A quick, and as yet incomplete, survey of re/insurance industry leaders indicates that the main concern they will have to deal with in the coming year isn’t climate change, or Solvency II, but the insurance industry’s ancient bugaboo, the soft market.
“Over the long distance market conditions are the main challenge,” said Neil Maidment, the Chairman of the Beazley Group’s Underwriting Committee. He explained that as a general rule the demand for insurance depends on the state of the economy, and, in the developed countries, economic conditions continue to be stagnant with insufficient growth to spur demand.
Maidment also pointed out that “while demand hasn’t increased, there’s been an increase in [the amount of] capital,” which in turn has increased capacity. “Other than offshore energy, most lines are facing fairly challenging conditions in 2011,” he said.
Over the last six years Beazley has assumed a significant presence in U.S. specialty markets. While one might expect some renewed growth in the U.S. it doesn’t seem to be happening. “The U.S. property/casualty market’s combined ratio is over 100 percent,” Maidment said; “plus investment yields remain low. There should be an improvement [in market conditions], but so far we haven’t seen any.”
What’s true for the primary insurers is also true for the reinsurance industry. John Moore, head of International Analytics at Aon Benfield, spelled out the situation: “In 2011, based on $465 billion of reinsurance industry capital at 31 December 2010, the event size needed to stop reinsurance prices from falling further is $45-50 billion in insured losses and the event size that is needed to clearly move reinsurance prices back to peak 2006 levels is $51-70 billion.”
Those figures explain why, even though insured losses in 2010 nearly doubled the figures for 2009 – $38 billion according to Aon Benfield, $36 billion according to Swiss Re – there has been no significant increase in reinsurance premiums. On the contrary, they seem to be “on the decline,” according to the latest information.
Reinsurance consultant Paul Walther, who heads Mindspring, summed up his views on the current state of the market. “As we move into ’11, I see reinsurance markets engaged in a continuing effort to a) maintain/increase bottom line results in an increasingly soft market; b) control and limit their catastrophe exposures; and c) carefully manage their “enterprise risk” in general, including asset portfolios.
“I believe the most significant and continuing issue for reinsurers will be coping with ‘the cycle’ in order to maintain investor interest and market share. Probably likely there will be additional effort devoted toward diversification; e.g., expansion into direct insurance lines, and/or at least some M&A activity in order to maintain critical mass in the current market environment.”
Walther also indicated that there will be some “increased hedging activity in the ILS (Insurance Linked Securities) markets by the larger and more sophisticated players better able to understand and absorb the frictional cost attached to those alternative products. Although there may be some retrocessional capacity available from certain markets, don’t believe the pricing of those contracts will attract too much attention.”
All three men said that due in part to the ongoing difficult market conditions the role of enterprise risk management (ERM) continues to increase in importance.
“Enterprise risk has certainly become the buzz issue in recent times,” said Walther – “certainly for good reason based on repercussions from the financial meltdown. For some many months now, it has become essential for corporate managements to concentrate their attention on the macro aspect of their entire operations, rather than to continue an age-old dedication to assuring profitable returns from their underwriting units.”
He also pointed out that the it has “become quite clear that the reinsurance community no longer functions in any sort of vacuum, and that increasing attention must be paid to the evolution and impact of various forces comprising the global family of regulators.”
Moore linked the importance of ERM with those regulatory considerations. “Another issue affecting the insurance industry is balancing Solvency II, IFRS and rating agency commitments in today’s regulatory environment,” he said, “with an increased focus on ERM to help re/insurers differentiate themselves.”
Maidment doesn’t see the implementation of the European Union’s Solvency II regulations in 2013 as being a particular concern, as “we’ve been working on capital assessment models for a number of years.” But he said they would “challenge how the industry operates. Good capital management could equal less growth.”
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