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Insight and Intelligence on the European and International (Re)insurance Markets

Rate softening in the European reinsurance market will come to an

end in January as the insurance sector responds to a $100bn third quarter cat bill.

However, sources expect that the market will be relatively stable at the key European renewal date, with single-digit rate increases paid by some cedants and others likely to renew their treaties on expiring terms.

“I think you have seen the last of rate reductions,” one underwriting executive said. “We have told our underwriters to decline anything with a reduction.”

A trio of reinsurance buying sources all accepted it was no longer realistic for them to secure a fresh round of rate reductions, although none expected to pay anything more than a token increase.

This picture represents the likeliest scenario for 1 January in Europe, but there is a high degree of uncertainty in the market around the ultimate outcome.

One senior broking source said it was impossible to divine the size of any uptick in non-US pricing at this stage.

“The market is really confused right now and it is going to take time to shake out,” the source said.

The market is closely surveying the parallels with 1 January 2006, when reinsurers came to terms with $85bn of losses from hurricanes Katrina, Rita and Wilma (KRW).

A Benfield report published after the

renewal pointed to a “muted” pricing reaction outside of the US, with rates flat to up 10 percent on European cat treaty.

But this represented a 10-15 point positive swing from the renewal 12 months prior, the report showed.

US pricing moved far more dramatically, with rates on loss-hit business doubling in some cases and loss-free treaties up 10-20 percent, while the mid-year renewals showed even more significant hardening. Cat pricing in the US the year before had been down by as much as 20 percent on loss-free business.

The figures suggest that the cat treaty market is partially but not fully siloed, creating scope for at least a partial pricing impact on European cedants.

Upward pressuresReinsurers will argue that European clients must pay back part of the loss because the low rates they receive depend upon the higher returns that have traditionally been made on US business.

“Someone has to pay for all of this,” a broking source said. “And it can’t just be the US that picks up the bill.”

However, the current state of the European reinsurance market is likely to be a more telling argument.

In strong contrast with 2005, when the industry was riding high on post-9/11 rates and benign casualty loss emergence, in today’s market pricing has been softening

for so long that reserve redundancies have largely been exhausted.

And, alongside the pending loss of this prop to earnings, reinsurers are dealing with paper-thin accident-year margins.

As far back as 2013 reinsurers were talking about European windstorm being written at rates that were below technical levels, and further ground has been given at each successive renewal, with pricing now down around a third since then.

Relatively light cat losses meant that other lines of business were still being subsidised by property treaty profits, but hurricanes Harvey, Irma and Maria (HIM) have dramatically ended that bailout.

Upward pressure will also be exerted by the knock-on effects of a hardening global retro market, with a capacity crunch from lost and trapped insurance-linked securities (ILS) capital set to push rates 25-50 percent higher.

Downward dragsThe HIM losses are sure to have some impact on the European renewals, but the post-Katrina rate movements – with US increases multiples of those seen on European business – suggest that any spill-over will be limited.

The case of reinsurers with European clients will also not be helped by the consistently profitable nature of the cat

HIM stops European soft market in its tracks

04 Lloyd's Brussels update

05 Bains to launch European treaty MGA

06 European legacy sales

08 Q3 cat loss analysis

13 Profile: Swiss Re's Frank Reichelt

17 The Big Question:

Market conditions21 Interview: UnipolRe's

Marc Sordoni23 Interview: Brian Young,

CEO, OdysseyRe

SUNDAY

22 OCTOBER 2017

MONDAY

23 OCTOBER 2017

INSIDE

BRINGING OPPORTUNITY TO RISKADAPTATION + OPPORTUNITY = GROWTH

BADEN-BADEN

Continued on page 4

Find out more at munichre.com/cyber

Let’s turn digital threats into client’s trust.

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10.9.17_Privacy_215,9x279,4_en.indd 1 10.10.17 15:58

COMMENT

03DAY 1: SUNDAY

Here’s how heavily HIM-whacked collateralised retro players hope

things will turn out:“People have been buying a lot more

of my retro the last couple of years. They like the fact that it’s responsive and they love the security that comes with collateralisation.

“In fact, they now rely on me as a large part of their capital stack. They have given me outsized losses, so I will put up prices significantly. They will have to wear the increases because they need me to maintain their position in the marketplace. We have built a good relationship the last few years. It’s only fair I get payback now that I need it.”

But here’s how smart reinsurance operators think:

“Yes, of course I’ve been buying more retro. This is because it has been really cheap. It has allowed me to manage the market downturn at little cost to myself.

“It’s helped my risk-adjusted returns no end and has enabled me to be there for my best cedants and maintain a meaningful gross presence on their programmes. It has helped keep me relevant and kept the brokers coming through the door, and let me continue to see more opportunities than I would if I had been shrinking my gross line.

“But this buying has been opportunistic, not strategic. If prices rise I’ll retain more for my own account. Hell, if prices rise by as

much as my retro partners want them to, I’ll become an opportunistic seller of retro, not a buyer.

“I’m a reinsurance trader and I calculate the best way of putting my capital to work against risk – then I go and do it. It’s simple mathematics.

“The last couple of years retro costs have been enhancing my prospective returns. If they start dragging on them I won’t buy retro any more – simple as that.

“My retro guy is also forgetting something. He’s underperformed and I’ve outperformed. He’s paid my losses. Who does he think investors want to back now?

“I’ve got the real customer relationships and I’ve got a record of outperformance. If I want to write more I can attract all the capital I want to on excellent terms. It could be debt, ILS, a sidecar, or even equity – or a combination of all four.

“Meanwhile he’s been capital-raising on the promise of much higher pricing. (He has to – all his capital is locked up in trust for my benefit).

“My capital position is such that I don’t

even have to charge any increases if I don’t want to. Of course, I will take whatever rate the market will allow me to take, I’m not stupid. But what I’m saying is I can afford to be as competitive as I need in order to get on the programmes of the best-run cedants.

“Some of these guys I have been chasing for years, and finally this year I’ll get a shot.

“The fact is I don’t need retro. It may not be fair, but welcome to the real world.”

It all depends on your point of view, doesn’t it?

But I’m with the smart customer. The tail doesn’t wag the dog, however much it wants to.

An expensive reckoning is in store for those that thought they had cleverly cornered the market. They cornered a market that can be easily bypassed. Only distressed clients will pay distressed prices – and in any case, distressed clients are second rate.

So long, and thanks for all the cheap retro.

So long, and thanks for all the cheap retro

“The tail doesn’t wag the dog, however much it wants to”

Mapfre has indicated to its reinsurers that it expects the global umbrella

catastrophe layer that sits at the top of its programme to run clean from Hurricane Maria, The Insurance Insider understands.

Reinsurance market sources said that the Spanish insurance giant, which has a major presence in loss-hit Puerto Rico, has suggested that its gross claims would not be high enough to attach the cover.

The layer is believed to provide $200mn of cover in excess of $1bn.

The suggestion that the treaty will remain untouched implies that Mapfre believes that its losses will be comfortably contained by its reinsurances.

Broking sources said that a range of reinsurers are putting the layer in as a total

loss when estimating their Q3 cat losses, and many observers are privately predicting that Maria will breach the top of Mapfre’s cover.

Mapfre also buys a $900mn cover in excess of $100mn, known as its North American Regional Cover, which protects its Puerto Rican portfolio.

In its statement on 25 September, Mapfre said the string of third quarter cat losses would impact its results by between EUR150mn and EUR200mn ($177mn and $236mn), but did not release a gross claims number for Maria.

The loss quantum for Maria is highly uncertain, but most market sources are talking about a loss in the $20bn-$30bn range.

Mapfre is a market leader in the Puerto Rican market. The Madrid-headquartered insurer has a 20.8 percent share of the commercial multi-peril (non-liability) market, according to AM Best data, with a further 22.5 percent of the homeowners’ market. It is also among the 10 biggest reinsurers of the domestic Puerto Rican insurers.

When The Insurance Insider published an analysis on 6 October, Mapfre Re CEO Eduardo Pérez de Lema Holweg, said: “Our range is based on our profound knowledge of our portfolio and our long experience of the island, as well as a clear understanding of the way our reinsurances work.

“We don’t have any information that implies that our estimate is not correct.”

Mapfre tells reinsurers global umbrella cat layer will escape loss

[email protected]

Mark Geoghegan, Managing Director

NEWS NEWS

DAY 1: SUNDAY04

Lloyd’s has filed an application with the Belgian regulator to form an insurance

company that will allow it to continue to write European Economic Area business after Brexit takes effect.

The application was filed with the Belgian central bank in mid-October following lengthy pre-application discussions.

With the gestation of Brussels-based Lloyd’s Insurance Company SA broadly progressing as planned, the market should be on track to write business via the entity for the January 2019 renewals.

Assuming it gains the go-ahead, the entity expects to write risks from a region which accounted for about 11 percent of Lloyd’s 2016 premiums through the market’s current distribution channels of brokers, coverholders and managing agents.

The Corporation has also indicated to stakeholders that it was confident a clampdown on reinsurance cessions by the EU insurance regulator would not derail plans for the new subsidiary.

Recent suggestions by the European Insurance and Occupational Pensions Authority that it wanted Brexit satellites to keep 10 percent of the risk written by their

new EU subsidiaries had briefly appeared to jeopardise Lloyd’s planned Brussels set-up.

Lloyd’s had selected Belgium as the location for the new unit in part because of the understanding that the new company could cede 100 percent of the risk to London.

The 100 percent cession goal reflects Lloyd’s aim to establish a capital-light entity in Brussels that would be regulated under the Solvency II standard formula.

Once it has gained Belgian approval, Lloyd’s European subsidiary will apply to the Prudential Regulation Authority (PRA) to establish a third-country branch in the UK.

This would allow staff in the UK to carry out regulated activities on Lloyd’s Insurance Company’s behalf when Britain leaves the EU.

The UK branch plan negates the need for intermediation to take place in Europe and for intermediaries to require authorisations from the local conduct regulator.

The PRA has traditionally preferred the subsidiary model over branches, but is thought unlikely to object to Lloyd’s Insurance Company’s UK branch since it is

the main regulator of the Corporation itself.Lloyd’s is also understood to have resolved

questions over financing of the entity.It has opted against the pay-to-play model

favoured by some carriers that have other European operations they can utilise. This would have mirrored the structure used for Lloyd’s China.

Instead, the costs will be funded centrally, with all managing agents effectively paying in regardless of whether they decide to use the platform.

Lloyd’s CEO Inga Beale has previously said that the Corporation is likely to have 10 to 20 Brussels-based staff initially, with around 60 overall in continental Europe.

The staffing plans of Lloyd’s have yet to be disclosed, but it has previously said the Brussels workforce would be “in the tens”.

Other elements yet to be decided include Lloyd’s Insurance Company’s IT infrastructure, with a tender still to be launched.

One adviser noted that larger companies with both Lloyd’s and company market operations generally expected to use the Lloyd’s platform as well their own planned EU hubs to write risk.

book over the last 20 years.The market has had a low incidence of

major cats, with European windstorm books profitable in every year since 1999 – when Lothar and Martin struck in quick succession leaving (re)insurers with around $15bn of claims.

In addition, the losses declared to date are far more modest as a proportion of shareholder equity than those delivered by KRW, with Bermudians in the range of 3-13 percent compared to around 10-70 percent from the 2005 events.

The market’s understanding and treatment of cat risk has also changed substantially in the wake of KRW.

Modelling firms substantially revised their expected loss numbers, ratings agencies punished carriers for taking cat risk and the carriers themselves slashed the proportion of their equity they were willing to bet on a single cat event.

These changes took capacity out of the market and made reinsurers more reluctant to deploy it without a comfortable double-digit return.

There is no expectation that the

fundamentals of the cat market will be changed this time round.

And any substantial shortfall in capacity today is likely to be made good by third-party capital – which has lower return hurdles than traditional equity capital – in reasonably short order.

The lack of a fundamental change in the supply-demand imbalance, combined with a blowout 2017 year and the psychological impossibility of further rate reductions, looks likely to yield a fairly stable reinsurance market outside of the US.

UncertaintyHowever, uncertainty is the market’s watchword right now, with 1 January still a long way off.

Munich Re and Swiss Re have huge pricing power in the European markets, and the way the renewals play out will depend on how hard a line they choose to take.

Cedant behaviour is likely to vary widely, but the outcome will turn on the degree to which they choose to behave as “good citizens” of the reinsurance community, or the extent to which they try to leverage the concept of a “bank” built up in the good years.

Their willingness to change leaders and shake up panels will be a major determinant of the pricing experience at a cedant level.

Reinsurers have suggested that buyers are talking about being accommodating at 1 January. And brokers have indicated they are prepared to be realistic.

Sellers of reinsurance have been taking a hard line in discussions, but in private all parties admit that the rhetoric means little at this stage.

Sources have said that the renewal season has been accelerated by the spate of losses, with clients coming to market earlier and the first pieces of business already being submitted for quotes – around four weeks ahead of the typical timeline.

Early indications suggest that quotes on cat business are typically coming in at around +10 percent, with some outliers at +20 percent.

Nevertheless, until a substantial amount of business is quoted, firm ordered and ultimately transacted, it remains to be seen how the renewal will develop.

And even if a certain baseline is set for early renewals, there is scope for a multi-phase renewal – with hardening or softening in the days immediately before 1 January.

Continued from page 1

Lloyd’s applies for Brexit hub licence

DAY 1: SUNDAY 05

NEWS NEWS

Former Dual CEO Talbir Bains is set to launch a European treaty MGA called

Horizon with former Sompo Canopius executive Eric Gutiérrez, The Insurance Insider can reveal.

Horizon, which will sit under Bains’ soon-to-be-launched Volante Global, will be operational in time for 1 January, according to sources.

It is understood the MGA will initially be able to offer a maximum line size of $50mn on European property treaty business.

Sources said that it would also look to write casualty treaty, although this book is not expected to be launched by 1 January.

Paper is in place for the 1 January launch, with most of the backing coming from Lloyd’s syndicates and a minority from the London company market.

Gutiérrez, who will be managing director of the venture, left Sompo Canopius in April last year.

The executive joined legacy Canopius in January 2011 to launch its Zurich-based reinsurance platform, Canopius Europe.

He oversaw the merger of the unit with Sompo’s Zurich operation after the Japanese big three member acquired Canopius in 2013.

Prior to his spell at Sompo Canopius, Gutiérrez was at Ace Tempest Re in Zurich.

Horizon will be the first start-up in Zurich since the abortive launch of Matt Fairfield’s Exin Re last year.

Earlier this month The Insurance Insider revealed that Bains was preparing to return to the market with a new underwriting business known as Volante Global, which will look to launch MGAs across four continents in the first half of 2018.

Bains, who is working with Aon Benfield, has raised almost £15mn ($20mn) of working capital to launch the “super MGA” and is aiming to hire around 10 teams.

The capital is believed to have come from a single backer whose identity remains undisclosed.

In addition to the launch in Zurich, Bains is preparing to open offices in the UK, US, Africa and Asia.

Targeted lines of business include motor, financial lines, property, casualty, general aviation, high net worth and equine – in addition to the treaty business that Gutiérrez will write out of Zurich.

Sources said that until the business was christened Volante it was known as Project Edison.

It is understood that Volante expects to build out full claims, actuarial and risk management functions, setting it apart from some of its peers that run with less infrastructure.

It has been suggested that Volante would employ a so-called “flip up” structure for teams joining the business.

Under this model, underwriters will receive equity in a cell but will only be able to monetise this by “flipping it up” to the parent company when the whole business is sold.

Bains was a senior staff member at QBE for 14 years before joining Dual as global chief underwriting officer in April 2015. He was promoted to CEO in January 2016 and left at the end of December last year.

UK motor reinsurance brokers and underwriters face an uncertain 1

January renewal as they await news about when a hard-fought increase to the Ogden discount rate will take effect.

The UK government in September announced further reforms to the discount rate that is applied to personal injury compensation. It said the new methodology would currently result in a discount rate of between 0 percent and 1 percent.

However, the government specified no timeframe for the increase from the crippling minus 0.75 percent level that this year triggered a reinsurance reserves hit running into several billions of pounds.

Some underwriters fear the reforms could take effect as late as next September or even potentially be derailed by Brexit.

In the meantime, market protagonists are predicting another rise in motor excess-of-loss (XoL) rates in January, albeit probably lower than the 50 percent-plus increases seen in April and in July.

PartnerRe’s head of global client and broker management Jörg Bruniecki said: “We are talking about degrees of bad news. The potential re-revision of the Ogden rate in

2018 may not be as low as the current minus 0.75 percent, but it still remains bad news for XoL reinsurers who will pay the bulk of the claims.”

Munich Re board member Torsten Jeworrek said his company does “not see any technical justification at this stage for reducing the current rate level for XoL pricing”.

He added that the market needs to agree on mechanisms to deal with the at-least-triennial reviews of the Ogden rate proposed in the government’s draft legislation.

One broker said some markets are considering giving different quotes for different Ogden rate outcomes, while other sources pointed to revision clauses within policies which allow for changes depending on when and at what level the rate is set.

Market sources also noted that current compensation settlements reflect a rate well above the minus 0.75 percent discount rate.

Guy Carpenter managing director Charles Whitmore put the current range at between 0.5 percent and 1 percent.

Whitmore, who is head of the firm’s placement solutions group, also predicted that periodic payment orders (PPO) will reduce in frequency since the existing low

Ogden rate means compensation recipients will gain more from lump sums.

He said the PPO decrease will cut down the long-tail nature of reserves and lower capital charges, thus “reducing impact of indexation creep and giving the market more certainty of ultimate results”.

But Swiss Re’s EMEA reinsurance CEO Jean-Jacques Henchoz noted that the impact of the Ogden change on PPOs was in itself another cause of uncertainty.

“For the forthcoming renewal season we expect XoL to continue rising, reflecting the current discount rate,” he said.

The shock cut to the Ogden rate led to some market churn amid the dislocation caused by the reserves hit.

One broker said that uncertainty around the outcome of a government consultation launched in the wake of the rate cut, and about the September reforms, had curtailed the number of newcomers to the line.

But Willis Re’s Dirk Spenner, managing director and head of EMEA North/East, said with the proposed reforms his firm “anticipates a more substantial momentum from potential new markets entering this space”.

Bains pairs up with Gutiérrez for Zurich MGA launch

UK motor XoL rates to rise amid discount rate limbo

LEGACY

DAY 1: SUNDAY06

Generali has awarded exclusivity to Compre in the sale process for its

circa EUR200mn ($235mn) legacy book, The Insurance Insider can reveal.

The European legacy specialist beat off competition from Enstar and Armour to emerge as the frontrunner in the process, sources told this publication.

If successful, the Generali book would be the largest acquisition Compre has agreed to date.

The Generali portfolio predominantly holds US asbestos, pollution and health hazard exposures from business written through Generali’s UK branch up to 2001.

It is understood the liabilities stem from

a time when Generali was a significant following market for major US casualty writers in London, particularly during the 1980s and 1990s.

The book is separate from Generali’s current corporate and commercial book written in the UK.

The disposal process for the portfolio is said to have been extremely competitive from the outset.

Sources previously suggested as many as 28 parties registered their interest in the book when it first came to market in the first half of this year.

PwC was appointed as an adviser on the disposal, with Generali UK country manager

Steve Spano also having an active role in the process.

This publication first revealed in January that Generali was approaching legacy consolidators to find a solution for the portfolio, which at the time was estimated to hold EUR300mn-EUR400mn of reserves.

The size of the book for disposal was scaled back following the appointment of PwC.

It was suggested by one source that the size of the book may have been scaled back further from EUR200mn, although they did not clarify by how much.

Compre and Generali declined to comment.

The bidding process for Sovag’s EUR170mn ($200mn) legacy book has

entered the second round, The Insurance Insider understands.

According to sources, Catalina, Darag and Enstar were the three companies that progressed to the second stage, with binding bids due to be submitted in the next few weeks.

This publication first revealed in July that Sovag was bringing a legacy book to market as part of a wider restructuring at the German insurer.

The book holds EUR170mn in gross reserves and contains a range of liabilities from business written out of London and several European countries.

One third of the book is understood to be reinsurance business written out of London, with the liabilities spanning a number of classes and dating back as far as the 1980s.

The remainder of the book is largely personal lines business written out of Germany, Malta, Spain and the Benelux countries via a number of MGAs. These classes of business include motor liability and property, as well as some reinsurance.

GC Securities is the adviser running the process.

The disposal process is making swift progress. Sources indicated Sovag is looking to sign with the successful acquirer in November, with completion targeted at the

end of the first quarter of 2018. It is further understood that Sovag is

also looking to commute a number of reinsurance contracts to make the book more attractive to buyers.

The firm launched a strategic review of its operations in January, which led to a capital injection from its shareholders.

The size of the injection was not disclosed publicly, however AM Best described the contribution as “material” when it removed Sovag’s B+ financial strength rating and

bbb- long-term issuer credit rating from under review with negative implications in March.

Since then, the carrier has appointed Arndt Gossmann, former CEO of European run-off specialist Darag, and former Sovag board member Gerd Meyer to its management board.

The duo has been given a mandate that runs until 2018 to turn the insurer around.

Catalina, Enstar, Sovag and Darag declined to comment.

Opinion: The run-off boomThe stars finally seem to be aligning for the legacy market, which has spent years waiting patiently for the anticipated wave of liabilities to arrive.

These are indeed boom times for run-off, but as the live market knows all too well, with a surge in demand comes the inevitable creep in supply.

Competition is already rife among legacy acquirers, with the margin on each legacy book thinning with every round of bids. But traditional live carriers will still look on at legacy carriers’ returns enviously, and it is only a matter of time before they turn up to the party.

Run-off carriers have the upper hand in terms of their existing expertise, but size, scale and the resulting ability to undercut on price is of increasing importance – and this is where larger live carriers can make their play.

Sources say a number of legacy-live partnerships are emerging, but this only serves as a way for live carriers to test their appetite in the space before they go all in.

So now is the time for legacy carriers to demonstrate their value. They must show they are able to offer more than a cheap deal – or risk falling foul of the live market’s previous failings.

Compre wins exclusivity in Generali legacy disposal

Three proceed to second round of Sovag run-off sale

SCOR’s strengthstands out clearly

“SCOR’s success story continues. Over the past 15 years, the Group has overcome obstacles, faced economic and financial crises, and absorbed major natural catastrophes. Throughout this long journey, SCOR has held its course. SCOR has achieved the solvency and profitability strategic targets set out in its successive plans. It has grown, reinforced its financial strength and expanded and deepened its franchise. It has diversified its portfolio and developed a superior risk management strategy. Today, SCOR is a truly global group. The upgrade of our rating to A+ by A.M. Best on September 1st, 2017, which follows the upgrade to AA- by S&P and Fitch in 2015 and to Aa3 by Moody’s in 2016, once more demonstrates the relevance of SCOR’s business strategy and confirms SCOR as a Tier 1 global reinsurer. The Group’s strength is a clear benefit for our clients.”

Denis KesslerChairman & Chief Executive Officer

A+2017

Stable OutlookAM Best

Fe55.93326

Iron

Co58.93327

Cobalt

Ni58.69328

Nickel

Tc98.90743

Technetium

Mn54.93825

Manganese

Pd106.4246

Palladium

Ag107.86847

Silver

Cu63.54629

Copper

In114.81849

Indium

Sr87.6238

Strontium

Mg24.30512

Magnesium

Ga69.73231

Gallium

Ca40.07820

Calcium

Au196.96779

Gold

Tl204.38381

Thallium

Ba137.32756

Barium

Os190.2376

Osmium

Re186.20775

Rhenium

Hs269108

Hassium

Bh264107

Bohrium

Ds269110

Darmstadtium

Mt268109

Meitnerium

Rg272111

Roentgenium

Uutunknown113

Ununtrium

Ra226.02588

Radium

AA-2015

Stable OutlookStandard & Poor’s

AA-2015

Stable OutlookFitch Ratings

Aa32016

Stable OutlookMoody’s

www.scor.com

ANALYSIS

DAY 1: SUNDAY08

The global reinsurers have joined a large number of US and Bermudian

carriers in pre-announcing their cat hits after the third quarter’s trio of hurricane losses.

Scor and Everest Re’s exposures were mostly in line with what analysts in the sector had modelled, despite uncertainties around the scale and complexity of industry insured losses.

However, Swiss Re was an outlier relative to its peers as its disclosed loss estimate came in above analysts’ forecasts.

Overall, the market is bracing itself for a red Q3 reporting period in light of the losses generated by recent catastrophe events, but equity analysts still expect the three reinsurers to remain profitable for the year.

Industry impactThe hurricane season brought a series of storms in different regions, making it difficult to determine the level of penetration into reinsurance layers.

Aggregating the midpoint loss estimates from the modelling companies for each event gives a total Q3 industry cat toll of around $95bn, while the top end of the estimated ranges would yield an industry loss of $125bn.

These figures exclude AIR Worldwide’s $40bn-$85bn estimate for Hurricane Maria due to the industry’s scepticism regarding the giant loss range.

Harvey’s midpoint currently stands at $21.3bn, while Irma has a midpoint of $43.5bn.

Maria estimates averaged $24.7bn, but most analysts pegged the storm’s industry losses at around $30bn in their forecasts.

Hurricane Nate and the earthquakes in Mexico are expected to add another $3bn-$5bn to the loss toll, taking into account estimates from modelling companies and market sources.

Recent company pre-announcements have also served as an additional benchmarking tool, based on market share and exposure to similar historical events.

Thus far, Scor, Everest Re and Swiss Re are the only global reinsurers in our coverage to have pre-announced their loss estimates. Hannover Re and Munich Re have yet to give full disclosure, but both have warned they could miss their profit targets.

Scor and Swiss Re’s loss estimates were based on a $95bn industry loss toll.

Everest Re assumed an aggregate industry

cat loss in the region of $100bn from HIM and the Mexican earthquakes when it estimated $1.2bn in pre-tax cat losses for the third quarter.

Scor French reinsurer Scor provided a loss estimate of EUR430mn ($505.1mn) after tax

and net of retrocession, which would impact its equity base by 6.7 percent.

The loss number equates to approximately EUR560mn before tax, or 8.7 percent of equity, according to analysts.

This is equivalent to around half the

Continued on page 10

Global reinsurers’ Q3 losses begin to surface

Global reinsurers: analysts' estimates vs reported loss numbersDeutsche Bank Baader Helvea RBC UBS Reported loss

HIM industry loss assumption $75bn $80bn $82.5bn $95bn $95bn

Munich Re EUR2,125 EUR1,987 EUR1,865 EUR2,800

Swiss Re EUR1,625 EUR2,330 $1,966 $2,650 $3,600

Hannover Re EUR750 EUR736 EUR803 EUR820

Scor EUR313 EUR446 EUR419 EUR550 EUR560*

Morgan Stanley Wells Fargo JP Morgan Janney Reported loss

Everest Re $1.2bn $1.2bn $1.6bn $1.5bn $1.2bn

*Consensus pre-tax estimate based on EUR430mn after-tax loss. Pre-tax losses; all numbers in mn unless otherwise statedSource: Deutsche Bank, Baader Helvea, RBC, UBS, The Insurance Insider

US wind net loss PMLs

Source: UBS, company reports, The Insurance Insider

Pre-tax Q3 losses against 2017E EPS consensus before hurricane season*


2.4% 2.7%3.7% 3.9%

8.6% 8.6%

10.9%11.7%

Loss

es ($

mn)

Q3 loss pre-announcements approaching $20bn

Londoners take biggest equity hit from Q3 cat losses

*Average between low and high estimates disclosed by companies Source: Company announcements, The Insurance Insider

Source: Company announcements, The Insurance Insider

*Hiscox used as proxy; **Scor used as proxy^Federated National used as proxySource: Company announcements, The Insurance Insider

*Hiscox used as proxy; **Scor used as proxy^The Hartford used as proxySource: Company announcements, The Insurance Insider

*Scor used as proxySource: Company announcements, The Insurance Insider

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Swiss Re; Atlantic hurricane 1-in-200

Scor; Atlantic hurricane 1-in-200Munich Re; US/Caribbean wind 1-in-200

Hannover Re; US windstorm 1-in-100

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14

USnationwides

USinsurers

USspecialty

Globalinsurers

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Bermuda Floridians Londoncarriers

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Q3

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Q3

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Q3

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es a

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0%

1%

2%

3%

4%

5%

6%

7%

London*

Global reinsu

rers**

Bermuda

US nationwides

Floridians^

Global insu

rers

Other U

S carri

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Hurricane Harvey

Hurricane Irma

Hurricane Maria

6.2%

3.4%

4.9%

2.1%

1.4%1.7%

1.3%

7.7%

4.0%

4.9%

4.9%

2.6%

1.2%

0.1%

3.1%

0.9%1.5%

0.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Floridians

Global reinsu

rers**

Bermuda

London*

Global insu

rers

US nationwides^

Other U

S insu

rers

0%

1%

2%

3%

4%

5%

6%

Globalreinsurers*

Bermuda Globalinsurers

Other USinsurers

*Based on estimates recorded after Q2 2017 earnings seasonQ3 losses are pre-tax and net of reinsurance/retrocessionSource: Company reports, The Insurance Insider

$3.6

bn$3

.0bn

$1.8

bn$1

,480

$1,2

00$6

25$6

17$6

00$5

93$5

63$5

10$5

03$4

75$3

79$3

50$3

15$2

62$2

25$2

25$2

05$2

05$1

59$1

10$1

08$1

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3$6

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3$3

9$3

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Q3 losses as a % of shareholders' equity

AFG

AIG

Allstate

AmTrust Arch (after tax)Assurant

Axis

Beazley

Chubb

CincinnatiEnstar

Everest Re

Fed NatHCI

Hiscox

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RenRe

Scor

The Hanover

The Hartford Travelers

Universal

UPC Insurance

Validus

WR Berkley

XL CatlinAspen

Argo

Swiss Re

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Pre-

tax

Q3

loss

es a

s a

% o

f 201

7E E

PS

Q3 loss pre-announcements over $15bn




2.4% 2.7%3.7% 3.9%

8.6% 8.6%

10.9%11.7%

Loss

es ($

mn)








17%16%15%

10%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016

Expe

cted

net

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0

2

4

6

8

10

12

14

USnationwides

USinsurers

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Q3

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0%

1%

2%

3%

4%

5%

6%

7%

London*

Global reinsu

rers**

Bermuda

US nationwides

Floridians^

Global insu

rers

Other U

S carri

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Hurricane Harvey

Hurricane Irma

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6.2%

3.4%

4.9%

2.1%

1.4%1.7%

1.3%

7.7%

4.0%

4.9%

4.9%

2.6%

1.2%

0.1%

3.1%

0.9%1.5%

0.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Floridians

Global reinsu

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Bermuda

London*

Global insu

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US nationwides^

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0%

1%

2%

3%

4%

5%

6%

Globalreinsurers*


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$3.6

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.0bn

$1.8

bn$1

,480

$1,2

00$6

25$6

17$6

00$5

93$5

63$5

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03$4

75$3

79$3

50$3

15$2

62$2

25$2

25$2

05$2

05$1

59$1

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3$6

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0%

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40%

60%

80%

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120%

140%

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0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Pre-

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PS

Focused on your goals. First.partnerre.com

ANALYSIS

Focused on your goals. First.partnerre.com

ANALYSIS

DAY 1: SUNDAY10

impact from a 1-in-200-year Atlantic hurricane, which would dent the equity base by 16 percent, according to Scor’s 2016 probable maximum loss (PML) estimates.

The company expected to incur $1.2bn of pre-tax losses gross of retrocession, which means Scor’s retro cover absorbed 56.0 percent of the Q3 loss toll.

Keefe, Bruyette & Woods analyst William Hawkins noted that while Scor did not provide additional details about its retro cover “it is clear that it is not in the market for additional protection”.

“Our understanding is that aggregate protection has been touched but not exhausted and so Scor’s net exposure to a further major event should be extremely limited until that limit is reached,” Hawkins said.

Hurricanes Harvey, Irma and Maria would each generate claims of $375mn, while the Mexican earthquakes were estimated at $50mn, before any retro coverage.

Assuming a proportional distribution of the retro cover, each storm would then produce losses of $165mn or 1.5 percent of equity. The Mexican earthquakes would add another $22mn of losses, or 0.2 percent of equity.

Scor’s pre-tax loss estimate of EUR560mn was equivalent to EUR2.90 per share, while the expected after-tax claims toll of EUR430mn translated into EUR2.20 per share.

This compared to Wall Street’s 2017 earnings per share (EPS) forecast of EUR3.0 per share estimated back in September. Most recent estimates showed the French carrier’s earnings at EUR1.70 per share, after modelling the pre-announced losses.

The carrier’s claims figure was around 20 percent higher than Baader Helvea analyst Daniel Bischof’s estimate, while Barclays’ Ivan Bokhmat noted that the pre-tax number “likely exceeds market expectations”.

Scor’s loss estimate was equivalent to a 0.7 percent HIM market share based on total industry losses of $100bn, said Bokhmat, whereas in previous active hurricane seasons (2004, 2005, 2008 and 2012) the French reinsurer took a 0.4 percent share of the average industry insured loss.

Everest ReMeanwhile, Bermuda-based Everest Re’s pre-tax loss estimate was in line with most analysts’ expectations at $1.2bn, or 14.0 percent of shareholders’ equity.

This would translate into a $29.20 loss per share, 40.4 percent more than the full-year 2017 EPS estimate of $20.80 modelled by equity analysts after the Q2 earnings season.

The current consensus EPS estimate for this year is $1.91 per share, according to MarketWatch.com.

The estimated pre-tax deficit was substantially smaller than the $1.1bn after-tax hit projected by Buckingham Research Group analyst Amit Kumar, who has reduced his estimate for the company’s third quarter loss to $15.28 per share from $21.07 per share.

On an after-tax basis, Everest Re expects to incur losses of $900mn, which would erode its equity base by 10.5 percent.

The estimated after-tax loss would be in line with the $921mn PML for a 1-in-100-year southeast US wind event.

Swiss ReSwiss Re was the latest member of the global reinsurer composite to pre-announce its Q3 cat loss estimate.

The reinsurer posted a $3.6bn pre-tax loss net of retrocession, which would erode its equity base by 10.5 percent.

This was above what some analysts had modelled. Baader Helvea’s Bischof noted that the figure was 17 percent above his latest estimate of $3.1bn. He also compared it to the company's 1-in-200-year Atlantic hurricane exposure of $5.1bn.

UBS analyst Jonny Urwin expected a pre-tax loss estimate of $2.6bn.

The claims toll was equivalent to a loss of $10.3 per share.

Consensus estimates after the second quarter reporting season pegged Swiss Re’s full-year 2017 earnings at CHF8.34 ($8.67) per share.





2.4% 2.7%3.7% 3.9%

8.6% 8.6%

10.9%11.7%

Loss

es ($

mn)








17%16%15%

10%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016

Expe

cted

net

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0

2

4

6

8

10

12

14

USnationwides

USinsurers

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Q3

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Q3

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0%

1%

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5%

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7%

London*

Global reinsu

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Hurricane Harvey

Hurricane Irma

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6.2%

3.4%

4.9%

2.1%

1.4%1.7%

1.3%

7.7%

4.0%

4.9%

4.9%

2.6%

1.2%

0.1%

3.1%

0.9%1.5%

0.8%

0%

1%

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3%

4%

5%

6%

7%

8%

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Floridians

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0%

1%

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$3.6

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$1.8

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$1,2

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0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Pre-

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7E E

PS

London takes biggest equity hit from Q3 cat losses




2.4% 2.7%3.7% 3.9%

8.6% 8.6%

10.9%11.7%

Loss

es ($

mn)








17%16%15%

10%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016

Expe

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0

2

4

6

8

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0%

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Hurricane Harvey

Hurricane Irma

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6.2%

3.4%

4.9%

2.1%

1.4%1.7%

1.3%

7.7%

4.0%

4.9%

4.9%

2.6%

1.2%

0.1%

3.1%

0.9%1.5%

0.8%

0%

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Floridians

Global reinsu

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0%

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Globalreinsurers*


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$3.6

bn$3

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$1.8

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$1,2

00$6

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17$6

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0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Pre-

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Q3

loss

es a

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7E E

PS


How do you spell tomorrow?TMR. Tomorrow is about looking beyond profit to do what’s right. While other companies provide reinsurance, we provide confidence. We are there for you in your times of need. We think through your challenges with you. And then, when the time comes, we will catch you, because we know that collaboration, transparency and trust are the path to…tomorrow.

Learn more at TokioMillennium.com

INTERVIEW

Frank Reichelt is clearly a well-travelled, city-loving man.

After exchanging views on the major issues affecting the European renewals at 1 January, the conversation drifts to our favourite travel destinations.

The Munich-born economist machine-guns a rapid list of favoured haunts, including Vienna, Hamburg, London, New York, Singapore, Paris, Copenhagen, Stockholm and of course his home town.

Perhaps it’s not that surprising that this reinsurance executive is so-well travelled, given the market is arguably more international now than ever before.

And while reinsurance has always been a global business, as the big boys take on bigger risks, the only way to manage those exposures is through diversification.

“The market conditions and market cycles have always been influenced by the global loss situation, and we will experience this again in the wake of the hurricanes and the earthquakes in 2017,” he says.

“After all, the reinsurance industry’s good and even excellent results in recent years were largely facilitated by the absence of any major catastrophes worldwide. Reinsurance buyers around the world were able to benefit from this. It looks as though this year we will see a reverse situation after hurricanes Harvey, Irma and Maria and the earthquakes in Mexico.”

But, I ask, playing devil’s advocate, surely European windstorm rates can’t be dependent what happens thousands of miles away on the other side of the Atlantic? Models are built on geographical differences after all. Why should a loss-free German cedant pay more for its reinsurance because of events happening on the other side of the world?

Undeterred, Reichelt continues: “I don’t believe the European market can disengage itself from our industry’s worldwide scenario. Global developments will also influence European renewals.”

He also references the growing number of small to medium-sized events – particularly local flooding and storms – that have

occurred in Europe in the year to date. “This is a particular burden for insurers, and reinsurers are also

participating in these losses via frequency protection coverage.”

He then contends that, putting these points to one side, it would not be right to link the development of reinsurance prices purely to loss developments. Swiss Re, along with other reinsurers, has to decide what loss potential it protects, and how that changes from one year to the next.

“This has a much stronger influence on our pricing than

any purely random occurrence of large natural catastrophes.

Reinsurance conditions that are

“I don’t believe the European market can disengage itself from our industry’s worldwide scenario. Global developments will also influence European renewals”


Swiss Re’s market executive for Germany and the Nordics Frank Reichelt talks about why in today’s international market, the US hurricanes will impact European renewal negotiations

Global ambition

DAY 1: SUNDAY 13

INTERVIEW

odysseyre.com

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15DAY 1: SUNDAY

INTERVIEW

based on the covered exposure can be held much more stable over time than prices that simply follow the market cycle and random loss experience.”

Reichelt admits this attitude may not “be to the liking” of all of the carrier’s clients, but he insists that when – not if – the market hardens and loss occurrences drive prices up, his clients then greatly appreciate the approach.

“Still,” he concedes, “it’s difficult to combine the two: requesting rate reductions due to a benign loss experience and rejecting rate increases in the wake of major losses with the argument that the exposure has remained unchanged.

“Fortunately, the vast majority of our clients are aware of this, so that we always find agreement during our renewals.”

The Franz Beckenbauer of reinsuranceOne of Reichelt’s favourite pastimes is the card game bridge. When not found in one of Germany’s famous opera houses, the Swiss Re executive can be found playing in the German Bundesliga of bridge. Yes really, there is such a thing. Which I suppose makes Reichelt the Franz Beckenbauer of the reinsurance bridge-playing community.

Bridge is the chess of card games. It requires major brainpower, and preferably an obsession with rules and strategy.

So it’s of no surprise that when the conversation moves on to InsurTech, Reichelt is highly strategic in his views on its future.

“The business model of traditional insurers is currently undergoing fundamental change. Digitisation, a new customer journey, new technologies, data analytics, behavioural economics and artificial intelligence are just a few topics that are currently occupying our industry,” he begins.

“Most of the more familiar InsurTech companies aren’t risk carriers but offer their expertise and services along the entire insurance value chain.”

All of this, Reichelt continues, means there is potential for a genuine revolution in our industry – but that’s not to say the traditional insurers have been resting on their laurels. Indeed, a number have accepted the challenge and taken the bit between the teeth.

“They have repositioned themselves or are in the process of doing so, and/or they have started numerous cooperations with

InsurTech companies in order to learn about and tackle the new topics together,” he says.

“In this sense, I would rather refer to an evolution of the business model for the time being. But if the traditional insurers then decide to wait and see or are too slow to introduce innovation in their companies, it could actually develop into a revolution.”

It’s an interesting point – historically revolutions have tended to claim many victims whereas evolutions have been much more humane. But if we are to see a

revolution, Reichelt believes there will be many losers in the ranks of the traditional insurers.

“There will also be losers if we remain on a more evolutionary path, as some insurance companies will not make it into the new age – but the losses will be significantly lower,” he adds.

For Swiss Re and the other major reinsurers, much of the focus at Monte Carlo this year – when not discussing the succession of hurricanes barrelling across the Atlantic – was on the insurance protection gap. And not just in emerging markets, but closer to home too.

“This gap concerns many areas of our daily lives, such as old age provision and occupational disability, but also natural hazard protection,” Reichelt begins.

“These issues are by no means exclusive to the emerging markets. With the most recent earthquakes in Italy, a mere 1 percent of the economic losses were insured, and in Germany less than 40 percent of private households are insured against flood risks. Although we read about heavy rainfall events in the media almost every week, the insurance gap has continued to persist.”

Swiss Re plans to work with its clients, but also with government institutions, to come up with joint solutions.

“We have made significant progress recently, particularly with product innovations, and we are very confident that this will enable us to narrow the protection gap. But the entire insurance and reinsurance industry still has a great deal of work ahead,” he says.

As our conversation draws to a close, we touch on a few more philosophical questions. After chatting a short while, it becomes apparent Reichelt prefers to look

at the combination of many small successes spread out over 34 years in reinsurance than any single big bang moment, when it comes to finding pride in his career choice.

“The 9/11 terrorist attack still occupies me today,” he says, adding that he was attending the Rendez-Vous in Monte Carlo when it happened.

“It was a formative moment for me, I was faced with inconceivable human tragedy on that day. But I had to stay focused on if and how we in the (re)insurance industry are at all capable of continuing to provide coverage against terrorism.”

Making the world more resilient is Swiss Re’s in-house motto, but that also applies to the individual as well as the firm. And resilience is all about learning lessons from life experiences.

Asked whether it’s more important to be liked or respected, Reichelt explains that both are needed for a contented life, as you can’t achieve professional success or fulfilment in your private life without the two.

And when asked what the hardest lesson was for him to learn, he responds: “With personnel decisions, compromise solutions don’t work out in the long run.”

Sage advice indeed. Although one can’t help but think that, as we head toward 1 January, compromise could well become one of the buzzwords of the 2018 renewals.


Frank Reichelt biography1983: Began reinsurance career at Frankona Rueckversicherungs-AG, Germany

1984-1993: Head of underwriting property non-proportional worldwide, Frankona Rueckversicherungs-AG

1994-1996: Account manager for Germany, Austria, Central and Eastern Europe, GE

1998-2002: Branch office manager for Austria, Switzerland, Central and Eastern Europe, GE

July 2006: Joined Swiss Re in Munich via the integration of GEIS

February 2012: Took on the Germany and Nordic countries market unit

July 2012 to present: Branch manager of Swiss Re Europe’s German office

“Some insurance companies will not make it into the new age”

odysseyre.com

CONSISTENCY AT WORKThe continuity of our team and the consistency of our business approach have

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BIG QUESTION: MARKET CONDITIONS

How would you describe market conditions at 1 January 2018?

Dirk Spenner, managing director, head of EMEA North/East, Willis ReThe recent loss activity in Q3 2017 has caused significant suffering and devastation and will likely produce historically high levels of insured and reinsured losses to the global (re)insurance industry.

A long period of favourable loss years with associated adjustments of conditions has negatively impacted the earnings potential of reinsurers, and in combination with the expected 2017 loss burden will likely bring a change to the market environment.

Jörg Bruniecki, head of global client and broker management, PartnerReAll lines are marginal at best and most are below adequate levels due to high levels of large risk losses, the effects of Ogden, above-normal cat activity and ongoing marginal investment income.

The influence of alternative capital in Europe is less pronounced. However, European markets have seen more moderate upswings in response to losses and have been fundamentally on a steady decline since the post-financial crisis era.

While loss-affected areas will see the largest reactions, we need to come to technical sustainable levels across all lines of businesses. This year marks the first year where this is not an abstract discussion but a market reality.

David Flandro, global head of analytics, JLT Re

The global market is currently experiencing its first series of significant losses since 2011. The reinsurance sector was better-capitalised than ever as it entered the 2017 hurricane season, with upwards of $60bn of excess capital. Even so, before the catastrophes, we were beginning to witness a “softening of the softening” trend, and these large losses will likely create some rating pressure in loss-affected regions.

Charles Whitmore, managing director, head of placement solutions group, Guy CarpenterTypically, reinsurance terms and conditions are largely influenced by the supply of capacity available to meet demand, and in spite of the recent losses we currently expect there still to be a significant amount of excess capacity to meet reinsurance purchasing demand at 1 January. That said, the recent hurricane loss activity will mean that renewal pricing for loss-affected areas will require greater scrutiny than for those that are loss-free.

Jean-Jacques Henchoz, CEO reinsurance EMEA, Swiss ReHow would I describe market conditions? In one word – unsustainable! Natural catastrophe-exposed reinsurance treaties saw unhealthy double-digit risk-adjusted rate reductions for three years in a row from 2014 to 2016. Consequently the normalised combined ratio of the global P&C reinsurance market has been at, or close to, 100 percent for the past two years.

In the recent past the impact of losses in

a single region has had a limited effect on rates elsewhere in the world. Do you expect Harvey, Irma and Maria to change 1 January renewals in Europe?

BrunieckiReinsurance is a global business that relies on diversification – however it seems that the fundamental rules of diversification have, to a large degree, ceased to function. With very thin profit margins, many (re)insurers are likely to be reconsidering their past positions.

In the end, we all have to satisfy the needs of our investors and this is the first year where the reality of inadequate margins will show up on balance sheets. I expect an evolving 1 January renewal as the full impact of the recent losses flows through all levels of the reinsurance value chain.

FlandroOnly in that certain reinsurers which underwrite US coastal risk are the same ones which underwrite, say, European wind risk. Global firms have global costs of capital and the reinsurance sector is indeed global. Still, it’s important to note that expected underwriting returns are calculated by line of business and by region. There is also still a strong argument to be made that diversification lowers a portfolio’s correlation. Any pressure in non-loss-affected regions will be offset by these factors.

WhitmoreThe wider impact of losses in a single region


As the reinsurance market descends on Baden-Baden once more, six of its top executives debate the impact of this year’s catastrophe events on European cedants’ conversations with their reinsurers

DAY 1: SUNDAY 17


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19DAY 1: SUNDAY


really depends on where those losses have occurred, and their quantum. US losses tend to have a more significant impact on trading conditions in the rest of the world because the US usually represents reinsurers’ biggest single region of cat accumulation.

Assuming reinsurance industry earnings of $46bn before tax and cat losses, on the basis of reinsurers having a 50 percent share of claims, should the sum of all insured losses from Harvey, Irma and Maria start to exceed $92bn, then the likelihood for a wider market correction grows. However, based on current loss estimates we do not expect that to happen, and therefore we anticipate a flat renewal in Europe.

HenchozSome market observers (analysts, rating agencies) estimate that the 2017 insured natural catastrophe losses could add up to $190bn, which would be among the highest on record. We therefore expect to see clear market hardening for loss-exposed reinsurance treaties. But I also believe that this year’s losses could be sufficiently significant to make the case for a change in market dynamics in Europe and to unwind some of the reductions we have seen in all markets in recent years.

Torsten Jeworrek, reinsurance CEO, Munich Re In contrast to prior years, this year we have seen quite an intense hurricane season with Harvey, Irma, Maria and Nate. Due to the complexity of these events, it will take a long time before the final insured losses are known.

On the basis of various estimates, we have to expect that the total insured market loss from these events might exceed $100bn. They will certainly be digestible but will have a deep impact on the earnings of many insurance and reinsurance companies. In some cases losses will even eat into carriers’ capital.

SpennerDuring previous events in 2005 and 2011/2012 the single region rate adjustments for loss-affected regions

prevailed. We would anticipate that reinsurers would want to spread the burden of rate adjustments at 1 January as far as possible but would expect that impact on rates will be focused on loss-affected regions and accounts.

How do you expect property catastrophe reinsurance dynamics to develop at 1 January?

FlandroFirst and foremost, we expect 1 January to be very workmanlike. The sector is set-up to deal with catastrophes precisely like those we’ve experienced and there is no reason not to get on with it. That said, we do expect some upward pressure on rates in loss-affected regions. This will be offset by the very high levels of capital prior to the hurricane season.

BrunieckiI expect that we will see insurers taking an early approach to renewal submissions, although I anticipate that many reinsurers will want to take the time to consider what capacity they are willing to commit at achievable price levels. Given many reinsurers have large amounts of retrocession, it will be interesting to see how this influences their approach. I think there will be some back-and-forth negotiations over the next few months.

WhitmoreThere will undoubtedly be significant focus on the ILS and alternative capital markets at renewal – particularly around their willingness to pay and their subsequent speed of payment, and their willingness to reload collateral and trade forward in

a marketplace that might not be offering significantly improved returns.

The market also faces the potential issue of ILS funds’ collateral being “trapped” in 2017 covers that cannot be released until loss amounts are better known. If this is the case then the investors’ willingness to reinvest will be a more critical factor.

HenchozWe expect to see some capital trapping in the ILS and collateralised markets. Consequently, the erosion of industry capital could be sufficient to spark some meaningful price correction over the upcoming renewal seasons – in the Caribbean and North America, but also in Europe, the Middle East and Africa, as well as in the Asia Pacific region.

For a number of years now, Swiss Re has maintained that reinsurance price levels are unsustainable and called for improvements. Consequently, in the recent past we have decreased treaty exposures in businesses which haven’t met our profitability requirements.

JeworrekThe events will certainly have an impact on pricing in both insurance and reinsurance. In the excess and surplus lines market, we are already seeing the first price increases, particularly in property and commercial motor. We also expect price increases in reinsurance, definitely in the US and the Caribbean, but there will most likely also be some impact in non-US cat business.

SpennerWhilst most reinsurers produced satisfactory returns on equity and high dividend levels at the end of Q2 2017, the third quarter losses will eliminate much of these earnings and for many will turn into a capital event to varying degrees.

We would expect reinsurer renewal strategies to be influenced by their relative share of the losses – being over or underweight, their dependence on retrocession, their ability to purchase retro or for the ILS markets to reload capital (albeit at higher cost), and their ability to demonstrate a sustainable business model to their investors.


“ I also believe that this year’s losses could be sufficiently significant to make the case for a change in market dynamics in Europe”Jean-Jacques Henchoz

Charles WhitmoreManaging director, head of placement solutions group, Guy Carpenter

Jörg BrunieckiHead of global client and broker management, PartnerRe

David FlandroGlobal head of analytics, JLT Re

Jean-Jacques HenchozCEO reinsurance EMEA, Swiss Re

Torsten JeworrekReinsurance CEO, Munich Re

Dirk SpennerManaging director, head of EMEA North/East, Willis Re

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INTERVIEW

21DAY 1: SUNDAY

Unipol Group’s Marc Sordoni is used to wearing several hats.

For more than three years he has both headed reinsurance buying for primary carrier UnipolSai and acted as CEO of reinsurance start-up UnipolRe.

He is also vice president on the board of directors at Greece’s Syneteristiki Insurance, where he has helped nurse the carrier back to financial health after a taxing time for Greek financial services companies during the country’s debt crisis.

He holds the positions at a time when reinsurance has come into its own as a capital management tool.

“Solvency II combined with a relatively high cost of capital has become a major factor in the industry drive to maximise capital [efficiency], and it’s not as simple as just looking at the price,” he notes.

UnipolSai cedes about EUR420.0mn ($493.7mn) per year to its treaty and facultative reinsurers. The company wrote EUR3.67bn of direct non-life premiums in the six months to 30 June 2017, of which almost EUR2.1bn came from motor insurance, where it is the clear leader in car telematics. UnipolSai has more than 10 million customers in Italy and also operates in Serbia.

Speaking to this publication about three weeks into this year’s renewal negotiations, Sordoni explained UnipolSai’s decision, as previously reported by The Insurance Insider, to change its natural catastrophe protection.

While UnipolSai does not operate in markets affected by this year’s North Atlantic hurricanes – which forecasters have estimated could generate insured losses of around $100bn – its main Italian market has experienced four earthquakes in little more than a year.

From 1 January UnipolSai’s catastrophe reinsurance will change from a EUR1.9bn per-event excess-of-loss (XoL) cover to a EUR1.8bn aggregate XoL cover.

The previous cover was a layered programme with up to EUR1.9bn for earthquakes, and other perils covered with lower limits. UnipolSai had, for example, up to EUR500mn of protection for flood.

Sordoni said: “It is much more efficient to have annual aggregate XoL on the cat side rather than a classical excess-of-loss per event [cover].”

UnipolSai has a panel of 16 reinsurers on the existing cat cover. Its current leader on the policy is Munich Re. Aside from Munich

Re, the other reinsurance treaty leaders include Hannover Re, Swiss Re, XL Catlin and Scor.

Sordoni said that within UnipolRe he was also seeing increased demand from clients for multi-line aggregates, including so-called top and drop structures.

And while the company has no exposure to claims arising from the North Atlantic hurricanes, he is watching the situation with interest. “I can’t think that it will put reinsurers in a position where they will have to completely change rate levels, but it should make the soft market less soft. We should go back to a more technical approach.

“But it is early. Assessing the damage and what should be paid is unfortunately not done in five minutes. Business interruption (BI) is a very important part of the losses and the more time passes the more BI will be part of the claims.”

UnipolRe, a three-year-old start-up, operates in Ireland, the UK, the Netherlands, Belgium, France, Germany, Switzerland, Turkey and Israel, but not in the Italian heartland of UnipolSai.

Next in line for UnipolRe is a potential entry into Spain and Portugal for the January renewals, says Sordoni, adding that reinsurance requirements in those markets tend to be more traditional.

The start-up had gross written premiums of EUR110mn last year, with France, Germany and the UK its main markets. The company has been roughly doubling its premiums each year since its inception.

UnipolRe was prescient in choosing Dublin rather than London as a base before the UK fractured from the rest of the EU with the June 2016 Brexit vote.

“We wanted an operation that was fully integrated into the European Union as a euro country,” Sordoni says. “Ireland has a very young and dynamic workforce, arguably the youngest and most educated in Europe, and you can access anywhere you want in Europe very easily.

“I would say the only shocking thing is the price of the property in Dublin,” he adds.

Sordoni said Brexit would mean little for UnipolRe, which has a small but expanding

book of business in the UK.Until this year the industry had been

reserving for the UK Ogden discount rate at 0.75 percent, before the March rate cut to minus 0.75 percent. UnipolRe strengthened its reserves by EUR2.5mn following the cut, and is now considering how to respond to news of the imminent rise in the discount rate to between zero and 1 percent.

Within motor, UnipolRe is leveraging group expertise to provide a service that includes a black box, and the related software and training, within a proportional reinsurance treaty.

Sordoni joined Unipol in 2014, having previously been senior client manager at QBE Re (Europe), where he supervised life and non-life underwriting in Italy, Greece and Cyprus. A former teacher of economics, Sordoni says there is no other industry he would rather be in.

“What I love about insurance and reinsurance is the speed and the evolution in the last 10 years. There are massive changes,” he said.

And his overriding wish for the sector?“To catch the fantastic opportunity of

what is happening on the technology side to improve the range of services and the quality of my relationships with my clients,” he says.

“Insurance shouldn’t be limited to paying claims when the house is burning, but it should be a much broader provider of information. Fundamentally, the insurance business is a service business. I do believe InsurTech provides an opportunity for the insurance world to improve the range of services they are offering their clients.”

“It is much more efficient to have annual aggregate XoL on the cat side”

Marc SordoniCEO, UnipolRe

Straddling the divide

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INTERVIEW

23DAY 1: SUNDAY

Making the most of today’s challenges

Brian YoungPresident and CEO, OdysseyRe

How will the market respond to the devastating natural catastrophes that have occurred in the last few months? The damage toll is immense and presents enormous challenges. As an industry, our immediate objective is to get claims dollars to insureds as quickly as possible to speed up recovery and rebuilding efforts. This will be no small feat as claim adjuster and contractor resources are stretched.

In terms of market impact, I firmly believe that the cumulative effect of these events will have a positive impact on pricing. Rates have fallen for too long and now capital is being burned. As the losses mount and risk appetites are reassessed, the pressure to raise prices will grow everywhere and not just in the affected lines and territories.

Where do you see growth opportunities at the moment?In reinsurance, before the recent catastrophe events, we were seeing growth in crop, accident and health (A&H), motor, credit and cyber. The attraction for many of these segments is driven by increasing buyer demand (particularly in crop, A&H and cyber) and market conditions that are generally more favourable than standard P&C lines. We were not a big writer of motor excess-of-loss reinsurance in the UK until a year ago, so we did not take a big hit from the Ogden rate change. Now with post-Ogden rates rising by 50 percent to 60 percent, we have a greater interest in this market.

We are experiencing growth in a number of areas on the insurance side as well. Our US insurance subsidiary, Hudson Insurance Group, continues to expand its presence in crop, commercial auto and excess and surplus lines casualty, while Newline Group, our international insurance operation, is targeting growth in life sciences and affinity and special risk products.

Is your business mix changing as a result of market conditions? Diversification remains critical to our underwriting strategy. We have 34 business units – 18 focused on reinsurance and 16 dedicated to insurance – operating from 36 offices in 13 countries across multiple distribution channels. Creating the optimal

portfolio is a constant challenge, but with so many business touch points, we are fortunate to have plenty of choice and the discipline to exercise it wisely. Over the last few years it has been harder to grow in reinsurance because of market consolidation and softening conditions, so our focus has shifted to insurance to widen our access to business and to give us greater control over risk selection.

What are the biggest challenges that you face? Market conditions aside, the biggest issue for us, and the industry as a whole, is escalating regulation. The cost of compliance has never been higher and as margins get thinner, the expense burden only gets bigger.

The rise in trade barriers being imposed around the world is a real problem too. Forcing reinsurers to move onshore makes the business more costly and local markets less stable in the long run, neither of which benefits the buyer.

How does the covered agreement impact OdysseyRe? The execution of the covered agreement is a laudable achievement that formalises strong regulatory cooperation between the US and the EU on (re)insurance issues. While both sides derive benefits from the agreement, a qualified US reinsurer – such as OdysseyRe – is relieved from collateral and local presence requirements, and can, therefore, freely conduct business in the normal course throughout the EU.

Is there one thing that makes OdysseyRe unique in the reinsurance market?In 2016 we celebrated our 20th anniversary

as a Fairfax company and it is important to note that most of our management team and senior staff have been together pretty much from the start. The continuity that we offer to our clients and the consistency of our approach is a fundamental strength. All too often we see others reinventing themselves and changing their management line-up; that hasn’t happened at OdysseyRe. Clients and business partners know what to expect when they deal with us and we think that is important.

Your parent Fairfax recently completed its acquisition of Allied World. What does this mean for OdysseyRe? That’s a good question. The short answer is that it is business as usual. There are no changes to strategy, no plans to consolidate and no plans to seek cost synergies. Fairfax is committed to a decentralised business approach where all subsidiary companies operate independently. Fairfax, which is short for “fair and friendly acquisitions”, feels very strongly that its ability to attract quality franchises like Allied World is because of its willingness to let the business operate exactly as it did before it was acquired.

It is important to add that just because we compete in the same market with Allied World, and other Fairfax subsidiaries like Brit, doesn’t mean that we don’t cooperate. We are always searching for ways to collaborate with other Fairfax entities where our combined experience, expertise and capacity provides added value to our clients and business partners.

The Insurance Insider spoke to OdysseyRe President and CEO Brian Young about market conditions, growth opportunities and the challenges facing the reinsurance industry

“In terms of market impact, I firmly believe that the cumulative effect of these events will have a positive impact on pricing. Rates have fallen for too long and now capital is being burned”

FOCUSED PROTECTION.ALWAYS.

46300IGI Brochure cover resize AW.indd 1 10/05/2017 13:06

INTERVIEW

25DAY 1: SUNDAY

Cat modellers have been permanently in the news these last few weeks. Can you give us a potted history of the industry?Between 1987 and 1994 the insurance industry had the cat loss equivalent of the 2007-2008 banking crisis. Cat models were just being developed at that time and the industry, reeling from the losses, welcomed those models for helping to bring greater structure and science to catastrophe insurance.

Over the past 20 years, during periods of low global catastrophe activity, cat models have helped provide a floor to risk pricing, so the industry does not indulge in reckless price competition below the technical rates for the risk. The whole idea of insurance-linked securities (also known as cat bonds) also developed because issuers and investors had come to trust that the cat models offered a reasonable perspective on risk.

Now after a very costly hurricane season, catastrophes are back on the agenda at board level. This is a high-profile moment for loss estimation and risk modelling more generally.

Where does flood modelling fit in?The early cat models developed in the 1990s were principally for hurricane and earthquake. Flood models have always been more data intensive and challenging to build and only arrived later. RMS was a pioneer in developing the first inland flood model about 15 years ago.

What does your new “high-definition” (HD) flood model in Europe offer?Traditional flood modelling would take shortcuts. Both because of computing resources and file sizes, the model would operate at a coarser resolution than was ideal.

The new HD model samples the hazard and loss to each individual property impacted by an event, as well as capturing where different perils, like flood and wind, impact the same property.

Why is that necessary?Flood risk can vary significantly over short

distances. One property may be two or three feet lower than its identical neighbour but the overall cost of flood losses may be five times greater. Small differences in elevation can make a huge difference in outcomes.

This is why the HD model resolves the risk at an individual property level. With more powerful computing capabilities and larger file sizes both for the model and the results, we can be more ambitious in capturing the fine details of the risk.

Aside from more detail, what else is new with the HD model?Previously with flood modelling we had to apply our best assumption about the quality of the flood defences protecting a town or an industrial facility. However, in the course of writing the risk, the insurer may have received superior information, or else wants to stress test the model to discover what would be the outcome if the defences should fail.

With the new HD model the user can adjust the level of protection provided by each section of flood defences.

Another feature of HD models is that for the first time we can track the extent of flooding all across Europe, day by day.

A primary insurer has to apply some definition of the duration of the loss before it becomes a single “event” for reinsurance recoveries. It is now possible for the user to set a definition of, say, seven days, or three weeks, for the purposes of exploring what would be the impact on reinsurance coverage and costs.

Flooding can often span multiple countries. In the past we have built flood models covering Europe, one country at a time. However, we know in around 25 percent of cases floods affect more than one country.

We have now built one single coherent European flood model that goes all the way from Ireland to Poland and which we’re extending next year to include Italy.

For a reinsurer this is really important. They may previously have assumed the book they were writing in Austria was completely independent from the book in the Czech Republic, but we can show there are many flood events that span national borders. If you are a big multi-national insurer you also need to be able to see how risk correlates from one country to another.

We introduced the HD flood model for the whole of western and central Europe this

year. Going forward all our flood models will be built to the same capability.

Is Europe really likely to be susceptible to a Harvey-like flood event?With Harvey we had an intense hurricane that hit an unpopulated area of the coast and then stalled. One half was over the warm water of the Gulf of Mexico, while the other half was raining out the moisture accumulated over the sea and dumping it over America’s fourth-largest city.

In Europe around the North Sea we have also seen past storms that stall at the coastline and bring exceptional rainfall totals to the Netherlands or the eastern UK. We’ve seen similar events around northern Italy, and even extending into southwest Germany fed by even warmer sea surface temperatures in the Mediterranean.

You can have catastrophic rainfall totals from these stalled circulations. For example, a similar situation to Harvey happened in Florence in 1966. We have the potential for floods that could cause $20bn of insured losses, running across more than one country. Economically you could be looking at tens of billions of losses.

What have the last few weeks been like for your cat response team in London?The team has been incredibly busy, working weekend after weekend, providing detailed, mapped information on flood depths – putting the upcoming HD US flood model to the test – and using HWind to provide wind speeds to clients so they can explore what are likely to be the losses suffered by their own exposures.

This is when cat models are most tested but also where their function in helping society comes to the fore.

For insurers and for cat modellers, everything else is preparation for the real event.

Robert Muir-WoodChief Research Officer, RMS

Model behaviourRMS’s Robert Muir-Wood talks through the latest in flood modelling and the potential for Harvey-style flooding in Europe

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INTERVIEW

27DAY 1: SUNDAY

How do you view the role of insurance-linked securities (ILS) in the global reinsurance market?In 2017, ILS markets supplied about a fifth of the $400bn global catastrophe market capacity. Taking into account the recent catastrophe activity in the US as well as longer-term market challenges – such as the increased scrutiny of credit risk by regulators, pressure to mitigate systemic risks by bringing in additional capacity and the need for insurers to diversify their reinsurer panels – we think the capacity provided by ILS investors will continue to expand significantly in the years to come.

We are seeing significant demand from the US in the aftermath of the recent hurricanes. ILS already forms a vital part of worldwide reinsurance capacity, and the role of this ILS capacity will become even more significant over the next few years.

Who are your investor clients? Who is ultimately backing your capacity?Our investors are institutional investors, predominantly pension funds. Historically we have had a strong client focus in Europe, but more recently we have expanded our investor base to Asia as well as to North America with a bespoke US and Canadian offering.

And what is the implication of the most recent hurricane events for your funds?At LGT, we focus on the one area where additional reinsurance capital is truly required – natural catastrophe risks in peak zones. As such, we run considerable concentrations of risks in the US with hurricane and earthquake exposure, in Europe with windstorm and flood risks, and in Japan with typhoon and quake perils. We have seen a notable impact to our portfolios as a number of our US-focused reinsurance transactions are expected to pay out in 2017, mostly as a result of hurricanes Harvey, Irma and Maria, but also due to the higher frequency of attritional losses such as floods and storms during the summer months.

However, given our globally diversified book of business, losses from the recent US events are very much in line with our investors’ expectations considering the significant event activity.

And what is the response of your investor client base?LGT is a team of reinsurance professionals who have gone through several market cycles and paid several hundred million dollars in claims for events such as hurricanes Katrina, Ike and Sandy as well as the Great Tohoku and New Zealand earthquakes in 2011, among other large natural catastrophe events. We have been managing ILS strategies for over a decade and many of our current clients have invested with us for many years. The most recent events and the corresponding draw-down in our funds is in line with their expectation for such events.

This is driven largely by the fact that we run all our portfolios on a constant risk and not return basis, which implies that investors are exposed to the same level of risk over time. We do not chase premiums, which is quite different from what most traditional reinsurers do.

One must not forget that contrary to reinsurance companies, institutional investors only allocate a small portion of their capital base to ILS and to extreme catastrophe events. The response from our client base has been as expected, indeed we received a series of inquiries from clients asking if they should increase their allocation, as such events also bring about new opportunities.

Speaking of opportunities, do you expect to see a change in reinsurance premium levels for 2018?Clearly, with Harvey, Irma and Maria, the worldwide cat loss burden will be significantly above the long-term annual average. Yet, many traditional reinsurance companies have reduced their balance sheet usage over the last two years due to the soft market conditions. As such, reinsurers have additional capacity available to both pay for the most recent loss events and supply fresh capacity for new protection in 2018.

Equally, we have seen solid interest from our investors even before the most recent events struck and market feedback indicates that such interest has again increased as investors hope for an adjustment of premium rates.

We clearly expect a firmer rate environment – reinsurers will demand premium increases

for loss-affected programmes, especially for those with large exposures in the US. Such “payback” elements support the partnership approach in risk sharing. We also expect to see new inquiries for additional frequency cover as insurers and reinsurers alike are keen to buy additional protection against the kind of multiple event scenario we have just experienced.

LGT currently has a Class 3-A regulated reinsurance entity in Bermuda – do you envisage that ILS managers will maintain rated reinsurance carriers in the future?We are constantly assessing opportunities to improve our services to our client base, such as rated risk vehicles, joint ventures or hybrid forms of transactions. The core value proposition of ILS is the full collateralisation of capacity. By establishing a rated carrier with a great level of leverage, one would defeat the original purpose of collateralised reinsurance.

However, we also see the merits of running a rated carrier when it comes to the operational element of conducting business and many of our clients have commented that it would be simpler than conducting individually collateralised deals whereby you have to set up the individual collateral solution for each transaction.

Whilst we do not see the need for yet another highly levered “hedge fund reinsurer”, a very highly capitalised and as a result highly rated “ILS carrier” would bring the best of both worlds to the market: the superior security of a collateralised offering for clients coupled with the operational ease of a rated balance sheet.

2017 losses will help boost ILS market share: LGT

Christian BrunsPartner and Portfolio Manager, LGT ILS Partners

LGT advert 2017.indd 1 29/08/2017 15:46

TRADING RISK

29DAY 1: SUNDAY

Florida insurers could seek increased quota share reinsurance or top-layer

cascading cover in 2018 after they escaped major losses from Hurricane Irma.

Local carriers will need to raise further capital, although a panel of experts at a New York conference hosted by sister publication Trading Risk said they were not expecting widespread solvency problems.

“Every company is in a position where they have lost primary capital,” said Citizens CEO Barry Gilway.

TigerRisk Partners president Tony Ursano said that initial forecasts for Irma had reminded Florida reinsurance cedants of the potential volatility they faced. “People will buy as much if not more [cover],” he predicted.

Elementum co-founder Tony Rettino agreed, saying that changes could be expected at both ends of reinsurance programmes, after top-end cascading covers performed well. But some Florida insurers might not be able to maintain their very low retentions and could need to

increase quota share support or their capital base, he said.

UPC Insurance CFO Brad Martz said that rising reinsurance costs could be an issue for smaller carriers but added that “the strong will get stronger”.

On the prospect for reinsurance rate increases next year, the panellists said they expected a range of outcomes at June renewals.

Martz said that after UPC’s first layer of reinsurance had been hit by losses two years in a row, it would be naïve to think increases could be avoided.

But Gilway said that for upper reinsurance layers, there was not an expectation of significant rate increases.

Velocity CEO Phil Bowie said that his preliminary guess for reinsurance rate

increases would be in the range of 10 percent to 15 percent.

In terms of the challenge of handling Irma claims, the panellists said there had been strong competition for quality claims adjusters – which could affect loss adjustment expenses from the storm.

On the potential for continued assignment of benefit-related litigation, Gilway said he was hopeful state lawmakers in both the House of Representatives and Senate would attempt to push forward legislation to address the issue this year.

However, he said the critical factor in getting on top of the problem would be addressing one-way attorney fees, and that this was unlikely to be fixed without support from consumers.

Citizens expects to grow in the next couple of years post-Irma, with the state insurer anticipating taking on another 100,000 to 150,000 of mostly multi-peril policies.

But Gilway said he did not expect Citizens would get anywhere near as large as it was five years ago given strong competition in the state.

The insurance-linked securities (ILS) market is well-placed to handle

locked-up collateral ahead of the 1 January renewals, with investors expected to replenish their holdings in the sector, according to speakers at the Trading Risk New York Rendez-Vous.

Aon Securities CEO Paul Schultz said ILS managers had prepared for the scenario of significant capital lock-ups, with plans to launch draw-down facilities or to rely on other forms of financing.

“It feels to us like it will be more capital coming in than going out.”

Andre Perez, CEO of Horseshoe Group, said that when it looked like Hurricane Irma was going to hit Miami, the company was involved in preliminary fundraising talks that could have brought in $3bn of capital over the course of just two days.

“We’re seeing investors coming back who haven’t been back since post-KRW [Katrina, Rita, Wilma],” he said.

Perez estimated the ILS market could be on track to take 20 to 30 percent of the roughly $100bn of industry losses anticipated from

hurricanes Harvey, Irma and Maria.The ILS market holds around $80bn in

capital.

Even though the worst-case Miami disaster did not materialise, speakers said they still believed even modest rate increases would draw in investors, at least those already active in the market.

Elementum co-founder Tony Rettino said most investors already active in the market would probably increase their participation a little, even for relatively modest rate changes in the 10 percent to 15 percent range.

But for those sitting on the sidelines, it might not be enough.

“I don’t know if it will bring others over the line,” Rettino said.

The prospect of modest reinsurance rate

increases after the 2017 hurricanes may be enough to keep ILS investors who had been reconsidering their allocation to the sector involved, according to Todor Todorov, head of ILS research at Willis Towers Watson.

The consultant said that midway through this year, some investors had been considering taking their “chips off the table” as years of softening rates meant that in some cases risk-adjusted ILS returns were not meeting their cost of capital.

But an uptick could be enough to make investors stay, if not to expand their allocation, Todorov said, noting that uncertainty in other asset classes meant there was no easy option to redeploy away from ILS.

Other investors who had simply been looking for a chance to enter the small ILS market in a significant way might also seize on the post-HIM opportunity to move in, he forecast. Schultz said indications on pricing trends would become apparent in “a matter of weeks”.

But it would not be a “one-size-fits-all” renewal, he added.

Florida insurers may look for more cover in 2018

ILS market will reload, panellists argue

“Every company is in a position where they have lost primary capital”Barry Gilway, Citizens

“We’re seeing investors coming back who haven’t been back since post-KRW”Andre Perez, Horseshoe Group

DAY 1: SUNDAY30

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OPINION

31DAY 1: SUNDAY

While the reinsurance product has delivered compelling balance-sheet

solutions since its beginnings, recent catastrophes in Mexico, the Caribbean and the US have created a perfect opportunity for the market to showcase its ability to adapt solutions to the unique risk profiles of individual clients seeking to manage capital events.

The value of reinsurance as a capital substitute was very apparent during the 2008 financial crisis, when debt and equity financing was difficult for our clients to obtain. In their place, the reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the recent series of catastrophes – the earthquakes in Mexico and hurricanes Harvey, Irma and Maria – is reminding cedants that reinsurance is also one of the most effective ways to protect corporate capital bases from such events.

The recent loss events have the potential to make the third quarter of 2017 one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, some analysts expect insured losses of at least $100bn. According to AM Best, total catastrophe losses of $75bn would mean a combined ratio of 106 percent for the world’s top 20 reinsurers. Although there appears to be little risk to solvency, individual insurers’ earnings will be impacted and in some cases excess capital positions and catastrophe budgets may be eroded.

With dedicated sector capital of $435bn, the global reinsurance market is underpinned by record capital levels – so in general terms the sector is well positioned to absorb such losses. However, the cumulative effect of the earthquakes in Mexico and hurricanes Irma and Maria will not fall symmetrically on the industry, and could create a capital event for some market participants.

Alternative capital has been growing at an annual compound growth rate of 18 percent for the last five years and now contributes around 20 percent of overall industry capital. Much of this capital is supporting reinsurance companies through sidecars and other instruments and has not been fully tested in the event of a major market loss. Initial observations are that the alternative capital has responded well to client demands post event by raising new funds and supporting back-up and short-term contracts. What remains to be seen is the availability and pricing of the alternative capital market to support retrocessional contracts at 1 January.

Despite years of low reinsurance pricing and low interest rates that have reduced the industry’s profitability, and uncertainty around the size of the ultimate losses from recent cat events and the response of the alternative capital market, industry capital remains strong. As a result, we expect a rational response from the reinsurance market at the 1 January renewals.

The earthquake and hurricanes also provide an opportunity to define the viability and effectiveness of the 144A product, creating either a day of reckoning or a day of glory for the insurance-linked securities (ILS) market. We expect that these instruments will demonstrate their effectiveness and serve their intended purpose.

Assuming the ILS market responds to these catastrophes according to industry

expectations, this capacity will likely remain an integral part of insurers’ capital structures, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on US Treasuries, so the asset class will remain attractive as interest rates rise. ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.

Overall, we expect the reinsurance marketplace to remain vibrant and rational, and to continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. Industry capital is at an all-time high and clients are expanding covers and fully leveraging a broader array of solutions as the sector modernises in the face of technological innovation.

As the industry enters the 2018 renewal, the market remains strong with a variety of solutions to deliver the right capital to risks. Following the recent catastrophes, reinsurers are adjusting business plans for opportunities in marine, energy, flood and specialty lines of business. In today’s world of unprecedented disruption, the reinsurance solution for managing capital and earnings is as relevant as its solution for severity protection. Guy Carpenter stands ready to help clients structure a reinsurance programme that fosters stability while allowing for adaptation to opportunities for profitable growth.

Reinsurance market poised to remain vibrant following recent cat events

“We expect the reinsurance marketplace to remain vibrant and rational, and to continue offering a full range of products”

James NashPresident, International, Guy Carpenter & Company

David PriebeVice chairman, Guy Carpenter & Company

OPPORTUNITYThe global convergence of man-made and natural risk is creating demand for new products and “out of the box” solutions.

We provide our clients with the insights, strategic analysis and analytic tools to help them confidently identify and profit from opportunity.

BRINGING OPPORTUNITY TO RISK

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