the marketplace at
a time when there is clearly a
resurgence of terrorism [and
the] threat is as high as it’s been
since September 11. Everyone is
deeply concerned about that.”
All these and more are sure
to be on the agenda for those
individuals at the PCI
Conference in Scottsdale, and
over the coming days Reactions
is here to bring you the best
insight and comment that
emerges from the event.
IN TODAY’S ISSUE
4
Berkshire Hathaway Specialty Insurance
going global – Peter Eastwood
14 Soft market means greater volatility,
Guy Carpenter finds
8
Emerging markets light
the way
16 Munich Re holds firm,
says Steven Levy
12 Innovate to succeed – Rod Fox
18 Time running out for Tria
Sunday 26 October 2014 | 3
25/10/2014 15:11
@reactionsnet
Berkshire Hathaway Specialty
Insurance going global
T
he rapid growth enjoyed by Berkshire
Hathaway Specialty Insurance (BHSI)
since its launch is set to continue, with
the company imminently moving into
new lines of business and geographies.
BHSI was officially launched on June 13 last
year, but actually began life on April 29 2013,
offering commercial property and casualty
insurance cover to US-based clients.
BHSI quickly increased its headcount from its
initial team of four/five who moved from AIG
(company president Peter Eastwood, and senior
executives David Bresnahan, Sanjay Godhwani,
and David Fields, with David Crowe joining BHSI
soon after). Staff numbers are now at about 500,
Eastwood told Reactions.
Around 350 work within BHSI’s travel
insurance business, a sector the company entered
following the acquisition of Wisconsinheadquartered MyAssist and Insure America at
the beginning of this year.
The remaining 150 staff are engaged across
BHSI’s seven other sectors: property, casualty,
executive and professional lines, medical
professional liability, surety, programme operation
and homeowners.
“Today, the majority of our business is in the
commercial property and casualty space and I
suspect it will be for the foreseeable future,”
said Eastwood.
“But we have a broad mandate and we can
enter any part of the world and any product line
we want as long as we feel we can generate an
underwriting profit for Berkshire Hathaway. We
have a significant amount of flexibility. Within the
eight different product segments we’ve developed,
we will be putting more product into the market
and expanding our capabilities. That could be new
products, entering new classes of business, or
addressing the needs of a new customer segment.”
While the US was the initial focus of Boston,
Massachusetts-based BHSI, Eastwood said plans
are in motion to open elsewhere.
“Our business plan is to also build outside the
US. We want to write indigenous business in the
countries we enter – business which is profitable
and where we can add value. We also want to
satisfy the needs of multinational customers,
whether they be US-based or a customer
elsewhere in the world that has cross-border
4 | Sunday 26 October 2014
PCI_Day1.indd 4
exposures and an insurance need. We’ve spent a
meaningful amount of time in 2014 taking the
necessary steps to build the business in certain key
geographies and working our way through the
regulatory process to get the business registered
and licensed from an insurance standpoint.”
BHSI is now looking to enter into Hong Kong,
Singapore, Australia, New Zealand and Canada.
“In all of those locations we’ve begun to hire
people and we are in varying stages of working
through the regulatory process and being close to
a position where we will write business,”
said Eastwood.
“Our objective is to build a long-term focused
and diverse, both by geography and product line,
principally commercial property and casualty
insurance business. We’re now well underway to
creating a global business.”
As Eastwood explained, BHSI has done its
best to offer as many products as it can in as short
a time as possible. However, this has only been
done when the company believes it can create an
acceptable return for Berkshire Hathaway.
“We’ve done our best to go wide as quickly as
we can. We want to get a lot of product into the
marketplace as quickly as we can with the belief
that our distribution, our broker partners and the
end customer want to build a strategic
relationship with their insurance carrier. By going
as wide as quickly as we can, we can satisfy as
many of our customer’s needs as we possibly can.
It’s a case of working across their business and not
just on a specific lines, so we continue to build out
more products underneath our eight broad
product categories.”
So far, the response to BHSI’s launch both
from brokers and customers has been positive,
Eastwood said.
“I’m very satisfied with the progress we’ve
made to date. We’ve been able to write a
considerable amount of business in a fairly short
period of time – we’ve now got approximately
2,000 customers. We’re looking to expand the
relationships with each of the customers we
currently have. As we acquire new customers, we
want to sell them as much as we can.”
Companies such as Swiss Re and Munich Re
have said recently that they are looking to increase
their participation in the specialty sector. Despite
that, Eastwood believes there remain plenty of
We have a broad
mandate and we can
enter any part of the
world and any product
line we want as long as
we feel we can generate
an underwriting profit
for Berkshire Hathaway.
Peter Eastwood, president,
Berkshire Hathaway Specialty Insurance
opportunities to write strong and profitable
business over the long term.
“Our business consists of a few principle assets:
the balance sheet and the capital that it holds, the
brand and the integrity it represents, and our
people. Ultimately, brands are nothing more than a
function of the actions of people over many years
and we’ve got some demonstrated integrity within
Berkshire Hathaway and within our team as well
from past experiences at various companies.”
“We can compete very effectively in the
marketplace with the key assets that we have.
Although I take nothing for granted, there’s still a
tremendous amount of opportunity in the
marketplace. We’re building a platform that, at its
core, has simplicity over complexity. It’s about being
a highly responsive organization and satisfying the
needs of both the broker and the customer.”
www.reactionsnet.com | Reactions PCI Reporter
25/10/2014 15:11
#empoweredexpertise
Something
big...
is happening
in Insurance
www.empoweredexpertise.com
PCI_Day1.indd 5
25/10/2014 15:11
•
SCOR
SCOR sets sights on US reinsurance growth
While some reinsurers are concerned at the possible opportunities for growth in the US,
SCOR is confident its business plan will allow it to expand the amount of cover in writes in the region
SCOR is broadening its horizons and targeting
some of the largest insurers in the US as potential
reinsurance partners following several years of
expanding and diversifying its operations in
the country.
Recent years have seen SCOR grow its
portfolio in the US by adding new clients to its
original book of regional clients and by
broadening the type and number of reinsurance
protections it offers US insurers.
“Building on its track record, SCOR has been
carefully building its franchise in the US,
expanding progressively its business appetite. We
are now able to write significant shares of casualty,
professional and large property accounts instead
of just writing a small portion of these as we did
before,” explained John Jenkins, SCOR USA’s
treaty manager.
“The fact that SCOR is one of the few Tier
One global diversified reinsurers means we can
work with clients across the board, from both a
product standpoint and a geographical one. We
can have a relationship with them across their
business. It’s something we’ve been working on
for the last couple of years and now we can
supplement our traditional portfolio of regional
and specialty companies.”
The smaller and more specialist firms have
been attractive to SCOR because they have a
thorough understanding of their business. Indeed,
as Jenkins explained, many outperform the wider
market because they have such an in-depth
knowledge of the market in which they operate.
But SCOR is now also looking to provide
reinsurance protection to some of the larger
insurers within the US, Jenkins said.
“A specialty operation that SCOR would have
taken on seven or eight years ago would have been
one that writes a single class of business. Now
when we say specialty, we look at operations that
specialise in large surplus and excess lines or have a
large component of their business in that segment.
“We think they’re great partner companies for
us. We’ve looked through that entire segment of
the marketplace and identified companies that do
a really good job of working on the type of
account they want to write, and on the
underwriting and pricing that they do.”
6 | Sunday 26 October 2014
PCI_Day1.indd 6
This change in stance from SCOR comes at a
time when the US reinsurance market is facing
increased competition, with some companies
looking to gain a foothold in the region for the
first time while others are seeking to expand their
existing presence.
As such, there have been questions as to why
SCOR would look to increase its commitment
when pricing pressure is only expected to rise
further in the short term.
Jenkins observed many insurance companies
are rethinking their attitudes towards how they
buy reinsurance. With capital in plentiful supply,
some insurers are increasing their retention and
reducing the amount of risk transferred to the
reinsurance industry.
Other insurance companies, however, are
changing the way they buy protection by cutting
the number of companies within their reinsurance
programmes. These insurers will have a
programme made up of fewer, but stronger,
reinsurers. Those firms looking to do this are those
that SCOR is targeting in its bid to grow in the US.
“For other reinsurers, this would be
something that is seen as a threat as less
reinsurance is being bought, but for SCOR it’s an
opportunity to be on a programme that we
haven’t been on before. Our decision to expand
has been very well received by the market so far,”
said Jenkins.
One of the main reasons for this has been the
recent trend of insurers looking to tier their
potential reinsurance partners. Those at the top
are the vast global multinational re/insurance
companies while those further down the food
chain will be companies restricted to particular
geographies or product lines.
“Our clients want to work with global
reinsurers that can serve them across all of their
product lines,” explained Jenkins.
“Being one of the few reinsurers that is actually
diversified around the world and in products,
targeting the larger insurers has been a great
initiative for SCOR because we’ve been able to
expand the business we write for these companies.
“SCOR has a good brand name and it’s well
capitalised. We’ve also seen this trend with some
of the larger insurers who are now purchasing
John Jenkins,
USA Treaty Manager, SCOR
SCOR is one of the
few Tier One global
diversified reinsurers,
which means we can
work with clients across
the board, from both a
product standpoint and
a geographical one
these consolidated programmes as it simplifies
the buying process for them. For us, not having
been as big a player in this market, we view this
new trend as an opportunity to get on
programmes that we haven’t been on in the past.”
This is all part of SCOR’s plan to grow its
reinsurance business in the US. The Chicago
office handles the bulk of the US treaty
reinsurance business and is now home to around
70 staff, with more based in New York providing
additional support and writing facultative covers.
The US treaty business has almost tripled in the
last seven years.
“We feel we’ve brought together the teams in
all the various disciplines and now we’re looking to
grow that and build on it over time as we need to,”
said Jenkins. “It’s a real growth opportunity for us.”
www.reactionsnet.com | Reactions PCI Reporter
25/10/2014 15:11
• Photo credit: Getty Images
Over the past 50 years,
s, the insurance and reinsurance
industry has seen tremendous
mendous changes. From products,
services and distribution
on networks to risk management,
capital management andd regulation, nothing is how it used
to be. Far from slowingg down, the pace of this change is
accelerating. New technology
nology is having a profound impact
on the way in which wee assess, model, price and reserve
risks. At SCOR, we have the
andd expertise
h experience
i
i
to stay at the cutting edge of these developments.
By sharing the art and science of risk with our clients,
we can adapt to a changing risk universe together.
scor.com
PCI_Day1.indd 7
The Art & Science of Risk
25/10/2014 15:11
@reactionsnet
Emerging markets
light the way
T
he struggle for growth
continues in the insurance
markets of the world’s
mature economies, six years
on from the financial crisis.
Meanwhile, across the southern
hemisphere, from Latin America to
South East Asia, continued strong
economic activity in emerging countries
keeps on fuelling the expansion of local
insurance markets.
Global non-life premium growth
slowed to 2.3% in 2013, compared
with 2.7% the year before, with total
premiums at $2,033bn, according
to a sigma study from Swiss Re.
Not surprisingly, in view of economic
conditions across North America
and Europe, non-life premium
growth was driven by the
emerging markets.
Non-life premium growth remained
strong in 2013 in emerging markets at
8.3%, after 9.3% in 2012, and was solid
across all regions with the exception of
Central and Eastern Europe (CEE), the
sigma report said.
By comparison, non-life growth in
advanced markets has been slow since
the financial crisis in 2008. Premiums
increased by an annual average of 0.7%
between 2009 and 2013, compared with
1.9% in the period 2003-2007.
Non-life premium growth in
emerging Asian countries continued at
13% in 2013, on the back of sustained
strong growth in China (+16%) that
was based on rising motor sales and
infrastructure investment.
In Southeast Asia, Thailand
premium revenues maintained
momentum (+13%), despite lingering
social unrest, while strong macro
fundamentals underpinned insurance
demand in Indonesia (+13%) and
8 | Sunday 26 October 2014
PCI_Day1.indd 8
the Philippines (+10%). In Vietnam,
premiums were down 1.6% as the
market recovered from the domestic
financial turmoil of 2011–2012 related
to corporate bankruptcy, when banks’
balance sheets deteriorated because of
rising non-performing loans.
In India, non-life premium
growth slowed in 2012 to 4.1% from
8.9%, due to a weaker economy and
poor business sentiment. But rising
incomes and an expanding middle class
will soon refuel demand for non-life
insurance products in India, Swiss Re’s
analysts believe.
The non-life sector across the
Middle East, Central Asia and Turkey
has also developed well (4.7%), relative
to its Western counterparts. Turkey,
which produces over one quarter of the
region’s premiums, grew by 13%
mainly driven by a double-digit
increase in motor liability business but
engineering, property, credit & surety,
workers comp and general liability
premiums also expanded.
In Latin America, despite a cooling
economic environment, non-life
insurance premiums ticked up by 7.2%
in 2013 to $103bn, with Brazil, Mexico
and Argentina leading the charge. Chile,
Colombia and Venezuela all slowed as
did Mexico, which is expected to keep
trailing its peers.
Rising tax rates and depressed
consumer confidence in Mexico were
behind sluggish growth in that market.
Chile and Colombia also had weak
growth in the motor and property lines,
reflecting slowing economic growth and
increasing competition. In Chile, harder
rates after the 2010 earthquake attracted
additional capacity into property
insurance, which set the stage for the
current soft market.
In Peru and Colombia, resilient
infrastructure investment should
cushion the downside from softer
private consumption, Swiss Re believes,
while exposure to an accelerating US
economy also bodes well for traderelated lines of business.
Looking to the future, Shaun
Crawford, Ernst & Young’s Global
Insurance Leader, believes that the
overall contribution of rapid-growth
markets to insurance premium growth
will continue to be very significant.
“Some of the larger economies, such as
Brazil, Russia, India and China, appear
to have entered a period of slower
growth but they continue to possess
high, long-term potential.
Crawford said in a report that new
waves of market liberalisation and rapid
consumer adoption of new technologies
are opening additional markets such as
Mexico and Thailand to non-domestic
firms. “However, each market has its
own distinct risk profile. Insurers will
need to model the risks across all the
geographies to clearly evaluate the
drivers for growth and pick their
targets carefully.”
The E&Y report noted
that many rapid growth economies
have opened up their insurance
markets over the years by privatising
state-owned organisations,
encouraging foreign investment and
reducing tariffs and non-tariff barriers.
It added that, while deregulation
of the insurance sector has come
relatively late in many emerging
economies, reduced government
intervention and the opening of
domestic markets to global
players created an array of
attractive opportunities for the
insurance industry.
www.reactionsnet.com | Reactions PCI Reporter
25/10/2014 15:11
#PCIAM2014
Insurers acquire a
taste for MINTS
“Insurers will need to
model the risks across
all the geographies to
clearly evaluate the drivers
for growth and pick their
targets carefully”
Shaun Crawford, Global Insurance Leader,
Ernst & Young
Reactions PCI Reporter | www.reactionsnet.com
PCI_Day1.indd 9
Goldman Sachs Asset Management chairman Jim O’Neill
was the first to coin the acronym BRICS to reference the
fast growing economies of Brazil, Russia, India, China and
South Africa. He has subsequently identified another set of
countries with big potential: Mexico, Indonesia, Nigeria
and Turkey – or the MINTs.
But what makes the MINTs especially attractive to
insurers? John Cusano, Accenture’s senior managing
director of Global Insurance recently came up with the
following suggestions.
Mexico is close to the established markets of the US
and the expanding markets in Latin America, and it’s
growing well at 3.6%, without the drag of high population
growth. Urbanization is expected to increase – a key
indicator for insurance – while per-capita income is also
expected to rise. Premiums are projected to grow by 13%
thanks to economic performance. However, there are new
capital requirements and tax law reform that could prompt
industry consolidation.
With GDP rising at 5.9% and low population growth of
1.4%, Indonesia is an attractive target for insurers. It’s
already the world’s fourth most populous country, so low
growth rates are good. Fairly low urbanization rates
(53.7% projected for 2015) will increase to 72.1% in 2050,
with a fast-growing middle class. Insurance penetration
is low.
Nigeria, one of Africa’s most populous countries, is
urbanizing—and fast growing more wealthy. It has a
substantial middle class and plenty of oil. Projected annual
growth rates in non-life are 9.5% and 13.5% for life. Some
big insurers are already purchasing existing Nigerian
insurers as a way into this exciting market, Cusano said in
his note.
At 3.2%, Turkey’s growth is the least lively of the four,
but its economic expansion continues apace driven by
exports to the Middle East and a boost in investment
spending. It’s already fairly well urbanized at 75.1%, a
figure that is expected to rise to 87.3% in 2050. Another
important indicator for insurance companies is the growth
in wealth per capita from $7,274 in 2000 to $17,103 in
2013 (135.1%).
Sunday 26 October 2014 | 9
25/10/2014 15:11
Following the arrival of its new
management team in January 2013,
Qatar Re, the global multi-line reinsurer
headquartered in Qatar, has established
a well-balanced and diversified portfolio
that will provide the platform from
which to pursue its goal of becoming a
leading and globally recognised
reinsurer. To this end, Qatar Re
provides lead quotations and capacity
across all international markets based
on the in-depth technical and product
expertise of its highly experienced
underwriting teams. Its unique
underwriting approach sees it measure
the impact of each risk underwritten on
the overall portfolio. This is coupled
with a strong and growing capital base
that is highly rated and offers instant
diversification to reinsurance panels
given its lack of correlation with
traditional financial markets.
Our underwriting team
Qatar Re’s success is rooted in the quality and expertise
of its team of highly experienced underwriting
professionals who have an acknowledged track record
in the industry. They provide a deep understanding of
the markets in which they operate and an invaluable
insight into the underlying trends based on many years
of experience in the reinsurance sector.
Qatar Re’s underwriters are empowered to make
decisions enabling them to react quickly. The ability of
clients and brokers to talk directly to the decisionmaker is an important cornerstone of Qatar Re’s
business model and philosophy.
Overview of the portfolio
Over the past twenty months Qatar Re has built a
global franchise, recruited a team of renowned
underwriting specialists and established a global
presence with its headquarters in Qatar, branch offices
in Zurich and Bermuda and a representative office in
London. Through a disciplined and selective approach
to underwriting Qatar Re has grown its portfolio which
continues to be well-balanced across its lines of
business and territories.
Qatar Re writes all major lines of property and casualty
and specialty lines of business, including: Aviation &
Space; Agriculture; Credit & Surety; Energy;
Engineering; Liability; Marine; Motor; and Property. The
focus on specialty lines is evident in its portfolio split.
At present, Qatar Re’s largest specialty line of business
is UK Motor (writing both proportional and nonproportional). Qatar Re’s success in this line has been
aided by the company’s competitive advantage in the
area of Periodical Payment Orders (PPOs) of which its
Chief Actuary Mark Cockroft is an acknowledged expert.
PCI_Day1.indd 10
25/10/2014 15:11
Agriculture is another line in which Qatar Re has
established a strong presence, with this class business
benefiting from strong worldwide growth and providing
good diversification geographically (by region) and
through uncorrelated sublines (e.g. multi-peril Crop,
Hail, Blood and Livestock, Forestry, Aquaculture and
Greenhouses). Qatar Re anticipates the average
annual growth rate of the global agricultural insurance
market to be in the range of 10 to 15% in the coming
years, with increasing demand for both proportional
and non-proportional reinsurance.
An important addition to Qatar Re’s offering is Credit &
Surety, with this line still enjoying reasonable growth.
Qatar Re’s Credit & Surety underwriting team is in the
process of rolling out its services to all key markets
with the aim of developing a market leading portfolio
written on a global basis. Thus far, the focus has been
Gross written premiums Half Year 2014
by domicile of reinsured
3%
on Continental Europe, complemented by business
written in the Americas and Asia.
Geographically, Qatar Re’s current portfolio has a
strong bias towards Europe, followed by North
America, the Middle East, Asia and Latin America. By
mid-2014, and with a client base of more than 400
cedants, Qatar Re has achieved the critical mass and
diversification required to build a capital-efficient
global portfolio.
For 2014, Qatar Re will meet the challenges of the
current soft market cycle with a selective approach to
underwriting and the drive to generate attractive
risk-adjusted returns based on a holistic portfolio view.
Despite the headwinds, Qatar Re is committed to its
journey.
Gross written premiums Half Year 2014
by lines of business
Motor
3%
2%
Property
Agriculture
21%
17%
Credit & Surety
Europe
30%
Americas
52%
25%
Asia
Africa
Oceania
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Energy
5%
Marine & Aviation
6%
6%
17%
13%
Engineering
Others/Multi Lines
25/10/2014 15:11
@reactionsnet
Innovate to succeed
T
igerRisk’s chief executive
Rod Fox has seen a fair
number of interesting
times in the insurance
and reinsurance industry,
yet despite his long and distinguished
career he finds the present an amazing
time to be in the market.
Highly competitive conditions,
brought about by the entry of a variety
of capital market players into the
reinsurance industry, has meant that
many reinsurers have been left searching
for an advantage in order to differentiate
themselves from other companies.
This, Fox says, is creating a highly
innovative atmosphere in the
reinsurance marketplace.
This new spirit of innovation is
perhaps the most important theme in
the market at the moment, changing
an industry which can often be seen as
too conservative.
“I think it is a fascinating time for
the business,” Fox told Reactions.
“What we are seeing is a lot more
innovation, and we are just scratching
the surface on it. A little pet peeve of
mine is that, in general, this can be a
pretty staid and boring business.
However, there is a lot of opportunity
to innovate around the business.
“I think we are now starting to
see some of that, so that is interesting
for me.”
Fox says too much is made of the
phrase “alternative capital” when
reinsurers discuss the changing
dynamics of the industry. He says that
reinsurance is in its essence a business
about providing capital and the fact that
new capital is entering the business
should not be seen as revolutionary or
groundbreaking.
This new influx of capital is driving
the innovation that Fox now sees in the
reinsurance industry, and he says that
innovation is levelling the playing field
between larger and smaller players, with
ideas beginning to become more
important than size.
12 | Sunday 26 October 2014
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“As more capital is coming in it is
driving more innovation,” says Fox.
“I think that is exciting and we are
enjoying it and as a firm and we are
thriving on it.
“We are now close to seven years
old, so it’s not like we are the new kid on
the block, but we are finding that you
don’t have to be huge to have great ideas.
It’s a more level playing field now so
it’s good.”
Fox points out that the perceived
threat posed to traditional reinsurers by
the capital markets is not a new
phenomenon. The capital markets have
been involved in reinsurance investing
for a number of years and will continue
to be. However he says that perceptions
may have changed about how
committed new capital is to staying in
the business long term.
“It’s been around a long time,”
Fox said talking about new capital. “My
partner Jim Stanard brought alternative
capital to Renaissance Re 10 to 15 years
ago. It’s not a new phenomenon.
“However, I think there is
recognition that it is a part of the
industry that is here to stay and I think
also the recognition that there is
dramatically more that can come in.
“It is driving efficiency and
people have to really figure out
what their competitive advantage
What we
are seeing
is a lot more
innovation,
and we
are just
scratching
the surface
on it.
Rod Fox,
chief executive,
TigerRisk
is as they go forward.”
Additional capital in the market is
something that worries a number of
reinsurers. It scores highly on every
survey about reinsurer concerns and is
the talking point at almost all industry
events. But Fox believes that the
competition in the industry brought
about by alternative capital, particularly
in the catastrophe space, is forcing
reinsurers into truly understanding their
competitive advantage.
This is healthy for the market and
will allow for more innovation, forcing
reinsurers to do better and more creative
business, rather than focusing on just
catastrophe lines where profits have
been good.
He says: “The other thing that I have
talked about before is that everyone
seems to focus on the catastrophe
business, which is maybe only 10% of
the global reinsurance market. But that’s
the one that people talk about.
“Reinsurers were generating
outsized returns in the cat business and
there is also a realisation that with all
the additional capital those returns are
getting more normalised.”
Fox identifies specialty lines as
an interesting play for the whole
industry. He also notes that insurers
now have to focus on writing better
casualty business.
“There are multiple levels of insurers
going into specialty lines,” says Fox.
“There are primary insurers delving into
specialty lines and there are reinsurers
paying more attention to specialty lines.
There is a recognition that you can’t just
make your living in the cat business.
“I’ve also said for a couple of years
that the industry has done a poor job
selling casualty insurance. I don’t think
the products have been particularly
responsive and I don’t think we have
spent enough time thinking through it.
“I think there is more of that
happening today on the casualty side of
the business and I think we are just
scratching the surface, so it’s exciting.”
www.reactionsnet.com | Reactions PCI Reporter
25/10/2014 15:12
Sirius Ad
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25/10/2014 15:12
•
@reactionsnet
Soft market means greater volatility,
Guy Carpenter finds
M
any underwriters may have
reaped the rewards of a low
level of natural catastrophe
activity and modest loss
development trends in 2013 by
posting strong results, but a new report from Guy
Carpenter and Oliver Wyman has found the
insurance industry experiences a greater level of
volatility in the midst of a soft market.
The report, the fourth time the two Marsh &
McLennan subsidiaries have jointly issued the
Insurance Risk Benchmarks Research: Annual
Statistical Review, shows that the relatively low
level of natural catastrophe activity, impressive
stock market returns, plus an increased level of
benefits from deferred tax assets and changes to
pension accounting all played a significant part in
the strong financial results reported by property
and casualty insurers at the end of 2013.
Despite the ongoing concerns over the global
economic situation and the soft market conditions
that exist in many lines of business around the
world, last year was a good one for many property
and casualty insurers.
Aside from the relative lack of natural
disasters to hit the market and the insurance
industry benefiting as a result, the report also
found that the wider industry managed to
continue its recent trend of reserve releases.
Indeed, as the report shows, 2013 saw the
property and casualty insurance industry record
the largest release of the most recent accident year
since 2007. At the same time, ultimate loss
estimates were cut for each historical accident
year since 2004.
“Interestingly, the single-year reduction
to estimated ultimate loss for the youngest
accident year, 2012, was approximately 2% and
represented the largest such decrease since 2007,”
the report states.
“The experience of the last three decades
supports the view that the lines of business with
highest concentration of bodily injury costs
(general liability, products liability, and medical
professional liability) present the largest
uncertainty in initial reserve estimates. This
highlights the need for reserve modules of
economic capital models to consider the
relationship between these liabilities and
14 | Sunday 26 October 2014
PCI_Day1.indd 14
Columbia University collaborated with Guy
Carpenter and Oliver Wyman to produce the study
macroeconomic drivers.”
While many in the industry have been
bemoaning the tough market conditions and how
the influx of capital from a variety of sources
across the sector has pushed down rates and
pricing, the report, which the two Marsh &
McLennan companies compiled in collaboration
with Columbia University, shows insurers were
able to secure rate and price rises in some select
classes of business.
“Companies have been successful at achieving
rate increases and industry written premiums
grew by 4.4%,” the report highlights.
“Top gainers include workers’ compensation
[up by 8.2% year on year], commercial auto
liability [an increase of 7.7%], and products
liability [which increased by 6.9%].”
Rate increases in these lines of business have
helped the industry maintain profits and revenues
at a time when many other insurance classes are
suffering from high levels of competition and
increased capacity. But improvements in loss
ratios have also played their part in ensuring
insurers ended 2013 in a healthy state.
Booked loss ratios for accident year 2013 are
lower than the long term average for every line of
business, the report explains.
“In general, 2013 loss ratios compared
favorably with those of recent years. Mild natural
peril activity and modest trends in loss cost
contributed to these results. Among the lines of
business most favorably impacted were the two
covering real property: homeowners and
commercial multiple peril.”
The tri-party report notes loss ratio volatility
for the homeowners and commercial multiple
peril segments “appears to be less than that for
other lines of business”. However, as the report
explains, that statement “should be interpreted
with a grain of salt”.
That is because the full range of potential
natural peril losses is not extant in the loss history.
Furthermore, because much of the volatility
affecting these segments of the insurance industry
stems from natural peril losses that are
independent between years, the correlation with
other lines of business is comparatively low.
“These loss ratios exhibit strong dependence
on regional market segment,” explains the report.
“Companies in the Southeast/Gulf market
segment have fared the worst. Northeast/Atlantic
carriers seem to vary the most in terms of
profitability and Midwest carriers are generally on
the higher side.”
It is the large, multi-regional companies that
have the most success in the homeowners class of
business, the report found.
“Homeowner’s volatility is uncorrelated with
other lines and driven by natural peril profile
and geographic footprint,” the Guy Carpenter,
Oliver Wyman and Columbia University
study discovered.
“The underwriting cycle is much less
pronounced. Large, multi-regional companies
have outperformed regional players and the key to
stable profitability is regional diversification and
risk management.”
Looking at specific segments of the insurance
industry, the report notes that private passenger
auto loss ratios are the most stable in the industry.
These do not appear to be materially better or
worse in individual regions. At the same time
though, this is a product that in recent years has
become increasingly commoditized as
competition has intensified.
“The strongest loss ratio correlations have
occurred between lines of business driven by
trends in bodily injury costs, including general
liability occurrence, products liability occurrence
and medical professional liability occurrence,”
the study found.
“This suggests that risk models need to
consider the common dependence of these claims
on systemic drivers of loss cost.”
www.reactionsnet.com | Reactions PCI Reporter
25/10/2014 15:12
•
GUY CARPENTER
A.M. Best’s New Analytics Will Broaden and
Improve P&C Industry Capital Modeling and
Benchmarking of Tolerances
A.M. Best’s rating analytics continue to evolve and
the pace of change is accelerating as the industry
embraces more analytical tools, emerging best
practices, and peer benchmarking.
The rating agency is placing greater emphasis
on risk-based analytics in its ratings process and
will increasingly focus on management’s ability to
execute its business plans and reasonably deliver on
its financial projections.
The convergence of ORSA regulatory
requirements and A.M. Best’s new emerging
risk-based analytics has significant implications
in 2015 and beyond. Large and small US P&C
insurers will be expected to further develop their
financial forecasting, capital modeling and risk
tolerance metrics for both capital and earnings.
Insurers will need to more tightly link their
business plans, with both capital and earnings
adequacy assessments from a risk-adjusted
perspective, to maintain and enhance their Best’s
Ratings while complying with new regulatory
requirements.
Insurers need to understand A.M. Best’s
evolving criteria with respect to their company’s
ratings and business plans, particularly in
three areas:
• Stochastic-Based BCAR (Best’s Capital
Adequacy Ratio)
• Earnings Adequacy & Variability
• ERM Impact Analysis
A Closer Look at Best’s New Analytics
Stochastic-Based BCAR
A.M. Best plans to refine its capital adequacy
BCAR model and upgrade risk factors based on
stochastic analysis. The change may negatively
impact P&C insurers depending on their risk
profile, rating levels, and capital position.
A.M. Best is expected to publish a Draft
Criteria Report early next year before implementing
its Stochastic-based BCAR sometime in 2015.
Implications of the new model include:
• Stochastic-Based BCAR will incorporate a
consistent TVaR risk metric and become
A.M. Best’s risk-adjusted capitalization tool
used in its ratings and capital evaluations
Reactions PCI Reporter | www.reactionsnet.com
PCI_Day1.indd 15
(l-r) Jack Snyder, Managing Director, Business Development and Head of the
Rating Agency Practice, Strategic Advisory, Eric Simpson, Managing Director
in the Rating Agency Practice and Mark Murray, Senior Vice President in the
Rating Agency Practice, Guy Carpenter & Company, LLC
going forward;
Stochastic-Based BCAR will affect strategic
risk-based decisions (including reinsurance)
and accelerate industry trends of more
companies developing their “own” internal
financial/capital model, particularly among
small to mid-sized insurers;
• Certain insurers’ cost of capital will increase,
especially for outlier companies that operate
within industry lines exhibiting higher loss
ratio/loss reserve volatility; exhibit aboveaverage company-specific loss ratio/loss
reserve volatility; and have concentrated
natural catastrophe exposures and asset risks.
P&C insurers will need to understand these
changes and how their risk profile and volatility
impact their BCAR score and ratings. Negatively
impacted companies will need to consider
corrective underwriting actions and reinsurance
solutions to address unfavorable BCAR scores
and align their risk profile and risk tolerances to
their desired rating levels.
•
Earnings Adequacy & Variability
While “capital adequacy” remains important, a
company’s ability to sustain acceptable operating
performance is even more vital. The vast majority
of P&C rating downgrades in recent decades for
companies have been driven by “earnings
adequacy” issues. Chronic under-performance
erodes A.M. Best’s confidence in a company’s
ability to execute its business plans and effectively
compete. Insurers with sustained underperformance and greater earnings variability will
be most at risk.
Companies will need to think beyond “capital
preservation” and develop “earnings adequacy”
risk tolerance statements as well, given A.M. Best’s
increased focus on a company’s earnings
variability and financial forecasting.
ERM Impact Analysis
Analysts prepare ERM Impact scoring worksheets
for Best’s Ratings Committee to gauge whether a
company’s ERM capabilities support its risk profile
and rating – and result in a ratings “lift” or “drag.”
Companies will need to demonstrate that
their ERM practice is linked to risk decisions,
business plans, and financial forecasts. A.M. Best
continues to view many insurers’ risk tolerance
statements as needing further development and
will be probing this topic more in rating meetings.
Companies Will Need to Understand
and Act
Highly rated insurers will continue to develop their
risk and capital management capabilities to gain a
competitive advantage and improve their business
performance. ORSA requirements and Stochasticbased BCAR are fast approaching. Together, they
will accelerate companies’ need to better
understand and “own” their risk profile and capital/
earnings risk tolerances. Guy Carpenter is fully
prepared to assist our clients with these challenges.
Sunday 26 October 2014 | 15
25/10/2014 15:12
@reactionsnet
Munich Re staying disciplined in the
face of competition
C
ompetition is the predominant
issue affecting the US
reinsurance market as
alternative capital continues to
take more business away from
traditional reinsurers, says Steven Levy, the
recently appointed president of Munich Re
America’s reinsurance division.
Steven Levy says the biggest issue facing
reinsurers in the US is the current market
competition that is driving reinsurance
prices down.
The segment that has seen most of this
pressure continues to be property/catastrophe,
traditionally one of the most profitable for
reinsurers, says Levy.
“This [competition] is driven by the ample
capacity that is out there from both the traditional
reinsurers and alternative capital. This comes
along with the fact that many primary companies
are also ceding fewer risks to reinsurers.
“With respect to the alternative capital, it is
mostly being channelled to non proportional
catastrophe business, so that continues to be the
segment that is experiencing the most pressure.”
The squeeze on traditional property
catastrophe business has caused a number of
reinsurers to look at other lines of business,
leading to fears in some quarters that the market
will begin to lose its discipline as reinsurers
scramble to look for new opportunities that
provide more attractive pricing prospects.
Levy says this will not be the case at Munich
Re, which intends to maintain underwriting
standards, despite the squeeze on prices. But this
does not mean that the reinsurer will not look for
other opportunities.
“At Munich Re we continue to maintain our
clear profit orientated underwriting policy despite
pricing pressures, only accepting risk on a sound
economic price and sound terms and conditions,”
said Levy.
“That being said, we are always on the lookout
to offer innovative and tailored reinsurance
solutions for our clients.”
Casualty is an opportunity that continues
to be trumpeted as a growth area for
traditional reinsurers looking for more solid
pricing opportunities.
16 | Sunday 26 October 2014
PCI_Day1.indd 16
Steven Levy
While many other markets are starting to
suffer similar pricing pressures from an influx of
property catastrophe reinsurers entering new
markets looking for better rates, Levy says
casualty has remained relatively stable given the
rate environment in the primary market which
has in turn presented reinsurers with greater
opportunities in the segment.
“We are definitely seeing the reinsurers that
were focused on the property cat space
experiencing a lot of pressure because of
alternative capital, given the focus of alternative
capital on natural catastrophe excess of loss
business. Those companies are diversifying into
other lines, which is putting pressure on these
other segments,” says Levy.
“That being said, we are seeing greater
stability in the casualty market. For example,
pricing is still increasing in most primary
segments for casualty, albeit in low single digits.
And in casualty reinsurance, pricing still remains
close to adequate. This is particularly notable
compared to property segments, especially
property cat excess of loss segment.
“Many of our clients also continue to add
casualty products to round out their product
offerings, so we continue to see new opportunities
for casualty, especially in the niche areas.”
When analysing the benefits of traditional
reinsurance over alternative capital solutions,
reinsurers have been keen to emphasise that they
offer far more than cheap capital. Traditional
reinsurers insist that what they offer is a
long-term partnership with cedents, and a
guarantee to be there when they are needed in
the wake of a disaster.
This is the most frequent accusation levied at
the alternative capital space, that when push
comes to shove they are untested when it comes to
paying out on claims and that in some cases there
has been litigation when investors have been
unwilling to part with their premium.
“Clients frequently tell us that they really
value the long-term relationships, they value
dealing with parties who they are familiar with,”
says Levy. “Clients know how we behave in stress
scenarios whereas a lot of these things are
unknown with alternative capital.
“You have the whole experience with one
cat bond sponsor and the litigation they
experienced with their cat bond; compared
with that we traditional reinsurers are in
essence a known quantity.”
“I think litigation is untested, there hasn’t
been a significant event which has tested
alternative capital’s willingness to pay claims or
whether there will be issues in respect to that,”
he continued.
When looking at the market more broadly,
Levy, like many in reinsurance, highlighted the
global economy as one of the most important
factors affecting the market, especially in the
current low interest rate environment that
continues to eat away at investment income.
“Obviously the low interest rate environment
is probably the most significant economic factor
affecting the insurance and reinsurance industry,”
Levy told Reactions. This is highlighted by the
recent drop in interest rates and 10 year Treasury
yields continuing to fall in October.
“This obviously puts pressure on investment
income and emphasises the need for underwriting
profitability and discipline.
“As a result sound technical underwriting
remains key to maintaining stable profitability
going forward. And that historically has been the
focus of the Munich Re Group.”
www.reactionsnet.com | Reactions PCI Reporter
25/10/2014 15:12
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@reactionsnet
Time running out for Tria
T
he Tria programme expires
at the end of December,
and if it is not renewed
imminently, many industry
experts are speculating that
it will severely affect the terrorism
insurance market in the US.
Even by Washington standards, the
renewal process this time around has
been arduous. Despite a deal looking
close after the Senate passed an
extension in July, differences of opinion
in the House led to a halt in negotiations
in the lower chamber.
The insurance industry had been
hoping for a relatively straightforward
extension of the programme for a
number of years, but recent
murmurings in the House have
suggested that this may not end up
being the case.
“It’s going to get extended. The
question is, do you do reforms now and
negotiate, or do you just do a short-term
extension into next year and then
negotiate reforms?” said Rep. Paul Ryan
(R-Wis.) on September 18. “You will not
see just a straight current law extension.”
There remains a possibility that, if
the Republicans win the Senate in
November’s midterms, then some
members of the House might wish to
revisit the issue again when both Houses
in Congress are controlled by their party
next year.
“There is an uncertainty over
whether the US Senate will go
Republican after the election which
could change the dynamics. If the House
is looking at a Republican Senate next
year it may feel that it would prefer to
take up the issue in 2015 when both
Houses are of the same political
persuasion,” Bob Hartwig president of
the Insurance Information Institute (III)
told Reactions.
This may be the view of some
Republicans in the House and it
certainly would make a short-term
extension of the kind that Ryan has
suggested more likely.
18 | Sunday 26 October 2014
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There is an
uncertainty
over
whether the
US Senate
will go
Republican
after the
election
which could
change the
dynamics.
Bob Hartwig, president
of the Insurance
Information Institute
However, a Republican senate
would not necessarily be in favour of the
kind of extension that failed in the
House in July. As has been a welldocumented scenario, the GOP is
entwined in an ideological battle
between the mainstream and the more
conservative wing of its party.
In the House, the main force behind
modifying Tria has been Jeb Hensarling
(R-TX) Chairman of the House
Financial Services Committee.
Hensarling sits on the ideological right
of the GOP, and has in the past expressed
relative disdain for Federal government
involvement in private industry,
including insurance. This has led the
committee to propose a rise in the
programme’s loss trigger, shifting more
responsibility to the private market.
On the other side of the GOP are
more pro-Tria Republicans vocally
represented by Rep. Peter King (R-NY),
who has publicly dismissed any attempt
made by Hensarling’s committee to
modify Tria or raise the programme’s
loss trigger. This would likely diminish
industry capacity for terrorism
insurance as a raised loss trigger could
force smaller insurers out of the market.
The majority of the House of
Representatives is thought to favour the
bill being proposed by the Senate, but it
is Hensarling’s House Financial Services
Committee that is responsible for
bringing a bill to the floor of the House.
The fact that the House failed to
pass the House Financial Services
Committee bill would suggest that there
is not widespread support for a
heavily-modified version of the
programme among Republicans.
This is also backed up by the
overwhelming support for the bill in the
Senate, 94-3 in favour of a straight
extension. A Republican majority in the
Senate doesn’t change the fact that most
Republicans in Congress like the
programme as it is.
However, the key to a quick success
here will be working with Hensarling,
who has been accused of stubbornness
in the past, on a compromise rather
than fighting him.
Those closest to the negotiations are
still optimistic of a deal being struck
during a Lame Duck session and there is
significant momentum in both parties
to get this done.
“I know that the leadership on both
sides of the aisle are prepared to
have this be an item in a Lame Duck
session and I think the challenge now is
to keep the pressure on so that a deal is
ready to be made,” said Leigh Anne
Pusey president and chief executive
(CEO) of the American Insurance
Association (AIA) told Reactions on the
last day the House was in session.
“I was with Chairman Neugebauer
[chairman of the Insurance
subcommittee on the House Financial
Services Committee and a close ally of
Hensarling] this morning and nobody
wants to get this deal done more than he
does and he has spent a lot of time
getting this bill in better shape than I
think a lot of us expected that we would
get out of the House.”
The only thing likely to hinder
Tria would be a return to some of the
intransigence that has been associated
with Washington over the past couple
of years.
www.reactionsnet.com | Reactions PCI Reporter
25/10/2014 15:12
DON’T IMPLEMENT
YOUR ENTERPRISE RISK
MANAGEMENT PRACTICES
IN THE DARK.
At Standard & Poor’s Ratings Services, our experience in the Insurance
sector has led to the launch of our Enterprise Risk Management (ERM)
Benchmark Review, a new stand-alone product providing insurance
companies with a comparison of their ERM practices against their peers
and our criteria.
Our ERM Benchmark Review also helps insurers keep up with emerging
risks and trends, such as the 2015 ORSA reporting requirements
mandated by the NAIC, climate change and cyber risk.
To learn more, contact Steven Cooke, Senior Director, Client Business
Management at 212-438-7240 or [email protected]
The analyses, including ratings, of Standard & Poor’s and its affiliates are opinions and not statements of fact or recommendations to purchase, hold, or sellsecurities.
They do not address the suitability of any security, and should not be relied on in making any investment decision. Standard & Poor’s does not act as a fiduciary or an
investment advisor except where registered as such.
Copyright © 2014 by Standard & Poor’s Financial Services LLC. All rights reserved.
www.SPRatings.com/ERM
STANDARD & POOR’S and S&P are registered trademarks of Standard & Poor’s Financial Services LLC.
PCI_Day1.indd 19
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TWO WORDS:
PROFITABLE GROWTH
Guy Carpenter Strategic Advisory uses our insights to integrate your capital
and risk objectives into an equation for proﬁtable growth.
Our global team of over 150 leading experts in the areas of business expansion,
capital advice and structuring, advanced analytics and industry and market
intelligence work together seamlessly to customize integrated advisory and
implementation solutions for our clients.
GUY CARPENTER
Learn more at guycarp.com
STRATEGIC ADVISORYSM
GROWTH | CAPITAL | RISK | INSIGHT
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