GR_Mar11_All

PEACE TALKS Is mediation the way to settle claims disputes?

SHOP SMARTERWhy good data is more vital than ever for cedants

MARCH 2011

Can alternative providers breathe new life into the

retrocession market?

Going retro

DAMAGE DOWN UNDER Reinsurers may overpay Australian fl ood claims

GR_OFC.indd i 22/02/2011 15:25

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GR_Ad_Page.indd 1 21/02/2011 10:47

Leader

GLOBAL REINSURANCE MARCH 2011 1

The humble combined ratio might seem an unlikely source

of contention. But in some areas – London in particular – insurers and equity analysts are wrangling over how this universal measure of underwriting profi tability should be reported.

It may be assumed that the combined ratio is a standard calculation. After all, every non-life company reports one. But while there are some conventions regarding its use, there is also an element of fl exibility – which some fi rms are taking advantage of.

Specifi cally, they exclude certain costs from the expense ratio element, which essentially makes the combined ratio lower by several percentage points and therefore underwriting appears more profi table.

These exclusions are fully disclosed in companies’ earnings, but the pared back ratio is the one used in their headline fi gures, and an alternative all-in ratio is not usually published. To an untrained eye, one combined ratio is the same as another and will be treated as such.

There are several stories about why insurers do this. One is simply keeping up with the Joneses. If one company strips out the costs, those that do not follow suit could risk posting worse ratios. Another is to improve the ratio in those times when underwriting profi tability is borderline.

The real problem here is not a moral one about trying to hide the true picture. It only takes a few minutes and a calculator to set the record straight. It is a problem of consistency.

If companies are calculating combined ratios differently, it is adding to the already onerous task of analysing results. Comparing performance is tricky enough across markets, so the last thing we need is more inconsistencies within the markets themselves.

Ben DysonAssistant editorGlobal Reinsurance

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To an untrained eye, one combined

ratio is the same as

another and will be treated

as such

GR_01 Leader.indd 1 22/02/2011 14:39

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

MARCH 2011 GLOBAL REINSURANCE2

News1 Leader

4 News digest

8 News analysis Confusion over the cost of the Australia clean-

up; and picking out the winners from the US players’ 2010 results

12 News agenda Is retrocession coming back in fashion?

People & Opinion 16 John Winter Going back in time with APH liabilities

17 Up the ladder Models are not black boxes, says

AIR Worldwide boss Ming Lee

18 Gallagher’s guiding light David Ross of Gallagher

International explains why he sees now as the time to buy

40 Diary Monty thinks there’s everything to play for (on his iPad)

Cedants22 Knowledge is power The analytics arms race is on

24 Q&A Mitsui Sumitomo’s Mike Watson on forging his own path

Lines & Risks28 These climes, they are a-changing Do feelings of

déjà vu over icy winters tally with climate change predictions?

Claims32 Meet in the middle A US alliance thinks we need to talk

Country Focus35 Waiting for dawn Japan’s soft market continues but, as a

peak zone for reinsurance, the sun is sure to rise soon

David Ross, page 18 Number crunching, page 22 Mitsui’s reinsurance buyer, page 24

Editor-in-chief Ellen BennettTel +44 (0)20 7618 3494Email [email protected]

Assistant editor Ben DysonTel +44 (0)20 7618 3480Email [email protected]

Finance reporter Lauren GowTel +44 (0)20 7618 3454Email [email protected]

Group production editor Áine KellyEmail [email protected]

Deputy chief sub-editor Laura SharpEmail [email protected]

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GLOBAL REINSURANCE MAGAZINEis published 10 times a year byNewsquest Specialist Media Ltd30 Cannon Street, London, EC4M 6YJ, UKTel +44 (0)20 7618 3456Fax +44 (0)20 7618 3457www.globalreinsurance.com

© 2011 Newsquest Specialist Media Ltd. All rights reserved. No part of this publication may be used, reproduced, stored in an information retrieval system or transmitted in any manner whatsoever without the express written permission of Newsquest Specialist Media Ltd. This publication has been prepared wholly upon information supplied by the contributors and whilst the publishers trust that its content will be of interest to readers, its accuracy cannot be guaranteed. The publishers are unable to accept, and hereby expressly disclaim, any liability for

the consequences of any inaccuracies, errors or omissions in such information whether occurring during the processing of such information for the publication or otherwise. No representations, whether within the meaning of the Misrepresentation Act 1967 or otherwise, warranties or endorsements of any information contained herein are given or intended and full verifi cation of all information appearing in this publication must be sought from the respected contributor. The publication of the articles contained herein does not necessarily imply that any opinions therein are necessarily those of the publishers.

March

GR_02 Contents.indd 2 22/02/2011 09:22

GR_Ad_Page.indd 1 23/02/2011 16:12


News Digest

People

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into your web browser to access our recommended articles from globalreinsurance.com and its sister titles

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NOVAE CUO QUITSPeter Matson is to stand down from his role as chief underwriting offi cer of Lloyd’s insurer Novae on 30 April, reported Insurance Times. He will also relinquish his board membership. Matson joined Novae in 2004 after the sale of PRI, where he was a founding director and chief underwriting offi cer. He was previously the active underwriter of Syndicate 990 and director of XL Syndicate Management Limited. Board-level responsibility for underwriting has been assumed by Novae’s risk director Jeremy Adams, who is also chief executive of its Lloyd’s managing agency business. Novae chief executive Matthew Fosh said: “Peter has helped the group regain its confi dence and competence.” (goo.gl/FNpyV)

WILLIS RE’S NEW CHIEFGlobal broking group Willis has named Steve Hearn as chief executive of its reinsurance brokerage business, Willis Re, reported Global Reinsurance. He replaces Peter Hearn, now chairman of Willis Re. Steve Hearn previously headed Willis’s London wholesale broker Faber & Dumas, as well as the Global Markets International and Willis Facultative units. Dominic Samengo-Turner will replace Hearn as chief executive of Faber & Dumas. He was previously chief executive of Global Placement, which oversees group relationships with insurance carriers and placement capabilities. Alastair Swift, previously head of North American placement, will assume Samengo-Turner’s position as chief executive of Global Placement. (goo.gl/BsR0W)

TYSZKIEWICZ BOOSTS TOWERS WATSON IN FLORIDATowers Watson’s capabilities within the growing Florida property and casualty sector have grown since it hired John Tyszkiewicz from Aon Benfi eld, reported Insurance Day. Tyszkiewicz, who has also worked for Guy Carpenter, will be based in London and will work in the company’s North American reinsurance team. The London-based managing director for Towers Watson’s North American reinsurance team, Keith Harrison, said: “We are delighted that John has decided to join our team as he brings both property and casualty broking expertise. His signifi cant experience in the Florida property cat arena is especially valuable and complements our existing initiatives. His appointment further strengthens our Florida expertise and follows several similar senior hires in the USA.”

GERTSCH TO HEAD GULF REDubai-based reinsurer Gulf Re has appointed Michael Gertsch as its new chief executive, replacing founding chief executive Gail Norstrom, reported Global Reinsurance. The company has appointed ex-Partner Re Global chief underwriter Christian Vogel as its new chief underwriting offi cer. Vogel joined Gulf Re in December last year. Norstrom will continue to serve Gulf Re in an advisory capacity, primarily related to risk management. (goo.gl/WZe4V)

NEW PROPERTY UNDERWRITER AT BRITBrit Insurance has appointed Stuart Wolstenholme as property and packages underwriter in its combined property and packages London team, reported Insurance Times. He will report to Amanda Doran, underwriting manager, combined property and packages. (goo.gl/0Xy09)

ResultsSWISS RE PROFITS UP 74% DESPITE CAT LOSSESSwiss Re recorded a full-year net profi t of $863m, up 74% on $496m in 2009, reported Global Reinsurance. The reinsurer also reported a return on equity of 3.6%, up from 2.3% in 2009. However, the full-year combined operating ratio was 93.9%, compared with 88.3% in 2009. Swiss Re has taken a hit from natural catastrophes in Australia. Its preliminary claims estimate relating to Queensland fl oods in Q1 2011 is $225m, while claims from February’s Cyclone Yasi will be around $100m. (goo.gl/DBZCR)

GR_04-07.indd 4 22/02/2011 15:36


News Digest

If BP thought $20bn would buy them any love, or even a little mercy, from the US government, they were wrong. In January, the National Commission, set up by president Barack Obama to investigate the Deepwater Horizon oil spill at BP’s Macondo rig, put the boot into the already battered energy giant.

The Commission cited systemic management failure and concluded that cost-cutting and a lack of proper risk assessment were the biggest causes of the spill: “The most signifi cant failure at Macondo – and the clear root of the blowout – was a failure of industry management.”

Damning stuff. And this is not the fi rst time poor management in the energy industry has proved catastrophic. Much of the damage and loss of life at Piper Alpha, owned by Occidental – where a platform fi re in 1988 cost Lloyd’s £8bn ($13m) – was down to poor management: a neighbouring platform kept pumping oil despite the blaze.

Given the risks of management failure, what are insurers doing to evaluate it?

“The problem is that insurers will have to rely on information given in the underwriting process,” explains law fi rm Barlow Lyde & Gilbert partner James Roberts. “And very often, insurers will be essentially taking it on trust.”

The biggest risks are inevitably in the riskiest businesses. “Every company tells us they operate safely, but do commercial pressures impinge upon their safety standards? What priority is safety given? Is it ingrained within the culture of the business?” asks lead underwriter of the Aegis London syndicate David Croom-Johnson.

View from Insurance

Times: Big risks

To read the rest of this analysis, visit the Insight channel on:

.co.uk

Australia weather losses

STATES OF EMERGENCYOn 1 February, the USA was struck by one of the largest winter storms in 60 years, affecting nearly 100 million people across 30 states.

A state of emergency was declared in Illinois, Indiana, Missouri and Oklahoma. Oklahoma was declared a federal disaster area.

Catastrophe modelling fi rm AIR Worldwide estimates insured losses to residential, commercial and industrial property to be between $790m and $1.4bn.

Reinsurers will be hit with large loss claims in Australia, following two months of wild weather caused by La Niña weather patterns.

SOURCE: COMPANY RESULTS

AFP BECOMES LLOYD’S CONSORTIUMNexus Underwriting Management (NUM) has converted its subsidiary Argo Financial Products (AFP) into a Lloyd’s consortium, with effect from 28 January 2011, reported Global Reinsurance. The consortium partners are AG Doré & Others Syndicate 2526 and Montpelier Syndicate 5151. AFP will be rebranded as Nexus Financial Products (NFP). Argo International retains its shareholding in NFP. NFP will continue to specialise in underwriting fi nancial lines classes of business with limits up to £10m ($16.1m) per account. (goo.gl/qDSry)

RISK MANAGEMENT LAUNCH FOR COOPER GAYCooper Gay has launched a new integrated risk management trading unit called Cooper Gay European Markets, reported Insurance Times. The new platform will combine the expertise of Cooper Gay’s 20-strong team in Hamburg, Paris and London. It will cover risks such as property and terrorism, as well as liability insurance and reinsurance risks. The team will place wholesale insurance and facultative reinsurance business in the European and international markets, including Lloyd’s and the London company markets. (goo.gl/vw3Zq)

InsuranceNOVAE CLOSES 1007 AND 1241 RUN-OFF SYNDICATESLloyd’s insurer Novae has folded the 2002 and prior open years of run-off syndicates 1007 and 1241 into its ‘live’ syndicate, 2007, reported Insurance Times. Novae said closure of the years had long been a strategic objective, and their size and volatility has fallen. The regulatory capital needed for the run-off has fallen to £15m ($24.3m) in 2011 from £38m in 2010. (goo.gl/4EZkt)

RFIB SETS UP RETAIL BROKER IN RUSSIALloyd’s of London broker RFIB has established a new retail broker in Russia, reported Post. Based in Moscow, Anglo Russian Insurance Broker, known locally as AnRu, will be managed by general director Oksana Solomko. Solomko was previously a reinsurance manager for Yakor. AnRu is licensed to operate as both a broker and as an agent, and will develop a network of agencies targeting corporate retail business. According to RFIB, a number of agency agreements have already been signed with local insurance companies.

MUNICH RE HITS TARGET DESPITE QLD LOSSESGerman reinsurance group Munich Re hit its profi t targets, despite major catastrophe losses in the fourth quarter of 2010, reported Global Reinsurance. In November, Munich Re raised its full-year 2010 profi t target to €2.4bn ($2.01bn) from €2bn. The reinsurer met the revised target, recording a net profi t of €2.43bn for the full year of 2010, down slightly from the €2.56bn it made in 2009. Gross written premium in 2010 rose by almost 10% to €45.5bn from €41.4bn in 2009. Munich Re’s combined ratio in property-casualty reinsurance was 100.5%, up from 95.3% the previous year. Additionally, the reinsurer announced a further share buy-back programme. Shares with a volume of up to €500m are to be repurchased before the annual general meeting in 2012. (goo.gl/admzV)

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Loss estimates issued by various (re)insurers for

Australian fl oods in December and January

GR_04-07.indd 5 22/02/2011 15:36


News Digest

Queensland: Cyclone Yasi damage ‘l

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On 13 March 2011, the curtain will rise for the fi fth annual MultaQa Qatar conference, the fl agship event of the Qatar Financial Centre (QFC) Authority. In just fi ve years, MultaQa has developed into one of the Middle East and North Africa region’s leading non-commercial (re)insurance platforms for discussion and debate. This is an exclusive event. Participation is by invitation only and last year it was attended by more than 220 international and regional (re)insurance and corporate risk management executives. The conference offers delegates a forum for exchanging views on trends that shape the global and regional risk landscapes of the future.

Interest in this year’s event is set to be particularly high. The Gulf Cooperation Council (GCC) region, and Qatar in particular, has left the global fi nancial crisis behind and is back on a path of rapid growth, underpinned by recovering oil and gas prices and a strong pipeline of infrastructure projects worth well over $1 trillion. The eyes of the world are also on Qatar as it prepares to host the football World Cup in 2022. The awarding of this championship is testament to the progress that has been made by the region, and refl ects its potential and aspirations.

Against this backdrop, a number of questions arise. What are the prospects for the GCC region’s insurance industry? Will insurance penetration fi nally reach levels commensurate with the region’s high GDP per capita levels? Will corporate and individual policyholders wake up to the rapidly increasing exposure to natural catastrophes in the region? Will business conglomerates embrace risk management as a factor in profi tability? How will they protect their balance sheets? Which insurance lines offer particularly attractive prospects for growth and profi tability? Is the heavy reliance of domestic insurance fi rms on international reinsurance capacity sustainable?

These are just a few questions that will be discussed at MultaQa Qatar 2011. Once again, the conference will benefi t from the presence of eminent local, regional and international speakers. The Qatari minister of fi nance, HE Yousef Hussain Kamal, will deliver the keynote address on the region’s economic situation and Qatar’s increasing role in it, while Lloyd’s of London’s deputy chairman Graham White will elaborate on strategic opportunities and challenges in global (re)insurance. Later on, International Insurance Society president and chief executive Michael Morrissey will discuss the growing importance of emerging insurance markets and QFC Authority board member Abdulrahman Ahmad Al-Shaibi will look at the authority’s strategy and the developing (re)insurance market. As in the past, there will be panel discussions involving senior executives.

Akshay Randeva is director of strategic development at Qatar Financial Centre Authority

Reinsurance AUSTRALIA DAMAGE ASSESSEDEmbattled Queensland was battered by category 5 Cyclone Yasi (according to the Australia Bureau of Meteorology’s intensity scale) on 2 February. AIR Worldwide estimated that insured losses will be between A$350m ($352m) and A$1.5bn.

But AIR’s principal engineer Dr Vineet Jain said: “Many residents are expressing relief. While the storm was indeed damaging, its impact on heavily populated areas along the country’s north-east coast was less than expected.”

SWISS RE MAY REPAY $1BNSwiss Re, which posted record losses in 2008, is considering share buy-backs and dividend payouts after agreeing to repay a lifeline extended by Warren Buffett, reported Bloomberg. Swiss Re may return $1bn to shareholders in 2011, according to the mean estimate of fi ve analysts surveyed by Bloomberg.

‘A’ RATE POSITIVE FOR ARCHRating agency AM Best has revised its outlook on the A fi nancial strength rating of Arch Reinsurance and affi liates to positive from stable, reported Global Reinsurance. The agency said the revised outlook refl ects Arch’s “continued superior operating performance, consistently excellent capitalisation and demonstrated risk management prowess”. It added that Arch maintains a strong underwriting culture, which centres on cycle management and adapting to market conditions. AM Best said overall operating results since Arch’s inception have been strong and in certain instances have exceeded most peers in the sector. Arch has had a smaller share of major industry losses, which the agency said demonstrates its superior risk management. (goo.gl/Ro12C)

HEADWIND FOR MUNICH REMunich Re is to begin insuring the guarantees being offered by German wind power plants builder, Fuhrländer, to its customers, reported Global Reinsurance. The (re)insurance giant said it is the world’s fi rst insurance of its kind and becomes part of a range of innovative covers that Munich Re is using to underwrite risks in the renewable energies sector. Fuhrländer gives buyers of its up to 2.5-megawatt wind turbines a technical guarantee of fi ve years with corresponding service contracts. Munich Re is covering these guarantees and assuming the associated fi nancial risk. (goo.gl/drPCq)

HANNOVER HAPPYHannover Re has said it is “satisfi ed” with the outcome of the 1 January treaty renewals in non-life reinsurance. “Despite softening tendencies in the market, we achieved broadly stable rates and conditions,” chief executive Ulrich Wallin told Post. “In certain segments, such as offshore energy business and European motor liability, we were even able to push through price increases.” Of the previous year’s total premium volume in non-life reinsurance (excluding facultative business and structured reinsurance) amounting to €4,867m ($6,595m), two-thirds of the treaties worth altogether €3,282m ($4,447m)(67%) were up for renewal as at 1 January 2011. Of this, treaties worth €2,993m ($4,055m) were renewed, while treaties worth €284m ($384m) were either cancelled or restructured.

MultaQa Qatar 2011

GR_04-07.indd 6 22/02/2011 15:37


News Digest

e ‘less than expected’ ‘Gallagher’s fortunes were

misunderstood from the outside

looking in – and from the

inside too’ David Ross, Gallagher International

>>> see Profi le, page 18

TechnologyXIS TRIES TO STEM FEARS ABOUT XCHANGINGXchanging Insurance Services (XIS) chairman Richard Bucknall has written to several London market heads assuring them its shareholders can buy out Xchanging’s 50% stake “in the unlikely event that any shareholder ceases as a going concern”, reported Insurance Times. Bucknall has also assured them that XIS is a separate company and legal entity to troubled outsource provider Xchanging. In a trading update last week, Xchanging announced a profi ts warning, goodwill and fair-value impairments, and the departure of chief executive David Andrews.

The letter, sent on 11 February and seen by Insurance Times, is addressed to Lloyd’s chief executive Richard Ward, LMA chairman Barnabas Hurst-Bannister, International Underwriting Assocation chairman Stephen Riley and London and International Insurance Brokers’ Association (LIIBA) chief executive David Hough. XIS, which is a provider of back-offi ce services to the London insurance market, is 50% owned by Xchanging. Lloyd’s owns 25% and the International Underwriting Association owns 25%. (goo.gl/zXWVe)

ENDURANCE REPURCHASE FROM PERRY SET AT $321.5M Endurance Specialty Holdings has entered into an agreement to repurchase the ordinary shares and options held by two affi liated funds of Perry Corp, a founding shareholder of Endurance, reported Global Reinsurance. Endurance is repurchasing 7,143,056 ordinary shares and options to purchase an additional 10,000 ordinary shares. The aggregate repurchase price for the shares and the options is $321.5m. (goo.gl/4C4fg)

Capital

AIG TO HIKE CHARTIS RESERVES BY $4.1BNUS insurance holding company American International Group expects to record a $4.1bn charge in its Q4 2010 results to strengthen loss reserves at its Chartis non-life insurance subsidiaries, reported Insurance Times. The fi gure is net of $446m in discount and loss-sensitive business premium adjustments. The strengthening refl ects adverse development on old accident years in classes of business with long reporting tails. Four classes – asbestos, excess casualty, excess workers’ compensation, and primary workers’ compensation – comprise approximately 80% of the total charge. The majority of the strengthening relates to development in accident years 2005 and before. (goo.gl/gPR1R)

ClaimsRISK FIRM SETS YASI LOSSES AT UP TO $5BNCyclone Yasi, which made landfall in the Australian state of Queensland on 2 February as a category 4 storm, could cause economic damage of up to $5bn, according to risk modelling fi rm EQECAT reported Global Reinsurance. The company said Cyclone Larry, which hit almost the same spot in 2006 as an intense category 3 storm, caused $1bn of damage. However, Yasi has higher maximum windspeeds and a wider spread of hurricane force winds, so EQECAT expects losses to be between $2bn and $5bn. Both storms occurred in an area of modest coastal population density distant from the urban centre of Brisbane. However, EQECAT said Yasi is a much broader storm affecting a much larger populace and an area roughly fi ve times the area impacted by Larry. Yasi’s radius to hurricane force winds was approximately 80 nautical miles, compared to Larry’s radius of 15 nautical miles. (goo.gl/L5PiY)

M&AVALIDUS TARGETS ARIELBermudian reinsurer Validus is in advanced takeover talks with privately held ‘class of 2005’ reinsurer Ariel, reported Insurance Insider. In its 2009 annual report, Ariel stated that diluted book value was $161.94 per share, giving the company a book value of $1.46bn. However, according to sources, the company has since returned to the region of $400m to investors bringing the book value down to $1bn.

GR_04-07.indd 7 22/02/2011 15:37


News Analysis

Mopping upNatural disasters

The recovery effort has begun, but confusion over what really happened during the Australian fl oods and the scale of the damage could mean reinsurers end up paying out more than they

need to. Lauren Gow reports

Reinsurers have been hit hard by recent catastrophic events in Australia. The country’s east coast was hit by heavy rainfall and fl ooding during late December and early January, which caused widespread damage and loss of life.

It was the most expensive natural disaster in Australian history, according to Aon Benfi eld, but loss estimates vary wildly. As the clean-up begins, some market analysts believe that the uncertainty surrounding the exact cost of repairs and nature of the losses could mean reinsurers end up making unnecessarily high payouts.

The Insurance Council of Australia’s (ICA) initial insured loss estimate for the fl ooding was A$150m ($151.6m), following more than 4,300 claims. By 11 February, however, it raised the estimate to A$2bn, following more than 43,700 claims. The bill is expected to rise further in the coming months.

Even (re)insurers themselves are unsure of the true extent of the damage. German reinsurer Munich Re estimated in its 2010 full-year profi t update that insured losses for the market would range between A$4bn and A$5bn, but US insurer Chubb suggested that the fi gure could reach A$10bn.

Another major area of uncertainty for reinsurers is the defi nition of an “event” in Australian insurance policies. The ICA classifi ed the December and January natural disasters as four separate events – Lockyer Valley, Toowoomba, rural Queensland and Victoria. This does not include Cyclone Yasi, a category 4 storm that hit beleaguered Queensland on 2 February.

RMS chief researcher Robert Muir-Wood says that because there is no consistency over defi nitions, reinsurance policy thresholds are murky. “Like a lot of fl ood events, it’s very messy and I am sure there will be some litigation over whether things should or should not have been included in what really appears to be a two-events reinsurance recovery process,” he says.

He warns that reinsurers need to be alert to the uncertainty over defi nitions. “They need to make sure they don’t feel losses are being added together that are inappropriate for the same reinsurance recovery,” he says.

Aon Benfi eld meteorologist Steve Bowen is concerned that the ICA is creating further confusion with its post-event fi gure updates. “It is releasing this data within one release,” he says. “It is not breaking it down into the catastrophes it declared. That adds even more confusion. What exactly goes where?”

Even the defi nition of a fl ood is unclear in Australian insurance

policies. In 2008, the ICA had its defi nition of ‘fl ood’ rejected as “anti-competitive” by government consumer watchdog the Australian Competition and Consumer Commission, and no further defi nitions have been submitted.

An ICA spokesman says MP for Maribyrnong in Victoria Bill Shorten is now pushing the government to clearly defi ne ‘fl ood’, adding: “The good thing to come from this disaster is that the industry wants it defi ned and we now have a minister who does too.”

According to Muir-Wood, most policies cover fl ash fl ooding but not river fl ooding, leaving hundreds of thousands of people without coverage from the overfl ow of the Brisbane River. He says: “People are upset about this and these fl oods have become much politicised.”

He is concerned that this level of government and public backlash will force insurers to pay claims that are not strictly covered – a move he says will leave reinsurers vulnerable to higher claims. “Insurers will be caught in the middle. If they pay for things they aren’t meant to, reinsurers may well deny recoveries for those costs.”

Reactive measuresIn late January, Australian prime minister Julia Gillard announced a A$5.6bn funding package for fl ood rebuilding, including a one-off levy on Australian taxpayers.

Swiss Re’s head of Australia and New Zealand operations Mark Senkevics told a local

radio station that cat bonds were more appropriate: “We’d like to see some form of insurance rather than a levy after the event,” he said.

But Muir-Wood strongly disagrees. “People drop cat bonds into conversation because they are alternatives, but it doesn’t make sense that they would neatly fi t into what the levels of risk here. They are quite expensive and I don’t think there is a capacity shortfall there at the moment. The danger of cat bonds is they are designed to give you protection against a 100-year event, but no protection whatsoever against a 50-year event. Actually, this event is not even a 100-year event, so it wouldn’t have been covered.”

There is one positive that Muir-Wood believes will emerge from this series of events: Australia will be forced to clearly defi ne the parameters of policies, ensuring there is no confusion in future.

But that defi nition will come at a price. “The challenge is, while they are being asked to come up with a broader defi nition that doesn’t exclude river fl oods, there isn’t an understanding that those in fl ood zones will have to pay a much higher technical rate for the risk. That debate hasn’t gotten very far yet.” GR

Australian losses: the breakdown

Residential property

46%

Other8%

Residential contents

25%

Vehicles11%

Commercial property

10%

Brisbane53%

Regional Queensland

30%

Toowoomba and Lockyer Valley

17%

Source: Insurance Council of Australia

Types of claims Region of claims

GR_8 NewsAn.indd 8 22/02/2011 09:26

www.hannoverlifere.com

WITH SOME PARTNERS, IT CAN BE HARD

TO SEE EYE TO EYE.

GR_Ad_Page.indd 1 21/02/2011 10:50


News Analysis

Squeezed from all sidesResults

The major US-listed players have released their fi gures for 2010 and despite remaining overcapitalised and failing to boost profi t margins in many cases, there are reasons to

be proud. Ben Dyson reports on some notable success stories

If the reinsurance industry was hoping to shed some capital in 2010, it appears at fi rst glance that it failed.

The major US-listed (re)insurance groups that have reported their 2010 results so far saw their collective shareholders’ equity increase by 6.6%, or $5.3bn, to $86.3bn. If the industry was overcapitalised going into 2010, it is more so now.

The increase comes despite the swathe of share buy-backs and special dividends the industry embarked on throughout 2010 in a bid to keep excess capital in check, maintain underwriting discipline and improve returns on equity (ROE). However, the rise in capital levels has been driven in part by turnarounds and M&A activity, rather than a failure to manage capital.

XL Group, for example, saw its shareholders’ equity increase 12%, from $9.4bn to $10.6bn, bringing it back up to 2007 levels. The fi nancial crisis hit the company hard in 2008, evidenced by its dip in shareholders’ equity to $6.1bn for that year, and it was still very much in recovery mode in 2009.

But 2010 has been a much better year for the fi rm. In addition to its substantial increase in shareholders’ equity, XL was one of only four fi rms to report an increase in net profi t for 2010 – the others being Axis, Alterra and Ace. XL made a profi t of $643.4m in 2010, a rather signifi cant improvement over the $75m profi t it made in 2009.

Profi ts erodedWhile the shareholders’ equity fi gure rose overall, seven of the 16 companies studied reported falls in shareholders’ equity, indicating that efforts to return capital are taking effect.

Perhaps not surprisingly in a year blighted by $37bn of insured catastrophe losses, overall profi tability slipped noticeably in 2010. The 16 companies studied reported combined net income of $9.9bn for 2010, down 12% or $1.4bn on the $11.2bn it made in 2009. The average profi t margin – profi ts as a percentage of net written premium – for the group, as calculated by Global Reinsurance, was 23.6% in 2010 compared with 34.3% in 2009.

The effect of the catastrophe losses can clearly be seen in the (re)insurers’ combined ratios. The group average combined ratio for 2010 rose 9.6 points to 89.1% from 79.5%. The only company that managed to improve its combined ratio was Alterra, which enjoyed a 2.4% cut to 85.7% from 88.1%. However, this is likely related to the effects of combining Harbor Point and Max Capital rather than a genuine

bucking of the overall trend. Alterra reported that catastrophes cost the company $54.9m in 2010, compared with $10.4m in 2009.

Even though (re)insurers’ combined ratios worsened in 2010, the industry can take heart from the fact that it collectively still made a very creditable underwriting profi t in the face of adversity. Only one member of the group, Flagstone Re, posted a combined ratio of above the all-important break-even point of 100%.

In addition to the catastrophes, the (re)insurers’ profi ts were further eroded by falling investment income caused by the persistently low interest rates in the post-crisis fi nancial environment. Net investment income for the group dropped 2.6% to $7.3bn in 2010 from $7.5bn in 2009.

But seven of the group boosted investment income despite the general trend. Everest Re in particular showed strong growth, raising

net investment income by 19% to $653.3m in 2010, from $547.8m in 2009.

PartnerRe also turned in a good investment performance, increasing net investment income by 12% to $672.8m, from $596.1m.

A few winnersThanks to the reduction in profi ts, ROE for the group also dipped to an average of 11.3% in 2010, compared with 18.4% in 2009. Despite the general downturn, however, two fi rms out of the 16 studied boosted ROE. XL’s shareholders will no doubt be much more

pleased with 2010’s return of 6.42% than they were with 2009’s 0.96%, even though it still lags the industry average by quite a way. Axis had a storming 2010 in ROE improvement terms, posting 14.7% in 2010 compared with 9.26% in 2009.

But the prize for the best shareholder returns goes to Bermudian (re)insurer Arch Capital Group, with 18.5%. ROE rankings can often be dominated by catastrophe specialists, but Arch shows that larger, more diversifi ed fi rms can also make the grade. The fi rm has clearly impressed rating agencies over the past year. Standard & Poor’s upgraded the fi rm’s insurance fi nancial strength ratings to A+ from A in July.

Arch has stiff competition from Bermudian catastrophe specialist RenaissanceRe – a consistently high performer in ROE rankings – which posted an 18% ROE for 2010.

Overall, the major US-listed (re)insurance groups should be pleased with their strong performance in 2010. They remained profi table despite pressures from all sides, and for the most part served shareholders well. However, with the soft market settling in, it will be interesting to see how price cutting – to the extent it takes place – will affect 2011’s full-year results. GR

(Re)insurer results 2010 Profi t ($m) Combined ratio (%) ROE

2010 2009 2010 2009 2010 2009Montpelier Re 212.0 463.5 82.0 62.2 12.6 30.0Platinum Underwriters 215.5 382.0 86.2 76.7 10.8 19.7Axis 819.8 461.0 88.7 79.3 14.7 9.3Alterra 302.3 246.2 85.7 88.1 13.5 n/aValidus 402.6 897.4 86.2 68.9 10.7 30.1RenaissanceRe 702.6 838.9 45.1 21.2 18.1 24.4PartnerRe 852.6 1,536.9 95.0 81.8 11.5 26.0Endurance 349.2 520.6 88.7 84.0 12.4 20.8Aspen 243.4 400.3 96.7 84.1 7.4 13.2Everest Re 610.8 807.0 88.7 84.1 9.9 14.6White Mountains 86.5 470.0 105.0 104.0 2.4 14.3Arch Capital Group 816.7 851.1 92.5 88.1 18.5 21.9Ace 3,108.0 2,549.0 90.2 88.3 14.6 14.9XL Group 643.4 75.0 94.8 93.6 6.4 1.0Flagstone Re 97.1 242.2 101.6 74.7 8.3 22.0Transatlantic Re 402.2 477.7 98.2 93.5 9.7 13.2Total 9,864.7 11,218.8 89.1 79.5 11.3 18.4

Source: company announcements, Global Reinsurance calculations

ROE 2010 11.3

ROE 200918.4

Profi t 2009$11,218.8m

Profi t 2009$9,864.7m

GR_10 NewsAn.indd 10 22/02/2011 09:30

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News Agenda

Retro revolution

Fully collateralised catastrophe cover has helped to fi ll some of the pressing needs of the retro market since the hurricanes of 2005 dented capacity. But is it still too far outside the mainstream to achieve the key players’ goal of meeting all buyers’ reinsurance needs? Ben Dyson investigates

GR_12-14 News Agenda.indd 12 22/02/2011 09:30


News Agenda

When Validus bought rival Bermudian reinsurer IPC Re in 2009, the market wondered what Jim Bryce would do next. The longstanding IPC chief executive didn’t seem the type to go quietly into retirement.

In November last year, the market got its answer. An announcement revealed that Bryce would be chairing a new retrocessionaire, Aliseo Re, which would start offering $300m fully collateralised retro capacity to reinsurers from 1 January 2011.

During the Monte Carlo Rendez-Vous, a couple of months before Aliseo Re was announced, news of a new catastrophe fund offering fully collateralised retro cover started to emerge.

By December CATCo, as the new entity is called, had raised $80m by listing shares in its UK-based closed-end fund on the London Stock Exchange’s Alternative Investment Market (AIM) segment. In addition to the AIM-listed closed-end fund, CATCo also runs an open-ended fund in its domicile of Bermuda. The company is targeting $1bn in investments and pitching itself to the top 35 reinsurers.

These new entrants could prove a shot in the arm for a sector that has, in recent years, been blighted by prohibitively high prices and a lack of capacity. After hurricanes Katrina, Rita and Wilma hit the USA in 2005, the traditional retro market all but shut up shop.

While prices and terms have softened since then, buyers still sometimes struggle to get all they need. Can these new fully collateralised players give retro buyers and investors what they want? And what impact are they having on the traditional retro market?

In high demandCATCo chief executive Tony Belisle contends his fi rm has become a hit with buyers and investors alike. He argues that, unlike many catastrophe funds, which offer coverage for single risks in single territories, CATCo stands out because it offers protection in multiple jurisdictions and is not limited to property-catastrophe retrocession. In addition to property, it writes marine and aviation risks. It also aims to be the core retro provider for the companies it protects, assuming all the various risks they want to lay off.

The biggest selling point is the full collateralisation of the coverage, with the money held in a separate trust fund. Traditional retro writers can fi nd the security offered by such products tough to beat, particularly given the continuing post-fi nancial crisis jitters.

“Buyers love it,” Belisle asserts. “Buyer demand is phenomenal – it is far beyond

our capacity and has exceeded even our expectations. We are now out trying to raise additional money because the buyer appetite was so great.”

He contends that such is the appeal of CATCo’s approach that it has even attracted overcapitalised reinsurers who can afford to retain more risk and were not looking to buy retro this year. “The reason is we are offering a portfolio-wide solution,” he says.

He adds that companies have said they will pay additional premium if CATCo raises more money in the fi rst quarter and is able to offer more coverage. “We are topping up the existing deals in the fi rst quarter.”

Others agree that the fully collateralised retrocessionaires are gaining recognition. The concept has been around for several years: a series of private equity and hedge fund-backed fi rms, among them Aeolus Re and DE Shaw’s reinsurance division, sprang up on Bermuda in 2006.

“The collateralised markets have stuck with it and seem to be part of the

normal way of thinking,” says BMS Re managing director Jonathan Morris.

Belisle goes so far as to say that some types of retrocession will eventually be provided solely by the fully collateralised players. “I think what you will see is that super-catastrophe cover should only be in collateralised form,” he says.

Threat to traditionBelisle also claims that on seeing CATCo’s product, some traditional retrocessionaires have taken fright because of the potential competitive threat. “Originally one of the big writers actually called me into their offi ces and said: ‘Maybe we want to buy up all of your protections so we’ll fi ll up all of your capacity just to get rid of you’,” Belisle says. “That conversation has happened before and it will probably happen again.”

CATCo’s presence is certainly attracting the market’s attention. While contending that some buyers still prefer security with rating agencies’ seal of approval to the fully collateralised type,

reinsurance broker Willis Re Specialty non-marine managing director Jonathan Marsh concedes: “The reliance on fully collateralised capacity continues to increase.” He adds: “It will be interesting to see what the new entrants like CATCo and Aliseo bring to the table for the 1 April renewals and the rest of the year.”

Morris at BMS agrees. “CATCo offers a specialist product in some ways and [it is] not suited to everyone. In overall terms it doesn’t have a huge amount of capacity, but we are aware of them getting on programmes – it has done well there,” he says.

There is a sense that fully collateralised retrocession is not quite the panacea that some suggest. Despite Belisle’s claims that some retrocessionaires are running scared of CATCo’s products, there are many indications that traditional retrocession – also known as ultimate net loss (UNL) retrocession – is still playing a big role in most buyers’ programmes.

In some quarters there is a lack of comfort that the fully collateralised retro product will behave like regular reinsurance when it comes to making a claim. Private equity-backed providers of collateralised cover will want to recoup what appears to be unused capital as quickly as possible to begin the next underwriting years, meaning buyers need to ensure they can still access the money if claims from the covered year roll in after the renewal date.

“There is a place in people’s retrocession buying for collateralised products and, on the face of it, the security is fantastic,” says Morris. “But that’s on the face of it. You do run into timing issues. You have got to make sure that if there is an earthquake, for instance, there are adequate reporting clauses so you can hold on to the money.”

Morris acknowledges that some of the money is released according to certain triggers in collateralised arrangements, but he adds: “It’s not like having a more open-ended traditional player on the books where you just advise them that there might be a loss. Your cover note doesn’t disappear on 31 December.”

Belisle at CATCo says that his fi rm is trying to forge strong, long-term relationships with the reinsurers it serves. “In the deals we have done we have become the core protection for each company we have protected,” he says. “We just want strategic partners. We want guys we really respect as underwriters, and we only want 10 or 12 strategic partners that we protect year in, year out, and where the price is very healthy year in, year out.”

Collateralised funds may have some way to go before they win the market >

‘What you will see is that super-castrophe

cover should only be in collateralised form’

Tony Belisle, CATCo



News Agenda

over. The private equity-backed funds’ need to generate adequate returns for their owners means they may not be as relationship-driven as more established retro writers. “The traditional retro market is still primarily relationship- driven,” says reinsurance broker US Re’s executive vice-president Joseph Fedor.

“The collateralised market is tiptoeing into that area, but they generally look for quite high returns because they are a hedge fund type provider of capacity and generally they want a reasonable level of return for the level of risk they are taking.”

Still outside the mainstreamMany buyers are viewing collateralised retro as a specialist tool rather than an all-purpose product, meaning it has not yet truly entered the mainstream. “People are prepared to buy collateralised cover but the majority of retro buyers are still looking for cover that gives them worldwide protection, which the collateralised funds don’t generally do,” Cooper Gay reinsurance director Patrick Ellis says.

Because the collateralised funds tend to focus on high layers to get their returns, some feel a buyer is unlikely to rely solely on this form of cover. “You do need a mixture of more regular cover that you can conceivably collect from on minor market-changing events rather than just the events that completely change the reinsurance landscape,” Ellis says.

Equally, it seems not all investors are buying into the fully collateralised concept. Aliseo Re did not start writing on 1 January 2011 as planned, and sources suggest the company is now trying to look for new investors.

Bryce confi rmed that Aliseo did not start writing as planned, saying this is because the company is still discussing structural matters with legal representatives. Investors have previously turned their backs on alternative retrocessional covers. Lloyd’s insurer Catlin, for example, abandoned the $150m fl otation of its sidecar reinsurer Long Bay Re last year.

As a result, it appears that the most recent entrants have not yet made a big mark on the traditional retro market. “Their impact has been minimal, to be honest,” says US Re’s Fedor.

The newcomers’ foray into retrocession has been countered to an extent by some M&A-fuelled departures. PartnerRe’s purchase of Paris Re, for example, has curbed the latter’s underwriting of motor retrocession in the UK market. PartnerRe cut the coverage at the 1 January renewal because it was concerned about the accumulation of exposure that resulted

from combining Paris Re’s UK motor retro book with its existing reinsurance underwriting in Europe.

Similarly, Marsh at Willis Re reports that M&A is stunting the traditional market. “The traditional rated UNL capacity continues to reduce, mainly owing to M&A activity over the past three years, with Validus Re acquiring IPC Re, and Max Re and Habor Point merging,” he says.

The good news for buyers of traditional retro is that, in general, rates are falling. Recent catastrophes have not been suffi cient to trigger retro programmes, particularly in the peak

zones of Europe and the USA. Market participants contend that prices were down by between 5% and 10%.

Buyers should not start celebrating just yet, however. Rates are falling more slowly than in the original reinsurance market, meaning the two sectors are out of kilter. This is affecting buyers’ perceptions of the product. “Retro might be costing you less money, but relative to your inwards reinsurance book, it is probably looking more expensive,” Morris at BMS says.

Buyers test value claimsSome companies are starting to lose patience with the fact that, while they have been buying retro for the intervening years since Hurricane Katrina in 2005, they have not been able to collect on it because of the high attachment points, even though the market has seen some sizeable catastrophe losses since then. This is making underwriters’ claims to management that retro is good value sound increasingly hollow.

Coupled with this, the years of scarce cover post-Katrina, along with reinsurers’ solid levels of capitalisation, means that they have grown more accustomed and more able to retain risk.

Changes are afoot, however, that could trigger greater dependence on the retro market. The European Commission’s forthcoming Solvency II capital regulations could result in more demand for reinsurance, and in turn more need for retro to help absorb this. In the more immediate future, many expect the latest incarnation of Risk Management Solutions’ US hurricane model, due to be released at the end of February, to increase perceptions of risk and thus result in more demand for protection.

With deteriorating pricing, reinsurers can also expect worse results. “I wonder whether that will make people less bold when it comes to retaining more of the cat risk,” Morris at BMS says.

And though prices are still high, they are at least heading towards more acceptable levels. “I think we are now getting to a stage where the attachment points are more realistic and more justifi able for people to purchase these covers,” Cooper Gay’s Ellis says.

Although newer forms of retrocessional cover are coming gradually to the fore, it seems buyers are still fi nding comfort in the devil they know. GR

FIND OUT MORE ONLINE:EX-IPC RE CHIEF LAUNCHES NEW RETRO FIRM

To read this and more stories on retrocession, see globalreinsurance.com or goo.gl/rLk9u

‘Retro might cost you less money but look more expensive relative to your

inwards reinsurance book’ Jonathan Morris, BMS


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In my view


People & Opinion

For exclusive opinion and insight from Global Reinsurance and its sister publications, visit

globalreinsurance.com

Despite the delay in its implementation until January 2013, there can be few insurance and reinsurance senior executives who do not have Solvency II at the top of their worry list. Costly, administratively burdensome and negatively impacting capital positions, the EU directive can be seen as just one big headache for the insurance industry.

This should, however, be tempered by the fact that the imposition of Solvency II is leading many insurers to take a positive review of their business practices. A key area that they should urgently revisit is their exposure to old US asbestos, pollution and health hazard (APH) liabilities.

Twenty years ago, APH presented insurers with an enormous challenge that led to a complete overhaul of much of the way in which insurance business was transacted. Many of the industry’s newest senior managers will have missed this shift and for them APH may simply represent a historic cost of business carried about on the balance sheet and unable to be removed.

The cost of holding on to these liabilities is, however, substantial. In a recent research project,

APH liabilities have lain dormant on balance sheets since the 1980s, but Solvency II should prompt companies to look at them anew as a potential source of profi t, says John Winter

In with the old

CYCLONE YASI’S INSURED LOSSES UP TO US$1.5BNCatastrophe modelling fi rm AIR Worldwide estimates losses for Australian cycloneinsurancetimes.co.uk

NAT CATS COST £109BN IN 2010Russian heat wave and Haiti earthquake were deadliest disasters last yearstrategicrisk.co.uk

the profi tability of European insurers.When the magnitude and timeframe

involved in the APH problem erupted in the late 1980s, the industry engaged in a fl urry of activity to deal with the problem, closing legal loopholes to new underwriting and replacing the under-reserving of liabilities with over-reserving. Today, given the development of APH claims, this makes

many of the reserves look excessive,

liabilities of more than $5bn, taking the total balance sheet strain to $16.5bn.

Clearly, some insurers will be able to mitigate this drain on capital with the use of an effective internal model, but nevertheless Solvency II will highlight the capital requirement. Even without the impact of Solvency II, these sometimes ancient APH liabilities are placing an unnecessary drag on

particularly among European companies, which Ruxley’s research suggests have larger over-reserving positions than their US counterparts.

However, these larger reserves offer even greater opportunities to release capital and realise value and profi ts from old APH liabilities.

At its most basic, there is a signifi cant cost attached to the administration of these complex and open-ended claims that require expensive legal counsel to resolve.

So by highlighting the costs involved in holding on to old APH liabilities, and

reminding the insurance industry of this long-dormant

issue, Solvency II is perhaps doing the insurance industry a favour.

Perhaps another way for insurers to focus on this issue is to consider the profi t that can be generated when capital is released through an APH transfer. Recently, a number of APH liability transfers have

Ruxley Ventures estimated that major European insurers and reinsurers are currently holding APH liabilities on their balance sheets that total in excess of $11.5bn. Our fi gures suggest that the implementation of Solvency II will see a further regulatory capital requirement under the standard formula against these

GR_16-17 PandO.indd 16 22/02/2011 09:31


People & Opinion

Online top fi ve

How did you make it to where you are today?Quiet determination.

How has the industry changed since you fi rst joined it?Catastrophe modelling has changed dramatically in the past 15 years, both in breadth and depth. Greater breadth has come from the increasing use of analytics in decision-making, which has driven the adoption of modelling in all segments of the insurance value chain. More depth has come from the increasingly detailed data that we work with.

What are the key challenges ahead for you and the industry?Communicating best practices on how to understand uncertainty and use model output. Users need to get away from looking for “the answer” from the models. Models are not black boxes, but organisations generating simple benchmarks from them, and using only those for decision-making, are treating them as such.

Equally, what are the biggest opportunities?Advances in hardware and software will enable easier-to-use mapping and other intuitive interfaces, more horsepower to allow a qualitatively higher level of ‘what if’ analyses and, of course, faster performance.

What advice would you give to someone starting out in catastrophe modelling?Acquire a deep understanding of insurers’ and reinsurers’ business issues.

What is the biggest mistake you’ve made?Last summer, I hooked into a big tuna. I gave it too much slack and lost the darn fi sh.

What comes to mind when you think of your friends and contemporaries in the market?The happiest ones are those that follow their passions.

Up the ladder

Activity on the Global Reinsurance website this month was all about Australia, with three of the top fi ve stories dedicated to the country’s slew of catastrophic events in late 2010 and early 2011.

Australia was still struggling with high fl oodwaters when Typhoon Yasi slammed into North Queensland as a category 4 storm, one category down from the highest rating of 5 on the Saffi r-Simpson windstorm severity scale.

The situation with both the fl ood and typhoon losses is still evolving, and readers are clearly keen to keep on top of any updates and estimates.

While the situation in Australia captivated much of the attention on the site this month, the most-read story was the news that broking group Arthur J Gallagher’s profi t for the year was up 35%, despite a slump in organic growth.

Gallagher was the fi rst of the larger brokers to report its full-year 2010 results, and so readers were likely trying to gauge what to expect from Marsh, Aon and Willis. The good news of a strong profi t increase in what is a tough time for brokers probably also fuelled interest.

The story in fourth place shows that, although less immediate than the impact of catastrophe losses, Solvency II is still very much at the forefront of readers’ minds and they are keen for any extra detail.

It had long been expected that the implementation date for Solvency II would be 1 January 2013 rather than the previous offi cial date of 1 November 2012, but readers found it heartening to receive confi rmation of this fact.

1. GALLAGHER PROFIT UP 35% FULL-YEAROrganic commissions fell 2%

2. QLD FLOOD LOSSES STILL UNCERTAINPolicy wording will reduce claims

3. CYCLONE YASI THREATENS QLDMajor cities in the state have been warned

4. SOLVENCY II IMPLEMENTATION DATE PUSHED BACK TO 2013Transitional arrangements mean more time to adjust

5. CYCLONE COULD COST AUSTRALIA $5BN Second highest number of nat cats in 30 years

Ming Lee is president and chief executive of risk modelling fi rm AIR Worldwide

POLITICAL RISKS UP DUE TO ECONOMIC VOLATILITYRisks elevate in 19 countries, according to Aon’s political risks mapstrategicrisk.co.uk

resulted in a profi t for the insurer as liabilities are transferred for less than the value for which they were historically reserved. These successes are encouraging insurers to better understand the value of their APH liabilities and reserves, given the real possibility of realising an ‘instant’ profi t through a transfer.

The ongoing market orthodoxy that APH is a low-level problem slowly resolving itself, with manageable cost implications, is denying insurers the opportunity to maximise this potential source of capital release and the cost savings achievable. However, as the costs have largely been absorbed and accepted for many years, APH simply represents background

noise. A closer look at the recent claims history will demonstrate, however, that while levels of activity may be signifi cantly reduced, those that remain represent the challenging last battles that require the knowledge, experience and resources available to successfully conclude.

Solvency II should have a galvanising effect on insurers with APH liabilities – the additional reserve requirements that the directive adds to long-tail, casualty and old years’ liabilities should ensure that APH comes back on the agenda as a key issue. By focusing on APH again, both active and run-off players will be able to achieve a profi t, while simultaneously reducing their expenses, releasing capital, achieving fi nality and most importantly, focusing on future business development. GR

John Winter is chief executive of run-off purchasing fi rm Ruxley Ventures

To contribute to the website, email Ben Dyson at

[email protected]

Weblog

There is a signifi cant cost attached to the

administration of these complex and open-ended claims

GR_16-17 PandO.indd 17 22/02/2011 09:32


Profi le

“What do I do outside work?” Gallagher International chief executive David Ross is uncharacteristically taken aback as he ponders the question for a few moments. “I think about work,” he replies, tongue in cheek.

It’s not quite the whole truth. With a house in the East Sussex countryside in the UK, which he shares with his wife, four children and their three dogs, the 41-year-old is kept busy at the weekends. “I’m master of all I survey from Monday to Friday and then at the weekend I’m at the beck and call of a two-and-a-half-year-old,” he refl ects.

But on week days, the work ethic that has powered Ross’s rise within the Arthur J Gallagher empire takes over.

He joined Arthur J Gallagher as a claims broker in 1990 and has been there ever since. Within three years of joining, he was a director of the Chicago-based broker’s heartland North American operations. Ross’s State-side experience is betrayed by the east-coast twang that fl avours his native Irish brogue.

In 2005, Ross was appointed to lead Gallagher International, overseeing all of its non-US operations. In doing so, he became the youngest chief executive of a London market company.

At the time, the international operation was a minnow within Gallagher, accounting for just 3% of its total revenues. But while Gallagher >

Twenty years at Arthur J Gallagher have given chief executive David Ross a good nose for expansion and diversifi cation. As he tells David Blackman,

the broker is now looking to bulk up its non-US business

‘There’s not a huge appetite for borrowing

bucketloads. We like to eat what we

kill and then feed off the earnings’

Gallagher’s guiding light

GR_18-20 Profile.indd 18 22/02/2011 14:59


Profi le

GR_18-20 Profile.indd 19 22/02/2011 14:59


Profi le

has a low profi le in the UK – it ranked a modest 18th in the 2010 Insurance Times Top 50 Brokers – the strength of the company’s core US business places it in the global top fi ve.

High fl yerRoss’s task has been to build up Gallagher’s international profi le so that it more closely refl ects its US presence.

But fi rst he wants to talk about what he achieved at Gallagher International six years ago. He describes the fi rm at the time as a somewhat ramshackle operation. “We knew we had a great brand, but a network of sub-standard offi ces. People didn’t understand what we were about,” he says. “Gallagher International’s fortunes were fairly misunderstood from the outside looking in – and from the inside too.”

Ross’s fi rst two years were spent overhauling Gallagher International’s internal management. At the same time, he was plotting how the division could branch out from its traditional London market wholesale business into new fi elds, such as risk management, corporate risks and energy.

While keen to get into high-growth international markets, Ross says he wanted to be there for the right reasons. As an example, he says: “We wanted to be in Western Australia because it was an energy hub for the Asia-Pacifi c region.”

In the six years since, Ross has quietly been building up Gallagher International through a series of acquisitions in Australia, Brazil, Canada and the Caribbean. The strategy has been part of a wider drive by Gallagher to diversify beyond its US heartland. Ross says no company can “be entirely reliant on the fortunes of one market”.

He adds: “Being so US-centric was not that healthy. The plan to create balance by tooling up internationally has been good for Gallagher. It gives a lot more breadth and depth.”

Gallagher International’s softly-softly growth shifted up a gear last year with the acquisition of Lloyd’s broker First City Partnership. “We didn’t do First City because it was a cheap deal,” he says.

“Strategically it made sense and that made it worth pursuing. We did First City because we were incredibly weak in the fi nancial and professional space. We had some very muscular clients, but we didn’t have the expertise to talk to them about their D&O and banking.”

Sensentional growthOver the past six years, Gallagher International has turned an £8m loss into what Ross predicts will be a near-£35m profi t for 2010. “Our

be a deal that will move the needle. Strategically, it’s one of the most important things we are going to do.”

This move shouldn’t surprise those who know Gallagher’s US business. “Gallagher is a retail brand and the intention is to establish it in the [UK] regions. This is the second-biggest insurance market in the world; we have to be in it,” he says.

The right timeFor much of his time in charge of Gallagher International, Ross argues, the UK retail broking market has not been that enticing. “Round about 2007/08, the UK market was so overheated in the brokerage space because you had insurers and private equity both driving up multiples to ridiculous levels. So we focused outside the UK.

“The gluttony that came from that period saw a slightly ridiculous situation where Towergate became one of the biggest underwriters and AXA one of the biggest brokers. Talk about intruding into spaces that are not core …”

But unlike three years ago, now is a good time to buy, he says. “While the UK retail market is quite soft, the consolidator buyers are no longer active and nor are the insurers, so the multiples are back at a much more sensible price.

“There are so many brokers in London that are at a crossroads. You would consider now to be a buyer’s rather than a seller’s market.”

Rising regulation costs, poor returns on investment income and the soft market are three reasons fi rms are going up for sale, he argues. “People who have the money can do fantastic deals. It’s always the way at the bottom of a recession – people who have cash can tool up.”

But Ross insists debt-fuelled growth is not the Gallagher way. “There’s not a huge appetite for borrowing bucketloads. We like to eat what we kill and then feed off the earnings.

“Our ambition is to be better than we are today. If you invest in being better, the numbers will take care of themselves,” he adds.

Ross muses that achieving a more even work/life balance is another goal. But it’s clear that it’s not going to happen quite yet. GR

‘We are intending to move into the retail space.

Strategically, it’s one of the most important things we

are going to do’

compound growth rate has been, quite frankly, sensational,” he boasts. The division now accounts for 15% of the group’s total turnover.

Buying First City was complicated – Ross jokes it took 10 years off his life – but he also sees it as a “game changer” that has given Gallagher’s Chicago headquarters the confi dence to equip him with a war chest for acquiring and hiring.

So how is he going to use this cash pile? He rules out a fresh Lloyd’s acquisition. “You are not going to see us acquire another broker in the Lloyd’s market in the next couple of years unless there is a fantastically compelling reason. There are bigger wins for us that make more strategic sense outside of being a wholesaler.”

Moves are afoot to purchase a new MGA business, which Ross says will effectively double the size of Gallagher’s underwriting arm, acquired from Oxygen in 2008.

And Ross is thinking of branching out into virgin territory for Gallagher in the UK: retail broking. “We are intending to move into the retail space. That will

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FIND OUT MORE ONLINE: GALLAGHER FULL-YEAR PROFIT UP 35%

To read this feature, and for more reinsurer results, see globalreinsurance.com or goo.gl/aPt6o

GR_18-20 Profile.indd 20 22/02/2011 14:59

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GR_Ad_Page.indd 1 22/02/2011 15:03


Cedants

The world of reinsurance buying is evolving. It is no longer enough to rely on personal relationships and gentlemen’s handshakes to decide which reinsurers and brokers to use.

In addition, reinsurance managers are no longer making purchasing decisions in isolation within insurance companies.

The past decade has seen C-suite executives – chief executives, chief fi nancial offi cers and chief risk offi cers – get more involved in reinsurance-buying decisions as they seek greater understanding of, and control over, the risks facing their organisations.

This effort to understand risk better has also resulted in the incorporation of data and modelling systems into the decision-making process.

But different parts of the market are experiencing different levels of evolution and there is a concern that the fast pace of this change is leaving some reinsurance managers lagging behind.

Here, Global Reinsurance examines four different perspectives on the changing nature of reinsurance buying.

is power

Data modelling has transformed the nature of reinsurance buying, with brokers frantically engaged in an ‘analytics arms race’. Four insiders gave Lauren Gow their take on this rapidly evolving industry

The consultantArtur Niemczewski is managing director of Xchanging Broker Services and former chief operating offi cer at Willis. He has worked alongside reinsurance buyers and says the industry is going through a major evolution, particularly over the past decade.

“The massive shift in the past 10 years has been that the brokers have fi gured out that they too need to have analytical skills. Cedants realise that they need someone they can trust to do the complex modelling for them or they have to be smart enough to do it themselves, because otherwise negotiations will be asymmetrical,” Niemczewski says.

Niemczewski says he has seen for himself two of the top three brokers place massive investment into their analytic capabilities. But it is the scale of investment that he says is widening the gulf between the haves and have-nots.

“The disparity is that this is a large, fi xed investment in the tens of millions of pounds. And for that you need economies of scale. It is almost impossible to do that if you are a niche broker. The top three brokers hold 80% market share and everyone else has 20%. If you are not in the top three brokers, then there is a massive gap because the cost of such an investment could be your entire income.”

Reinsurance buying is not just about the price, according to Niemczewski, especially in an increasingly competitive market. He says: “It’s a misnomer that cheaper is better. Nothing could be further from the truth. A lot of investment fi rms try to squeeze 10 extra basis points out of their money. But you can’t do this until you have a clear, sophisticated understanding of data.”

The future of reinsurance buying is set to continue as an “analytics arms race”, says Niemczewski. He adds: “Once you are on this path, it is very diffi cult to come back. The use of modelling and sophisticated data will continue and there will defi nitely be observing events in shorter or even real time.”

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‘It’s a misnomer that cheaper is better. Nothing could be further from the

truth’ Artur Niemczewski, Xchanging

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Cedants

The data providerMatthew Newsome is a consultant with Building Cost Information Service (BCIS), part of the Royal Institution of Chartered Surveyors.

BCIS has recently created a database for cedants with 2.5 million rebuilding cost fi gures, covering almost all of the housing stock in the UK. This data can be used to make accurate calculations of property risk exposure.

Newsome says: “There has been a defi nite shift towards data usage in reinsurance buying.

“As part of the reinsurance-purchasing process, insurers need to know the total value of risk on their book. We work in home building insurance, so insurers we work with ask: ‘What is the total value of risk here?’”

The upcoming Solvency II regulation will require cedants to understand risk more intricately, which means that data systems are playing an increasingly important role.

The more tightly the reinsurance programme matches the risks on a cedant’s books, the lower the exposure to those risks and thus the lower the capital requirements under the new regime, Newsome argues.

“With better fi gures, reinsurance departments working in this sector are now able to run their book through [the database] and achieve a reasonable estimate of the rebuilding cost for each property.

“They can then use that to calculate risk, and that therefore puts them in a much better category of risk when going to purchase reinsurance,” he says. GR

The US perspectiveSpecialist (re)insurance broker BMS’s Philadelphia offi ce director John Faustman believes the move towards greater C-suite involvement has been in train for some time among regional and supraregional US insurers.

“We saw this shift beginning maybe 15 years ago and even within the last 10 years. If we don’t deal with the president or chief executive, we now deal with the chief fi nancial offi cer.

“And many times, that president or chief executive was the chief fi nancial offi cer and was promoted up. That is much more common today than it ever was before.

“With the chief fi nancial offi cer, the fi nancial nature of their discipline has made reinsurance buying different. It is much more fi nancially driven today [rather than underwriting driven] and the analysis that goes into it is much more rigorous than it was before.”

Faustman adds that part of the reason for this could be the convergence of insurance and the wider fi nancial services industry.

“Certainly the way we look at capital is different,” he says.

The regional shift towards fi nancially driven decisions is also the reason for increased use of data modelling, according to Faustman. But he warns: “We have reached a point where we don’t want to become overly reliant on models. But I think some common sense has crept back into the equation. I think there is a healthy awareness today of the limitations of models.

“Everything has to be modelled but you do have to step back and ask: ‘Does this make sense?’ I defi nitely see more of that today than I have in the past.”

The big hitterAlkis Tsimaratos has seen the evolution of reinsurance buying from the top of the food chain in his position as executive director at big three broker Willis Re. He says one major shift has been that insurers’ C-suite executives are starting to take a larger role in the reinsurance-buying decisions.

”With new regulation, such as Solvency II, coming through, the C-suites are starting to have a form of risk-based reporting at their disposal, which they probably had before but not in such a structured way,” he says.

Tsimaratos believes the role that regulation has played in the evolution of the buying process should not be ignored. “A lot of companies are accepting that they have to fulfi l a certain number of capital requirements from a regulatory perspective but they are now organising themselves on a more risk-transparent and risk-based basis,” he says.

“They have more numbers at their disposal to make their decisions and therefore C-suites are making more number-based decisions,” he continues.

Data is now vital to senior executives’ decision-making, but Tsimaratos warns that data output should be interpreted with an open mind.

“To be able to step back and see the high-level conclusions of data is starting to be very important. In a way, you could have the best data, you can be extremely precise in all your lines of business, and you can hire the best actuaries. But at the end of the day, if you can’t make fi ve main conclusions from that data and process, then you are not making business use of your modelling.”

Tsimaratos agrees with Niemczewski’s assessment that those who lack confi dence in this area may be left behind. “Some cedants are still very short of data and that is a problem. But they do have to make a call with the data they have. ”

Tsimaratos also says the future of reinsurance buying will be heavily reliant on data. He adds: “In a world of uncertainty, quality data provides a degree of certainty.”

GR_22-23 Cedants.indd 23 22/02/2011 09:34


Cedants

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ISRecently installed

as the fi rst reinsurance manager for

Mitsui Sumitomo Underwriting

at Lloyd’s, Mike Watson holds an

unusual position in the market.

Here he shares his thoughts on the

year ahead

Mike Watson

Q&AMike Watson, the new reinsurance manager at Japanese insurer Mitsui Sumitomo’s Lloyd’s operation, took an unconventional route into the world of reinsurance. After spending his early career with the UK Home Offi ce, working on the development of old prisons and building new ones, Watson was itching for change. A serendipitous conversation with a friend who worked for broking fi rm CT Bowring led to a job with Alexander Howden Insurance Brokers.

His latest job move, after nine years with Willis Re, establishes Watson as the fi rst reinsurance manager at Lloyd’s for Mitsui Sumitomo Insurance Underwriting, which runs Syndicate 3210. Watson relished the prospect because he could make the job his own. “This job was just too good an opportunity to pass up,” he said.

He now has ambitions to overhaul Syndicate 3210’s entire reinsurance purchasing strategy in 2011 to give the company greater control over its programmes.

Q: How would you describe the current pricing situation in the reinsurance market – would you say we are in a soft market at the moment?

A: Prices are in essence fl at. There is an excess of capital in the market and,

with

GR_24-25 Cedants QA.indd 24 22/02/2011 09:35


Cedants

although there were several large losses in 2010, the impact has really been more on earnings than their capital. Unless you had a signifi cant loss of capital, it hasn’t had an impact on pricing.

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

A: We are looking for an effi cient reinsurance programme. Cost effi ciency is measured against capital and our combined operating ratio.

As a syndicate, we’ve never had a reinsurance manager. The syndicate started 10 years ago and in January 2010, Eamon Brown came in as the underwriting director and identifi ed the lack of a reinsurance manager. It is quite unusual for most insurance companies in the UK not to have one. I came on board in September 2010, so it’s very early days yet.

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

A: Financial modelling and catastrophe modelling are vital. We use our reinsurance brokers to help us with the catastrophe modelling. We also use brokers to help us with fi nancial modelling, but Mitsui brought in an in-house actuarial team in early 2010. That has given us a capability we had to outsource in the past. We then run all the reinsurance programme structures and pricing through the fi nancial model to determine the most cost-effective programme for the syndicate.

Because we are regulated by Lloyd’s and the FSA, and with Solvency II on the horizon, we recognised the syndicate needed a restructure. We’ve created a performance management team that’s a little bit like the Franchise Board at Lloyd’s. That has allowed underwriters to do what they’re good at.

It’s allowed us to monitor results and help underwriters with realistic disaster scenarios. Our actuarial team is part of that. The performance management team is very much in keeping with the Lloyd’s model and gives us much more control over our reinsurance purchases.

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

A: It hasn’t really. We take a long-term view on reinsurance purchasing. We will take a look at opportunistic purchases but it’s not a core part of the process.

Q: How has your buying strategy changed post-fi nancial crisis?

A: Even though the (re)insurance industry has not been affected as much as the banking industry, we are aware of what could happen and therefore we have a lot more focus on our reinsurance security.

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

A: Until Solvency II comes in, that is a diffi cult question to answer. Reinsurance is a capital substitute and it’s all about capital management.

Inevitably, reinsurance strategy will be very closely linked to Solvency II and we will have to move and adjust to that as needed.

Q: How much premium do you cede to reinsurers?

A: It’s about 15% of our gross written premium. It will vary from year to year but that’s the core part.

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

A: We don’t use cat bonds at the moment and I think, fundamentally, we are too small as a syndicate. We don’t really have the volume that warrants that sort of cover. Will we look at it in the future? Who knows.

Q: What do you most look for in reinsurers?

A: Primarily fi nancial security. We don’t want reinsurers that are unable to pay claims.

But we also look for long-term relationships. We want the reinsurers to have good knowledge of us as a syndicate and of our business. And importantly, we want to work closely with them throughout the year, not just when it comes to the renewal season.

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

A: One measure is against capital and combined operating ratio. We would expect to see an improvement between gross and net results. Success is also judged on whether reinsurers are

responding when we have claims, and whether claims are being paid quickly and effi ciently.

Q: Describe to us your average day in the offi ce.

A: It depends on the time of year. Since I joined in September, the focus has been on renewals. Almost all our programmes, except one, renew on 1 January. We concentrated on data collection, information gathering, meetings with reinsurers and reinsurance brokers to achieve completion and contract certainty before the January deadline.

Going into 2011, the focus is on overhauling the entire reinsurance process and strategy. Because there hasn’t been a reinsurance manager up until this point, there isn’t as clear a strategy as we probably need.

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

A: Willis chief executive Joe Plumeri. I joined Willis nine years ago and Joe had been there about a year. The company at the time was in diffi culties. KKR came in and bailed it out, but despite its fi nancial support, that was never really going to be enough. Joe really turned the company around. Without him, Willis would not be where it is today. He’s really put it on the map.

Q: What do you do in your spare time?

A: I enjoy the outdoor life: horse riding, golf and walking my dog. GR

Q: What do you look for in reinsurers?

A: We look for long-term relationships. We want

reinsurers to have a good knowledge of us

FIND OUT MORE ONLINE:MITSUI HIRES NEW REINSURANCE MANAGER

To read this article and for more on Mitsui Sumitomo, see globalreinsurance.com, or goo.gl/ye1F8

GR_24-25 Cedants QA.indd 25 22/02/2011 09:36

DATE Monday 14 March to Tuesday 15 March 2011

PLACE Doha, Qatar,

VENUESharq Village & Spa

HOSTED BY

SPONSORED BY

Join us at our next reinsurance rendezvous in Doha and discover the perfect place to ‘do business’

Abu Dhabi National Takaful Co.ACR Re TakafulAdvent Underwriting LimitedAIGAlpha Lloyds Insurance Brokers LLCAlkhaleej Takaful Insurance and Reinsurance CompanyAl-Koot Insurance and Reinsurance Co.American Appraisal (UK) LtdAmTrust Management Services LtdAOICAon Benfi eld ReAon Qatar L.L.C.AONBenfi eldApex InsuranceArab Loss AdjusterArabia Insurance Co. – QatarArgenta Syndicate Management LimitedARIG Asia Reinsurance Brokers Pte LtdAspen ReAssicurazioni Generali S.p.AAXA [Insurance] Gulf, QFC BranchBerkshire Hathaway Group Reinsurance Division InternationalBesso Re LimitedBharti Axa General Insurance Co LtdBupa InternationalCapital Insurance ServicesCarroll London MarketsCharles Taylor Consulting plcChedid & Associates Qatar LLCChedid Corporate Solutions, LLP (UK)

CIICitigate Dewe RogersonClyde and Co.Commercial & General S.A.L.Commercial BankConsolidated Contractors Company (CCC)Crescent Global Insurance ServicesD O T Abu DhabiDoha Insurance Co. (Q.S.C.)Dr. Schanz, Alms & Company AGEcho ReEndurance Speciality Insurance LimitedEuler Hermes Credit InsuranceFair Insurance & Reinsurance BrokersFlagstone Underwriters Middle East Ltd.FWU InternationalGen ReGhazal Insurance Co.Global Re GroupGlobal ReinsuranceGlobeMed Ltd – Kuwait and GlobeMed Qatar LLC Gulf ReGuy Carpenter & Co LtdHannover ReTakafulHolman Fenwick WillanIAT ReInsurance CommissionInsurance Company Aldagi BCIInsurance Corporation of AfghanistanInsure Plus (Subsidiary of UDC)International Insurance ConsultancyInternational Insurance Society

JLTK.M.Dastur Reinsurance Brokers Private LimitedKaneKapital Re, CJSCKPMGLabuan ReinsuranceLancashire Insurance GroupLapal Insurers Brokers (A Division of Lapal Global Services Ltd)Libano-Suisse SALLibano-Suisse Sal-Insurance CompanyLiberty Mutual Insurance Europe LtdLibya Insurance CompanyLifecare International – Bupa Plan Adviser for the UAELloyd’s of LondonLondon Marine Insurance Services LimitedLonsdale Partners IncMalaysian Re (Dubai) Ltd.ManCapitaMarshMarsh Middle East and South AfricaMarsh Qatar LLCMedNet Bahrain W.L.LMiddleEast Insurance ReviewMilli ReMNK Re Ltd.Moving to Clyde & Co.Munich ReNexus Financial Services WLLNorthwestern University in QatarOdysseyRe

Oman Insurance CompanyOrientPartner RePricewaterhouseCoopersProfi le ReProjacs International QatarProtection Insurance ServicesQ Re LLC Qatar Bima International LLCQatar Broker InternationalQatar Chamber of Commerce & IndustryQatar Financial Business AcademyQatar Financial Centre AuthorityQatar Financial Centre Regulatory AuthorityQatar FoundationQatar Gas RiskQatar General Insurance & Reinsurance Co.Qatar Insurance GroupQatar Insurance Company GroupQatar National Food Security ProgrammeQatarlystQBE Insurance Europe Limited (Dubai Branch)QIC International LLCQICI – State of QatarQ-Re LLCQtelR+V Versicherung AGReed GlobalRFIB Middle East Sarnia Marine Insurance Brokerage Co. Ltd.

Saudi Arabian Mining Co.Saudi Telecom CompanySCRSEIB Insurance & Reinsurance Company LLCStandard & Poor’sStandard Chartered BankSupreme Council of HealthTalent&Pro EurAsiaT’azurTech Reinsurance Group, Inc. / HemisphericThe Lyle GroupThe TIMMINT Group S.A.L., HoldingTokio Marine Middle East LimitedUnderwriting Risk Service (Middle East) Ltd.United Insurance CompanyUniversity of Vienna, School of Law (Juridicum)URSVictoria Insurance BrokersWatkins Syndicate Middle East LimitedWeqaya Takaful Insurance & Reinsurance CompanyWillis ReWillis LimitedWilmington TrustWorldwide Insurance Brokers LimitedXL InsuranceZaris S.A.L.Zurich InsuranceZurich Middle East

JUST SOME OF THE COMPANIES ATTENDING

APPLY FOR AN INVITATION TO ATTEND @ WWW.GLOBALREINSURANCE.COM/QATAR

If you would like more details about the event please contact | [email protected] If you are interested in exhibiting at the business bazaar please contact | [email protected]

QatarV_GR_Mar11DPS.indd 2 22/02/2011 09:53

PROGRAMME HIGHLIGHTS

DAY ONE | Monday 14 March

Economic fundamentals of the GCC region and Qatar’s increasing roleHis Excellency Yousef Hussain Kamal, Minister of Finance and Economy of the State of Qatar

Key strategic opportunities and challenges in global (re)insuranceGraham White, Deputy Chairman, Lloyd’s of London

Qatar’s credentials as a fi nancial services hub: economic environment; Qatar’s evolving FS sector; legal framework; lifestyle issues; domestic insurance potential; and untapped potential as a captive/reinsurance hub Abdulrahman Ahmed Al-Shaibi, Managing Director and Board Member of the QFCA

How the IIS is responding to the growing importance of emerging insurance markets such as the GCCMichael J. Morrissey, President and CEO, International Insurance Society

INTERNATIONAL REINSURERS PANEL DEBATE | The dynamics of the global reinsurance marketplacePANEL CHAIRMAN: Dr. Kai-Uwe Schanz, Chairman & Principal Partner, Dr Schanz Alms & CompanyPANELISTS: Hans Joachim Guenther, Chief Underwriting Offi cer Europe & Asia, Endurance Juergen Gerhardt, CEO, Echo Re Manfred W. Seitz, MD Berkshire Hathaway Group Reinsurance Division International Salvatore Orlando, Head of Southern Europe, MENA, Africa & Latin America, Partner Re CEO PANEL DEBATE | How do global trends impact on GCC insurance and reinsurance markets?PANEL CHAIRMAN: Charles Cantlay, Chairman, Aon Benfi eld RePANELISTS: Andreas Pollman, Client Management Executive – Divisional Unit MENA, Munich Re Bruno Bertucci, General Manager & SEO, Generali Middle East Regional Offi ce Gail Norstrum, CEO, Gulf Re Ian Sangster, Acting CEO, Q-Re Saad Mered, CEO of the General Insurance business in the Middle East & Africa, Zurich QATAR ‘CASE STUDY’ CLINICS

TALENT & LIFESTYLE ISSUES | Recruiting, training and retaining the best and living in QatarCO LEADERS: Mark Greenwood, Regional Director – MENA Region, Chartered Insurance Institute and Susan Lansing, Corporate Development Director, Qatar Finance and Business Academy

TAKAFUL | Understanding Islamic insuranceLEADER: Osama Abdeen, CEO, Abu Dhabi National Takaful Company

INSURANCE REGULATION IN THE GCC | How local and foreign players can copeLEADER: Michael Ryan, Managing Director responsible for legal and policy matters and Deputy Chief Executive, Qatar Financial Centre Regulatory Authority

NETWORKING• Business bazaar• Complimentary afternoon social event• Complimentary cocktail reception and gala dinner

PROGRAMME HIGHLIGHTS

DAY TWO | Tuesday 15 March

RISK PANEL DEBATE | Risk management responses to corporate needs PANEL CHAIRMAN: Stephen May, CEO, Kane PANELISTS: James Portelli, Executive Vice President – Head of Strategy & Planning, Oman Insurance Lee Scargall, Director of ERM, Qtel International Rahat Latif, Enterprise Risk Management Lead – Corporate Planning, Qatar Gas Risk Ronny Vellekoop, Senior Executive Offi cer and Offi ce Manager, Marsh An economic outlook: The GCC in the global economy Dr Gerard Lyons, Chief Economist and Head of Global Research, Standard Chartered

Regulatory prospects in the GCC and QatarPhillip Thorpe, Chairman and CEO, Qatar Financial Centre Regulatory Authority

CLOSING PANEL DEBATE | The ingredients of a dynamic (re)insurance marketplace – how can we make it happen? PANEL CHAIRMAN: Yassir Albaharna, Chief Executive Offi cer, Arig PANELISTS: Heather Goodhew, MD – Head of Asia and Middle East – Head of Property Facultative, Aspen Re James Sutherland, Chief Executive Offi cer, Qatarlyst Mark Randall, Director, RFIB Middle East Peter Koener, Chief Operating Offi cer, ACR ReTakaful Wayne Jones, Partner, Clyde & Co.

NETWORKING• Business bazaar• MultaQa Qatar Annual Golf Tournament• Complimentary Doha excursion

APPLY FOR AN INVITATION TO ATTEND @ WWW.GLOBALREINSURANCE.COM/QATAR

QatarV_GR_Mar11DPS.indd 3 23/02/2011 09:35


Lines & Risks

These climthey are

a-changinThe snow that caused disruption to sports fans travelling to the Superbowl in Texas this February seemed to put an exclamation mark on a second successive winter of extreme cold and unexpected weather on both sides of the Atlantic.

As well as being deadly and disruptive, the extreme weather has resulted in a big bill for the insurance industry for two years running. This has prompted many to ask whether the cold snaps are an anomaly or a persistent phenomenon triggered by climate change.

Either side of Christmas, severe winter storms, signifi cant amounts of snowfall and gusty winds caused property damage, power shortages and travel chaos down the east coast of north America.

The storms were responsible for collapsed roofs, trees and power lines. Travel chaos followed, with roads beset by vehicle accidents and the cancellation of thousands of fl ights across the USA.

Following a series of costly winter weather losses in Europe and North America, Tim Evershed looks at whether recent cold snaps are an anomaly or part of a trend

GR_28-30 Lines.indd 28 22/02/2011 09:37

>


Lines & Risks

mes, e ng

And this year, a winter storm – one of the largest since the 1950s – affected nearly 100 million people across 30 states. The weather fi rst hit Canada, north-east USA and the Midwest, then travelled further south prompting freeze warnings for eastern Texas and most of Louisiana, with fears that crops and other sensitive vegetation could be killed.

It was a case of déjà vu for some areas, as the US winter of 2009-10 saw unprecedented snowfall along the east coast Interstate 95 corridor, with one-in-100 year snow events occurring multiple times during the same season.

Meanwhile, the UK’s second severe winter in succession arrived ahead of schedule, with the country suffering its coldest December since records began 100 years ago. With heavy snow and overnight temperatures regularly dropping to between 14°F and –4°F, large areas of the transport network ground to a halt.

This followed heavy snow earlier in the year, when the UK was hit by its coldest winter since 1978. In Europe, winter storms are forecast to become less frequent, but more intense.

Super stormsIn the US, the 1993 ‘superstorm’ brought record-breaking snowfall, frost, ice, and winds to the eastern third of the country, with total insured losses estimated at $3bn. A 1998 ice storm in New England and southern Canada was responsible for more than $1bn in insured loss.

The winter storms in the USA and Canada in the past two years also caused signifi cant property damage, with an estimated $2bn in average insured loss each year in the USA, and more than $250m in Canada.

Aon Benfi eld Impact Forecasting meteorologist Steve Bowen says it is too early to put a number on the most recent Midwest storm, but adds: “It will probably be in terms of hundreds of millions rather than billions – which is still rare for winter storms.”

AIR Worldwide estimates that insured losses to residential, commercial and industrial properties from that winter storm could reach $1.4bn. “Business interruption losses are going to take precedence over property claims,” Bowen predicts.

Meanwhile, UK insurers were hit with £1.43bn worth of claims in December. The Association of British Insurers (ABI) says the industry received 467,000 claims during the period, affecting vehicles, homes and businesses.

Of these, 190,000 claims related to property damage at a cost of £900m, with 103,000 stemming from burst pipe damage. A further 278,000 were linked to vehicle damage, costing £530m. Many

of these were for low-speed collisions as motorists struggled on icy roads.

The ABI’s director of general insurance and health, Nick Starling, says: “The big freeze highlighted that when bad weather strikes, there is no substitute for insurance. During a similar bout of freezing temperatures the previous winter, insurers paid out £700m in weather-related claim.

“Despite the past couple of winters being costly, insurers will continue to do all they can to ensure that the market remains as competitive as possible for consumers.”

UK insurers have already begun warning that the events will affect earnings. In January, RSA warned that

its full-year profi ts were likely to miss analyst forecasts after it suffered a spike in claims caused by severe winter weather across its global businesses.

The group said operating profi ts were likely to fall by between £600m and £630m because there were £142m more weather-related claims in November and December than usual.

Causes and effectSo, what has caused two such extreme winters to occur one after the other?

“These things do happen,” says Aon Benfi eld’s Bowen. “This year has been a bit of an anomaly in the USA because

‘The Midwest storm will be the greatest winter storm

we have seen recently’Steve Bowen, Aon Benfi eld

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GR_28-30 Lines.indd 29 22/02/2011 09:37


Lines & Risks

FIND OUT MORE ONLINE:CYCLONE COULD COST AUSTRALIA $5BN – EQECAT

To read this article and for more on the Australia losses, see globalreinsurance.com or goo.gl/9NYvE

we are in a La Niña phase (when the surface temperature across parts of the Pacifi c drops by 35–40°F). Typically, we would see less frequent coastal storms and less precipitation in the Midwest.

“This has been a big news item because of the frequency and severity of adverse weather,” Bowen says.

“It is extremely challenging to predict a trend based on just a couple of seasons’ activity,” says AIR Worldwide assistant vice-president and director of atmospheric science Peter Dailey. “We are, of course, interested in understanding how climate has infl uenced those seasons, but it should be studied within the context of the full historical record.”

“The past couple of winter seasons do not indicate a trend, because from a statistical point of view, just two years is insuffi cient to draw such a conclusion. The fact is, warm temperature records are being broken more often than cold temperature records worldwide.”

“Models are fundamentally data-dependent and thus the more data that’s available, the better models are able to make estimates of future risk predictions.”

Indeed, in the short term, the fact that one such cold winter has followed another could be down to a phenomenon known as “autocorrelation”.

“We found that in the early 1990s if you had one warmer, wetter winter, another tended to follow,” says Risk Management Solutions chief research offi cer Robert Muir-Wood.

To the extremeEven if it is too early to talk about trends, the extreme cold does fi t into wider climate and weather patterns that brought fl oods to Australia this year and Pakistan last year, as well as a heat wave to Russia. According to the National Oceanic and Atmospheric Administration, 2010 and 2005 were the warmest years on record globally.

“We can’t exactly say what has triggered it,” says senior climate change adviser in the risk management unit of Swiss Re, Andreas Spiegel. “We have seen quite a few freak events around the world in the past few years. It fi ts with the predictions made by the Intergovernmental Panel on Climate Change.

“We are seeing a warming effect globally, but in some places it could mean more cold. We could see places further north such as the UK and Scandinavia getting colder winters and warmer summers.”

“In general we expected winters to be warmer, wetter and windier, so this was

a bit of a surprise,” adds Muir-Wood. “In the long run, this is a bit unusual. In the UK you can expect more snow, but not necessarily more cold, because the seas around the UK are getting warmer.”

He explains that this is called “lake-effect snow”. “In Asia, they have had more snow as the sea temperatures have gotten warmer,” he says. “In New York state, the city of Buffalo is close to two of the Great Lakes and it gets huge quantities of snow early in the winter when the lake water is warmer, but as the weather gets colder and the lakes freeze over, the snow stops.”

However, this only explains some localised increase in snow. With global temperatures changing, storms, fl oods and other freak weather conditions will likely become more severe and more frequent, too.

“While most people think that climate change means everything is warming up, some studies also indicate that extremes are becoming more common – more frequent extremes in temperature and in precipitation,” says Dailey. “More extreme temperatures

‘When bad weatherstrikes, there is no

substitute for insurance’ Nick Starling, Association of British Insurers

will lead to more extreme weather conditions. A series of very cold, wet winters is by no means at odds with climate science.”

Cold comfortAlthough winter weather is unpredictable and costly for the insurance industry, action can be taken to keep nasty surprises, and thus losses, to a minimum.

In order to prevent damage from these extreme conditions, Dailey says it is important for weather forecasters to understand the precursors of a severe winter several months in advance. “These will include a combination of climate-related and weather-related warning signs,” he says.

Spiegel at Swiss Re says: “Up to 60% of losses could be avoided if adaptation measures were taken.”

The United Nations estimates that, by 2030, the world should be spending an additional $36bn-$135bn each year on adaptation measures, include zoning, tougher building codes and building smarter, to address the effects of climate change.

As more lives and properties are put at risk, these measures are rapidly becoming a priority. GR

Workers remove snow from inside the Metrodome in Minneapolis on 14 December 2010.

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Claims

The great and the good of the US insurance industry were all enjoying daiquiris and cosmopolitans in law fi rm Chaffetz Lindsey’s offi ces in New York. But it was a Brit who stood out.

By the end of the evening, the Americans knew all about Paul Moss. The head of claims at Montpelier Re’s Lloyd’s of London syndicate was in town late last year to strike a deal that he believes is the fi rst step in helping to transform dispute resolution practices between insurers and reinsurers around the world.

The Reinsurance Mediation Institute, better known as ReMedi, was set up in the USA in November 2009 to certify mediators, develop guidelines and create training courses to promote a more peaceful way of resolving disputes. Mediation has grown increasingly popular on both sides of the pond in recent years, but in ReMedi Moss believed he had spied a unique opportunity to sign up a powerful transatlantic partner for Inrem, a similar organisation that he has just set up in the UK.

This alliance means that Inrem and ReMedi can provide expert lawyers and practitioners, such as claims specialists, to help mediate disputes between insurers and reinsurers when the opposing parties are from UK and US jurisdictions. This will help the parties understand the other’s viewpoint, hopefully allowing them to fi nd a suitable compromise without ending up in the courts or dragging out matters through arbitration.

“It’s a mix-and-match situation,” Moss explains. “Our model offers mediators to work in tandem – perhaps with a lawyer and a market practitioner from two different markets. We felt a more global approach is needed to meet the international nature of the reinsurance business. There is a huge sea-change coming.”

Moss is also working with people looking to replicate the Inrem model by setting up what he calls ‘pods’ across Europe, particularly in Switzerland, Germany, France and Spain. These organisations will then affi liate with Inrem. This is certainly a novel way of pushing mediation as the dominant method of resolving confl ict. But the method is not without confl icts of its own, and not all of the industry shares Moss’s optimism.

The American wayThe folks behind ReMedi talk a good game. Board member Andrew Walsh hints that arbitration, the confi dential and non-binding process that sees the reinsurer and insurer put their cases to an independent third party, has become redundant.

“Arbitration, at least in the USA, is more and more litigation-like,” he argues. “Parties have begun treating it like litigation, with more depositions, so the cost has been going up at an alarming rate.”

In essence, arbitration has just become a very expensive trial, as the parties end up paying for the costs of the neutral party that decides the case. In litigation, the judge is at least free.

Walsh points to a dispute that ReMedi got involved with in 2010 that had been stuck in arbitration for several years as both sides entrenched their positions. “They agreed to go to mediation and in less than half a day both sides agreed [a compromise] that saved them at least $100,000 each in legal fees.”

A founding member of ReMedi and regular speaker at reinsurance forums, Walsh pushed for the Inrem alliance as “in the reinsurance market, so much work

is done internationally, we needed to bridge the continental divide”.

ReMedi chairman Katherine Billingham adds that she wanted “to provide education” that would help the market to understand that mediation was a cheaper, quicker alternative to arbitration.

The group’s website hints at just how zealously Billingham and Walsh take this mission, quoting Abraham Lincoln: “As a peacemaker, the lawyer has a superior opportunity of being a good man.”

Moss had spotted a similar trend in the UK and founded Inrem with reinsurance lawyer heavyweights Colin Croly, a former partner at Barlow Lyde

Meet in the middleA transatlantic alliance is setting out to make mediation the dominant method of cross-border dispute resolution. But is the process always the best way to stop confl icts ending up in the courts? Mark Leftly reports

GR_32-33 Claims.indd 32 22/02/2011 09:38


Claims

options. When one reinsurance fi gure hears about Inrem, he sighs: “Does the world need another mediation organisation? I’m slightly cynical. We have quite a few already.”

Law fi rm Kennedys partner David Wilkinson certainly is cynical.

He says that since mediation drifted across the Atlantic as a concept around 15 years ago, the industry has grown to the extent that “there are more mediators than disputes to be mediated – and I mean that quite seriously”.

Though there is nothing wrong with the concept, Wilkinson argues, mediation is failing in practice. In his fi rst mediation case, there were just fi ve people: two opponents, their lawyers and the mediator. Now there would be a deputy mediator, barristers, as well as solicitors and expert witnesses.

“What is happening in practice is that mediations begin to resemble mini-trials,” Wilkinson says. “Mediators want bundles of documents and you can see from this what is happening to the cost of mediation.”

This argument strikes at two of Inrem’s and ReMedi’s central contentions: that mediation saves time and money.

However, such arguments will not deter the groups. Inrem launched its website in mid-February, and will now work on offering its roster of experts to insurers and reinsurers across the country and then the world.

And if the practitioners at Inrem are that good at their jobs, they will soon convince the doubters of their way of thinking – perhaps with a little compromise. GR

& Gilbert, and Peter Schwartz, legal consultant at Holman Fenwick Willan.

A not-for-profi t organisation, Inrem is described by Moss as “a very sophisticated directory” where reinsurers and insurers can fi nd some of the UK’s best mediators. Their skills are vital as the European Mediation Directive is trying to stop cross-border disputes ending up in the courts. It threatens to impose cost sanctions on parties that unreasonably refuse to pursue alternative, softer dispute resolution methods to civil litigation.

Inrem and ReMedi try to distinguish themselves from rival mediation enterprises by ensuring the people on the books come from a reinsurance or insurance background.

“A lot of mediations fail because they are conducted by people outside the industry,” Moss says. “They may have the skills but not the technical understanding of the issues in dispute. Mediation inevitably involves compromise – and if the mediator doesn’t understand industry customs and practices, it is going to be very diffi cult for them to move someone from an entrenched position.”

The case for the defenceEdwards Angell Palmer & Dodge insurance and reinsurance partner

Richard Hopley agrees that mediation saves money as large disputes can potentially

cost millions of pounds in legal fees.He believes that mediation is best

suited to situations where both parties realise that the issues are not clear-cut.

For example, a complicated reinsurance contract might have fi ve

different ways to apply a policy that could result in several different outcomes. Neither

party would be clear exactly how much the reinsurer had to pay out, so a mediator could

help the parties work their way through the information.Hopley points out that mediation has a

benefi t beyond cost: “Commercial relationships are important and litigation doesn’t help. Arbitration is perhaps preferable to litigation

because it is confi dential and may do less harm to a commercial relationship, but that is still an

adversarial proceeding.”Law fi rm Addleshaw Goddard’s head of

litigation Richard Leedham, a specialist in reinsurance, says that commercial sensitivities have increased as a result of consolidation in the reinsurance market. “Twenty years ago, large insurers would lay off risk to 100 reinsurers, but now it will be only seven or eight, so they don’t fall out so much,” he argues.

With so few reinsurers, it’s not worth aggravating them over contract semantics. Instead, Leedham says, insurers have expanded the number of lawyers in-house to ensure that situations are resolved before they reach dispute stage.

Despite acknowledging the relevance of commercial sensitivities, Leedham actually disagrees with Hopley’s conclusion. He believes that confi dential arbitration remains the most popular form of dispute resolution, because neither the insurer nor reinsurer will want counterparties to have potentially precedent-setting information.

“Take a Hurricane Katrina,” Leedham suggests. “The insurer and reinsurer would like to keep the dispute under wraps so that the result does not bind them against other parties. It takes the risk out of a relevant, relatively high-profi le loss or issue being repeated.”

The case for courtAlthough there is broad consensus that mediation has grown in popularity in recent years, not everyone believes that this is because the reinsurance market has suddenly become a more conciliatory place.

Head of the contentious insurance and reinsurance practice at Norton Rose, Michael Mendelowitz, says that plenty of parties still ask: “Why should I go to mediation? Why should I compromise?” He believes that, instead, they should look at mediation as the possibility for a novel solution to their dispute, such as drawing up a new contract.

Although Mendelowitz agrees that it’s “probably true” that mediation has grown in success since around 2005, that is simply because, as a form of dispute resolution, it has matured: “People know how to use mediation properly now.”

Indeed, this suggests that the balance between mediation, arbitration and litigation is already reasonable, giving aggrieved parties plenty of

FIND OUT MORE ONLINE:PEACETIME SETTLEMENTSTo read this feature, and

for more on sector disputes, see globalreinsurance.com or goo.gl/sf0sl

‘A more global approach to mediation is

needed to meet the international nature of the reinsurance business’ Paul Moss, Inrem

GR_32-33 Claims.indd 33 22/02/2011 09:38

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Country Focus

Insurers in the land of the rising sun are taking a while to recover from the fi nancial crisis, but Japan remains the fourth largest non-life insurance market in

the world, with opportunities for those who dare. Helen Yates reports

for dawnJAPANCOUNTRY FOCUSWaiting

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Country Focus

As in other developed insurance markets, Japanese (re)insurers are struggling to bounce back while investment returns remain low and prices continue to soften.

And there is widespread anticipation of further premium rate softening as Japan readies itself for the all-important 1 April renewals. Dominated by three main insurance groups – MS&AD Insurance Group, Tokio Marine Group and NKSJ Group – following a recent spate of consolidation, as well as local reinsurer Toa Re, the market is yet to see any real improvement in investment returns since the fi nancial crisis peaked in 2008.

At the same time, low catastrophe losses, excess capital and competition have exerted downward pressure on (re)insurance pricing. “Japanese buyers have looked at the 1 January renewals and seen falling rates for catastrophe reinsurance, and they will be aiming for reductions themselves,” says Guy Carpenter managing director Edward Fenton. “It’s a sensitive issue for everyone, because reinsurers are hoping to resist and the buyers are hoping to get some reduction – it’s the same in any market.”

“There’s still a soft market trend for all the same reasons we had at 1/1,” he continues. “There’s surplus capital in the market and, on top of that, in Japan the loss history in recent years has been very good, so all those factors push the pricing downwards. The Japanese market is very similar to the international market generally – there was a slight fi rming of prices after the fi nancial crisis and Japan couldn’t escape that fi rming, but since then it’s gone back to a soft market trend.”

Rates continue to be pitched at levels that are expected to make only a modest profi t for insurers, with low volatility in pricing. However, given a favourable claims experience in recent years and the opportunity to diversify portfolios geographically for international (re)insurers, it remains a popular market with plenty of competition.

“Generally Japan is an ex-tariff market and the market conditions are dominated by a small number of domestic players,” says Lloyd’s Japan president and chief operating offi cer Iain Ferguson. “Generally it’s profi table. I wouldn’t like to tempt fate by saying that moral hazard on the claims side is less, but the Japanese people are inherently a very honest bunch.”

While the sun is shining …Despite being a peak zone for international reinsurers, the Japanese market has escaped sizable losses in

recent years. It was largely unaffected by Typhoon Melor in October 2009, the fi rst typhoon to make landfall in Japan since 2007, with total claims amounting to ¥50bn ($600m).

In fact, the catastrophe experience has been relatively quiet since2004, when Japan was hit by arecord-breaking 10 typhoons, with insured losses totalling $6bn. The largest loss was from Typhoon Songda, at $3.6bn. The country was also rocked by a major earthquake in Niigata in 2004, with an insured loss of $600m.

The 1990s, in contrast, was a period of intense catastrophe activity, which included the Kobe earthquake in 1995 and the Mireille (1991) and Bart (1999) typhoons. These caused insured losses of $3.5bn, $8.9bn and $5.2bn respectively.

Despite the low level of recent catastrophes in recent years, demand for catastrophe reinsurance remains high as insured values continue to grow in some of Japan’s most exposed cities. Earthquake and windstorm continue to dominate as the two main

Tokyo: a peak zone for reinsurance protection

‘I wouldn’t like to tempt fate by saying that moral

hazard on the claims side is less, but the Japanese

people are inherently a very honest bunch’

Iain Ferguson, Lloyd’s Japan

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Country Focus

perils, but fl ood, volcanic eruption, tsunami and winter storms are also major hazards. For most reinsurers, a Tokyo earthquake is one of the major loss scenarios.

Lloyd’s Realistic DisasterScenarios (RDS) for 2011 looked at the likely consequences if an event like the Great Kanto earthquake of 1923 were to occur today. Then, 142,800 people died; today, such an event is unlikely to cause more than 2,000 deaths, thanks to better building regulations, but it would still cost insurers and reinsurers an estimated ¥5 trillion in property damage.

All other lines of business would be affected by such a major catastrophes, with signifi cant losses for marine, personal accident, liability and business interruption.

“Japan is a big, well-developed country that has a large insurance requirement and signifi cant catastrophe exposures, so the insurance companies in Japan buy a considerable amount of reinsurance protection,” Fenton

says. “Because of all the demand for cover, this is a peak zone for reinsurers. Values are most concentrated in the Kanto area, which is basically Tokyo and its surroundings, generating a large insurance requirement.”

Secondary perils following earthquakes also have great loss potential – particularly for fi res following earthquakes and tsunamis. According to Risk Management Solutions (RMS) in a report on catastrophe mortality in Japan, the growth of coastal populations in Japan has signifi cantly increased the country’s exposure to tsunamis. Over 9.6 million people live within 2km of the main coastline, which accounts for up to 77% of the entire population.

Despite continued investment in coastal defences and warning systems, a tsunami generated by a large magnitude earthquake on the Nankai Trough that produces a 10-20 metre wave run-up along parts of the coastlines of Shikoku and Kyushu, and 5 metre wave run-up along the coastline of southern Honshu, could cause signifi cant damage. This scenario could cause 37,000 deaths.

Windstorm is another major peril in Japan. According to the Lloyd’s RDS an event based on the Isewan (Vera) typhoon of 1959 is likely to result in an industry property loss of ¥1 trillion if it happened today. Other classes likely to be severely affected include marine, specie and fi ne art, personal accident, aviation and liability.

Unsurprisingly, given these catastrophe exposures, an increasing amount of risk has been transferred to the capital markets in recent years via cat bonds and other insurance-linked securities.

JapanCOUNTRY FOCUS

The impact of natural disasters may have been relatively small in recent years, but the risks are still very real, so demand for catastrophe insurance in Japan has remained high. The sector is weak after the fi nancial crisis and barriers to entry for foreign players persist, but those who have entered are performing well.

Population: 127 millionGDP: $4,338bn (global ranking #4)FDI: $161bn

Main exports: Transport equipment, motor vehicles, semiconductors, electrical machinery, chemicalsTotal non-life insurance premiums: $100bn

One of the most recent transactions include last December’s $210m Montana Re issuance, structured by GC Securities on behalf of Flagstone Re, to protect against US hurricane, US earthquake, Europe windstorm, Japan typhoon, Japan earthquake risks and, for the fi rst time, Cayman windstorm.

The bond uses the RMS Paradex index as a trigger. It follows SCOR’s second issuance under Atlas VI Capital of €60m ($60.7m), to protect against European windstorms and Japanese earthquakes.

Shaky returnJapan’s non-life market size has settled at around $100bn over the past nine years, having peaked at $106bn in 2008. This makes it the fourth largest in the world, accounting for 5.78% of total global premiums. Only the USA, the UK and Germany are bigger. Of the 50 insurers in the market, around 30 are domestic carriers while 20 are foreign direct insurers.

While non-life insurers returned to profi t in 2009 following the fi nancial crisis, underwriting results remained “lacklustre”, writes rating agency Standard & Poor’s in its June 2010 report on the market. The top nine rated non-life companies posted a net profi t of ¥197.5bn, up from the previous year’s loss of ¥65.4bn.

“As the negative effects of the global fi nancial market turmoil eased, devaluation losses on marketable securities narrowed and helped a total of nine companies swing back into the black,” S&P says. “The fi scal 2009 results of the nine top non-life insurers are mostly within our assumptions and, therefore, there is no direct impact

GR_35-38 Japan.indd 37 22/02/2011 15:00


Country Focus

FIND OUT MORE ONLINE:ASIA PERILS: AFTERSHOCK ALERTTo read this feature, and for

more of our special report on Asia, see globalreinsurance.com or goo.gl/HqGiz

on the fi nancial strength ratings and long-term counterparty credit ratings assigned to them.”

Strength in numbersJapan’s mature insurance market has been the focus of intense consolidation over the past two years, with the three main groups now accounting for 84% of the market, according to 2010 fi gures (see chart, right). With premiums steadily shrinking across all major lines of business over the past decade, there have been few opportunities for growth. This is unlikely to change any time soon, with a declining and aging population contributing to the steady reduction in premiums.

Some insurers have been forced to merge. In April 2010, Mitsui Sumitomo, Aioi and Nissay Dowa joined to form MS&AD Insurance Group. Within this grouping, Aioi and Nissay Dowa then merged on 1 October 2010 to form Aioi Nissay Dowa.

The emergence of the three mega groups – MS&AD, NKSJ and Tokio Marine – heralds a new era of fi erce competition, according to S&P, as direct marketing insurers increase their participation in the sector. Following its creation in 2010 MS&AD became the biggest insurance group in Japan, deposing previous market leader Tokio Marine.

As the only domestically incorporated reinsurance company operating in both

JAPANCOUNTRY FOCUSTyphoon Malou caused extensive damage in Tokyo last September

local and international markets, Toa Re continues to dominate the reinsurance scene. The A+ rated reinsurer wrote total net premiums of ¥143bn during the year ending 31 March 2010.

Many of the major international reinsurers also have a signifi cant presence in the market, though the bigger or diffi cult-to-place risks are ceded to the international markets such as London, Bermuda and Europe.

Brand loyaltyDespite two decades of deregulation, barriers to entry to the market for foreign (re)insurers remain. Relationships continue to be important in a market where brand recognition is vital, and there is strong customer loyalty to the large traditional Japanese carriers.

However, many foreign companies are continuing to increase their market share – Lloyd’s premiums grew by 27% from $537m in 2008 to $680m in 2009 – with a strategy based on fi nding alternative distribution channels and challenging brand misperceptions that Lloyd’s is a market of last resort only for specialist lines of business.

Broker distribution in the insurance market remains in its infancy, with the majority of business placed via agents and direct distribution. But it holds a great deal of potential, particularly if the experience of reinsurance intermediaries isanything to go by.

“Reinsurance brokers are active in Japan and pretty well valued by Japanese buyers, who make extensive use of brokers not only to place catastrophe reinsurance but also many other lines of business,” Fenton says. “Guy Carpenter’s relationships with some companies are more than 100 years old.” Long-term relationships clearly count for a lot in Japan, but there are plenty of opportunities to form new ones. GR

Japanese insurance market 2010

‘Buyers have seen falling rates for cat reinsurance

and will be aiming for reductions themselves’

Edward Fenton, Guy Carpenter

Other16%

MS&AD Insurance

Group32%

NKSJ Group

25%

Tokio Marine Group

27%SOURCE: LLOYD’S

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Washington, DC New York California Anchorage London Brussels

GR_Ad_Page_ID.indd 1 20/08/2010 11:54


Rewind

Our man in the know is enjoying his moment in the limelight – on the Lloyd’s third fl oor, that is

– although price comparison sites are certainly working on that one.

A baffl ing fl ight of fancyIt’s no secret that I like the odd drink or two. Let’s face it, I’m down the pub most lunchtimes oiling the cogs of commerce, but I’m always in control. That said, something I saw in Lloyd’s the other day

made me ask if I’d fi nally had one too many. On venturing up to the new third fl oor, I could

have sworn that the escalator lights up there were green, rather than the usual yellow all the other fl oors are known for.

However, on questioning those in the know at Lloyd’s about this, I was told in no uncertain terms that the lights on all fl oors were the same colour. Now I’m really confused …

Game for anything (except underwriting)Regular readers of my words of wisdom will no doubt recall my pleasure at seeing iPads spreading like wildfi re in the market. A number of big hitters have them on their desks, including Miller’s Graham Clarke and Canopius’s

Michael Watson. However, I hear some are not convinced that they are all that good for underwriting – partly because it’s tough to compare two documents side by

side. My response to this? Why are you trying to use them for work?

Surely they’re designed for playing daft games on. That said, I’ve yet to spot Messrs Clarke and Watson’s names on the online gaming leaderboards.

Copious plans of CanopiusSpeaking of Canopius, its name has been linked to yet another potential takeover at Lloyd’s. This time it’s Jubilee Group, and Michael Watson is understood to be squaring off against Pat Ryan’s Ryan Specialty Group to take control of the fi rm. It’s still unclear whether the Omega bid will come off, so I’m guessing Michael is keeping his options open. GR

MontyOne good Hearn deserves anotherIt’s all change over at Willis Re. Or is it? Peter Hearn has stepped up to become chairman, leaving the way open for Steve, erm, Hearn. The powers-that-be at Willis assure me that they are not related, but I can’t help thinking this is going to cause some confusion. At least there’ll be less retooling needed for the brass nameplates, which has got to be good news in these tough times.

Don’t leave us this way, MatsonSpeaking of change, I note with some sadness that my old mate Peter Matson has hung up his underwriting pen over at Novae. With him going, the London market has lost one of its real characters. He’s done a fi ne job on fi xing up Novae, but I guess he felt that with those pesky open underwriting years now closed, it was ‘job done’ and he has decided to put his feet up for a while. That said, I don’t think he’s the kind to stay out of the market for long. He’ll get bored sitting at home, I reckon. I hear he has a couple of ideas on the go, but he is playing his cards very close to his chest. Come back, Peter, your market needs you.

A cash-in-Hands jobThose of you with memories that go back further than the last renewals season will recall that Novae was once in the running to buy Chaucer, but backed off when it saw the mess its investment portfolio was in. Well, since Bob Stuchbery has done his spring cleaning, the stakes have clearly risen: who’d have thought that the likes of Guy Hands would be interested in our little market? Still, I suppose now the banks have taken one of his toys away – namely EMI – he needed something else to play with. Unlike music, at least you can’t get insurance for free on the internet

Who’d have thought Guy

Hands would be interested

in our little market?

GR_40 Monty.indd 40 22/02/2011 09:42

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