Rendezvous Roundup: Guy Carpenter; Aon Global Re; Munich Re

September 8, 2008

The Annual Reinsurance Rendezvous in Monte Carlo convened this weekend amid concerns over the ongoing credit crisis, the softening of the market and the onslaught of storms in the Caribbean.

The current climate for the reinsurance industry is decidedly mixed. Some of its biggest players issued their analysis of the operating parameters as follows:

Guy Carpenter Describes ‘Unique Complexities’

Guy Carpenter & Co., MMC’s reinsurance division, held a briefing on Saturday, Sept. 6, directed by President and CEO Peter Zaffino. He opened the discussion with observations on the unique complexities of today’s reinsurance market, followed by additional insights from Guy Carpenter’s Chris Klein, Global Head of Business Intelligence, David Priebe, Head of the Global Client Development Group, and Nick Frankland, CEO of European operations.

Zaffino described the ongoing subprime crisis as “a new type of catastrophe – the ‘financial catastrophe’ – with the power to hit both sides of the balance sheet.” He continued by presenting the negative impact of the credit crisis on 2008 six-month earnings results, pointing to reduced investment results that put pressure on underwriters to maximize returns.

Klein stated, “If the credit crisis persists, there could be a post-loss liquidity crunch – particularly for credit.” He added that even with sidecars and cat bonds to supplement traditional reinsurance, “risk transfer is only as effective as the capital behind it.”

Turning to market conditions, Klein pointed out that high retentions by primary insurers have accompanied the soft market conditions. With the frequency of large per risk losses in the first quarter of 2008, together with a string of hurricanes, it means “losses will weigh more heavily on primaries, who may then seek to buy down retentions.” He added that “Gustav and Hanna are unlikely to have a major impact on pricing, but Ike could be a turning point.”

Priebe added that the alternative capital market is maturing, not disappearing. He stated, “The market is showing us the difference between capital markets as a source of urgent capacity and capital markets as a source of strategic capacity. Today, we’re seeing the latter.”

Nick Frankland commented on the European casualty marketplace, noting that risk is becoming harder to isolate as linkages in the business world are replicated in carriers’ portfolios. He stated, “Casualty catastrophes, litigation, changing access to cash – it all comes down to disciplined capital management. The industry has to focus on capital first, with every risk-related decision tied back to a capital implication.”

Source: Guy Carpenter –
Aon Re Global Says ‘Reinsurers Strong Amid Credit Crisis’

Aon Re Global, Aon’s reinsurance arm, issued a bulletin indicating that the “despite the impact of the ongoing credit and liquidity crisis to most financial services sectors, reinsurance companies are well-positioned to sustain reasonably significant property catastrophe losses or other large sequences of non-cat losses while continuing to meet the needs of reinsurance buyers.”

Aon Re added that the January renewals were “likely to reflect slowing rate of decrease in reinsurance pricing provided no significant catastrophe losses. It believes that with “the cost of reinsurance capital in continued decline, reinsurance is now a substantially more accretive form of underwriting capital than it was a year ago.”

Bryon Ehrhart, president and CEO of Aon Re Global Services, observed: “Equity risk premiums and credit risk spreads have become significantly more expensive for insurers, and the incremental benefit of reinsurance as an alternative source of underwriting capital has become even more pronounced.”

According to Aon Re’s analysis, “most insurers and reinsurers have had very manageable impacts to earnings or capital as a result of the credit and liquidity crisis. This reflects an enterprise risk management success for the industry and provides a strong foundation as the industry heads into what appears to be a softening global insurance and reinsurance market. Ehrhart added: “Indeed, even reasonably high levels of property or liability catastrophes could be sustained by insurers without material disruption of the global business.”

Aon Re asserted that the “credit and liquidity crisis will lead to a slower decrease in reinsurance pricing for Jan. 1, 2009 renewals than otherwise would have been available had the crisis not reached its current or projected level. The January renewals will reflect the first time the decline in reinsurance pricing has slowed since the credit crisis began.”

The bulletin also said Aon Re believes that “should significant insured catastrophes occur before Jan. 1, 2009, the fast pace of rebuilding capacity will be unprecedented since the reinsurance and insurance markets are now aligned with sufficient existing and contingent (e.g. sidecar) capital providers.”

As far as developments in the capital markets are concerned, Aon Re noted that, “while the pace of bond form transactions in 2008 may not reach the record levels attained though the end of 2007, the market continues to develop at a significant pace.” Paul Schultz, president of Aon Capital Markets added: “We expect this complementary capacity to continue to provide 10-30 percent of the capacity required by insurers that purchase more than $500 million of capacity.”

In the facultative market Aon Re said it sees a “balancing between the desire of cedents to spend less on reinsurance to sustain net premium growth in a softening market – an influence that’s also driving higher casualty net retentions — and the increased use of facultative certificates by underwriters that fear higher net treaty retentions.” It anticipates “rate, terms and conditions changes in the property and casualty facultative markets that are in line with the movements insurers offer to insureds. Catastrophe model miss vontinues to be a driver of facultative purchases.”

In some areas – “heavy industries such as mining, metals, pulp and paper and energy” – Aon Re noted that they have “contributed more than half of the insured losses in 2008. ” It therefore anticipates “neither capacity reductions on Jan. 1, 2009 renewals nor price increases on unaffected programs. Such programs are likely to see further rate relief.”

On the casualty front, Aon observed that “reduced demand from cedents in 2008 continues to impact reinsurers. Casualty capacity layers may increase or reflect lower levels of decreases than would otherwise have been achieved had the leverage from the underlying layers not been lost by reinsurers.”

To access Aon Re Global’s Jan. 1, 2009 pricing and capacity report, go to:

Source: Aon Re Global –
Munich Re Sees a ‘Turnaround in the Cycle’

Despite skepticism from a number of analysts and commentators (See related article), Munich Re believes that the “difficult capital market environment and higher losses can accelerate a turnaround in the cycle,” adding that it is also “committed to consistent cycle management and differentiated pricing in reinsurance. ”

Torsten Jeworrek, member of Munich Re’s Board of Management said the reinsurer fully intends to “maintain its underwriting discipline in every phase of the cycle”, describing cycle management as a “key topic for Munich Re at this year’s round of renewals.”

Munich Re said: “Renewals over the past few years were marked by a surfeit of capacity and growing competition. However, a drop in investment income in the past months has led to shortfalls in profit and lower equity capital in the insurance industry. Munich Re anticipates that this will have a positive impact on the cycle and accelerate a turnaround in the trend.”

Part of attaining its underwriting goals means dealing with “escalating claims costs,” which Munich Re said underlines “the importance of risk-adequate pricing.” Its analysis concludes that “globalization, the related distribution of labor, and soaring raw material prices are inflating claims, especially from business interruption. The number of large individual losses is on the increase.

“Exposure from natural hazards such as windstorms in Europe, hurricanes in the Atlantic, and inundation remains high and continues to trend upwards. Social and medical developments are causing an increase in severe personal injuries, above all in the USA and Europe. All of these developments are typical of the challenges we face in reinsurance business and are accounted for in Munich Re’s models. The important point is that such factors are consistently implemented in our underwriting.”

Munich Re reiterated that it “will maintain its clear, profit-oriented underwriting policy and accept risks only at commensurate prices, terms and conditions. It will not waver from its commitment to differentiated prices. “If you offer more security and better service, you should be paid the right price for what you provide”, Jeworrek asserted. “This gives our clients the opportunity to select the reinsurance which they consider best meets their individual needs.”

Source: Munich Re –

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