Global Crisis Dominates A.M. Best’s London Conference

The by now all too familiar litany of the world’s financial woes took pride of place at A.M. Best’s well-attended conference (over 240 attendees) in London on October 15.

Roger Sellek, the rating agency’s managing director-global financial services, called the credit crisis a “turmoil” in his opening remarks, and went on to detail the potential fallout. He cited the “downward pressure on ratings;” “liquidity problems across all lines,” and the status of “insurance linked securities” as the main areas of concern.

In the first presentation John Andre, Best’s group vice president, described the current financial crisis, as “a market changing event,” explaining that it “may be big enough to affect underwriting conditions.” He was cautious as to just what those effects might be. So far the world’s insurers and reinsurers have not felt a significant impact. “Overall terms and conditions remain attractive,” Andre said; “we’ve had relatively disciplined renewals to date, but there’s clearly pressure on prices.”

Vasilis Katsipis, General Manager – A.M. Best Europe then discussed the current state of the life insurers. In a related video release he explains how the current credit crisis combined with turbulence in the equity markets is affecting insurers throughout Europe. To acces his analysis go to:
http://link.brightcove.com/services/link/bcpid909966848/bclid1119245834/bctid1858922874

Miles Trotter, general manager of A.M. Best Europe, gave a well-illustrated presentation on the insurance pricing cycle, based on the “Warburg Wheel.” It starts with full demand, but gradually declines as competition increases, until a nadir is reached as underwriting losses increase and investment returns decrease. But, Trotter pointed out, it then begins to recover. His main point, however, was to avoid the highs and lows in favor of disciplined underwriting, which he defined as keeping existing clients in down markets, and trying to attract new business only when conditions are becoming more favorable.

Lloyd’s Franchise Director Rolf Tolle added a complementary view. He detailed Lloyd’s efforts since adopting a franchise system in 2003 to “get a better handle” on how the Syndicates operate. One guiding principle emerged – knowledge of how every aspect of your business works is absolutely necessary in order to achieve a measure of control over it. That’s a lesson the banking world could certainly profit from.

Another point that emerged in a number of presentations mirrors the financial crisis – be careful, be very careful. Analysis of reserves, of solvency capital, as well as risks and loss ratios, should be carefully monitored. As a result the larger companies and a number of smaller ones are placing greater emphasis on perfecting their internal capital models. With the Solvency II regulations looming ever larger, most of them are hoping that their own models will be acceptable to regulatory authorities as falling within the ambit of the new risk-based regulations.

There’s still a great deal of debate as to the precise form Solvency II will take when it comes into force in 2012. “Economically the idea of a non-linear approach to risk assessment is a good concept,” said Eberhard Mueller, chief risk officer of Hannover Re. “However,” he continued, “now we’ll see if this general approach makes its way to the final outcome.” He’s worried that it may not, due both to political interference and the possibility that it “will be watered down at the group level.”

Edward H. Easop, Best’s vice president, rating criteria and relations, reinforced the “back to basics approach” to risk management, which has become increasingly important, as the financial crisis deepens. In describing Best’s Capital Adequacy Ratio, or BCAR, and the role of Internal Capital Models (ICMs) he stressed the need for both to evolve as times change. “Your need solid guidelines,” Easop said, and “you need to reexamine them on an ongoing basis.” The size of the company, the type of business it writes, the areas it serves, how advanced its enterprise risk management is are some of the more important factors Best considers in establishing its ratings.

The concluding panel’s discussion of “Evolving Business Models” focused essentially on the attractions and deficiencies of more traditional insurance centers, i.e. London, and those that have recently attracted more company formation and changed domiciles, i.e. Bermuda. The debate between Chris Hitchings, senior vice president of Keefe Bruyette & Woods, and an acknowledged expert on Lloyd’s, and Hiscox CEO Bronek Masojada was particularly spirited.

Do Bermuda’s insurers have trouble employing the capital they’ve amassed? Is the island’s infrastructure at a saturation point as far as providing support and services is concerned? Are Bermuda’s tax benefits really that important? Has London sufficiently reacted to the island’s challenges? These were some of the questions raised. The answers, however, as is usual in such debates, largely depended upon the proponent’s point of view.

There was little disagreement, however, about the importance of facing the ongoing financial crisis. To sum it up: it will get worse before it gets better, and, if you don’t get your act together with better risk management, both operational and enterprise wide, you will be in for a lot of trouble in the near future.

Topics Legislation Europe AM Best Training Development London