It has definitely been a very exciting year on all fronts with slightly hardening rates in most cases and unpredictability still an issue. We directed a few questions at participants in the reinsurance environment and asked for general overviews from others. Gary Ankcorn, Head South Africa Treaty, Aon Benfield, Mark Haken of the Cotswold Group and SCOR’s Terry Ray provided direct comments to our questions while we received general comments from several other industry leaders.
Comment on the half year renewal process (capacity, pricing, innovation, service, conditions and information requirements) and what predictions for the year end renewals?
Mark Haken – At 30 June, 2009, the treaty renewal procedure followed previous years in most respects. An observation would be that the economic travails of the world have inevitably impacted on international reinsurers, and their reaction has been to become more particular about the conditions required, seeking greater accuracy and transparency of information, and looking for higher profit margins to offset the negative financial results of the previous year. In the main, it has become apparent that virtually all underwriting decisions are made centrally, thus removing the independence of local reinsurance underwriters, and this has slowed down the process giving the impression of deteriorating service.
Gary Ankcorn – Capacity is in abundance and, by and large, pricing remains static. However, where results have not been as expected, there have been price increases. The quality of data from insurers has improved versus last year; nevertheless, more progress is required into 2010. Reinsurers have tried to tighten wordings somewhat and, where appropriate, these changes have been incorporated; but reinsurers do need to understand that they must engage with the clients earlier in the renewal process to ensure such changes are effected smoothly.
To date, the US Hurricane season has been benign so we do not foresee any great changes for the year-end renewals. Whilst writing this report, Baden Baden is ongoing and initial news coming out indicate a flat to slightly softening year end renewal.
We have some new players in the local market and have seen some restructuring of existing players. How does that affect the local market (solvency/ approved reinsurance)? Is there an over-supply or not?
Gary Ankcorn – 2009 has seen three major changes to the local reinsurance market: the FSB approval of SCOR Africa, the change in shareholding of Flagstone Africa and the de-localisation of Swiss Re. Solvency issues have become more important to insurers and local reinsurance placement has become more desirable. However, the introduction of premium and loss reserves and, where applicable, the lodging of LOCs, have reduced the case for local placement.
South African business is extremely desirable to international reinsurers owing to the diversification effect from major reinsurance markets, and the supply of foreign capacity is increasing.
Has the market hardened as expected or was there a bowing to economic pressure? Are we coping with the worldwide recession?
Terry Ray – Despite property/casualty insurers being hit that much harder than reinsurers by investment losses, reinsurance pricing has been the first to react. Reinsurersmay not have been able to push up pricing in lines affected by hurricane-related losses, and liability lines likely to be hit by claims,or inflation associated with the financial crisis as much as they would have expected to, but the upturntrend has been there since the end of 2008 and looks solid enough to continue.Insurers have found it harder to pass onpricehikes tocustomers andclients already struggling against the economic downturn. We see an increasingly cleardislocation between the twoindustries.
The reinsurance industryis in a B to B world, looking to smooth the lower investment returns by strengtheningitstechnical margins through price increases, whichis reflected by howprices of excess businesshave been going up. But, on the insurance side, competitionfor market shares and B to C parameters are stilldominating in a number of markets and classes. If nothing really happens to change this, reinsurersare heading towards toughernegotiationswith insurerson the proportional side of the businessin these markets and classes.
Are we coping with increased CAT events and how is the market reacting to these?
Gary Ankcorn – The frequency of global Cat events may have increased, but, to date, the severity has not been significant. These events have not significantly impacted on the reinsurance programmes in place. “The reinsurance market won’t harden without a significant event to turn it,” according to Bryon G. Ehrhart, Chairman of Investment Banking Group and Chief Executive Officer of Aon Benfield Analytics at Aon Benfield in Chicago. Where claims activity has been high, certain insurers have increased their own net retained levels. This is a function of costing and risk appetite and, given the increase in reinsurance capacity available, has not significantly impacted the pricing available.
There is a general consensus among insurers that the pricing of underlying risks needs to become more scientific with specific allowance for potential catastrophe events being explicitly allowed for. This will become more important if the reinsurance price increases.
Any specific comments on Marine and Engineering rates?
Terry Ray – Speaking from within SCOR and our own experience, in terms of expected profitability ratios as produced from our pricing tool, we are better off today writing basic Marine risks diluted in ‘bouquet’ placements, proportionally, than carrying heavier risks transferred to us through pure Marine placements, whether it be hull or cargo.
Our ‘core’ portfolio (specialist marine) is mostly proportional and it is therefore predictable that our picture is more favourable than the reality of the reinsurance market for marine specialist portfolios. Insomuch as this is not what one would have anticipated and would like to see, it should not, nor does it, come as a total surprise. There is more than room for improvement in the pricing of the ‘core’ marine business that deserves to be dealt with by marine specialists because of its higher volatility. We are also far from having the safety margins built into our prices not to be concerned by the possible risk aggravation factors linked to the economic crisis. As a matter of fact, the distribution of the marine insurance business and its dispersion prevents the marine specialist entities, whether mono-liners or divisions of global insurers, to have access to a significant proportion of the available premium. As such, their concentration on the tougher end of the business and the peak risks does not make it an impossible mission to be technically profitable but it does represent a serious handicap.
With regards to engineering, the situation is slightly different. Beside the easiest end Machinery Breakdown which, in most of the cases, falls within a composite treaty, there is lesser difference between what’s written out of bouquet or composite treaties and stand-alone treaties both in terms of risk profile and results.
Has the consolidation within the major broking market (Aon / Benfield) had any impact on the purchasing decisions of clients?
Mark Haken – As a broker, this consolidation should provide opportunities, as there is inevitably some fall-out from the merging of two dominant market forces. However, in order to compete, one must still be offering a realistic and efficient alternative. From a small broker perspective, an offering of personal service together with smooth administration is seen as an advantage.
Gary Ankcorn – The merger of Aon Re Africa and Benfield has been very successful locally and worldwide. The influx of new ideas and fresh energy has focused our attentions on the key process of client service and retention. The merged analytical capabilities (actuarial and modelling) have created a great platform to offer our clients and potential new clients comprehensive solutions to their needs. The insurance and reinsurance markets have reacted very positively to the merger. The greater leverage and purchasing power that Aon Benfield now has will lead to better solutions for all concerned.
Has there been any significant innovation in the reinsurance market during the last 12 months? If so, what, and has it been driven by the reinsureds, the reinsurers, or the brokers?
Gary Ankcorn – The most notable innovation during the past twelve months is the desire for improved data quality. Reinsurers are making assumptions in their pricing that, without appropriate data, the broker and insurer are unable to alter.
The improvement in actuarial resource in the insurers and brokers has driven this partly, plus greater understanding and transparency from the reinsurers about how they derive their prices. Reinsurance worldwide is becoming more and more actuarial focused and the enhanced understanding of capital modeling and measures of risk will lead to further improvements. The difference in data quality in South Africa between insurers is huge and big strides need to be taken to improve this.
Reinsurance in South Africa has been very profitable to reinsurers. However, with increased competition on rates and falling solvency levels, attaining competitive reinsurance terms by producing quality data and enhancing transparency by the insureds has greater importance.
What impact has the development of actuarial resources within all sectors of the reinsurance market had on your particular business? How are we doing on skills in general?
Mark Haken – During the last decade, the upsurge in the use of actuarial skills in the short-term (re)insurance business has been driven from several perspectives. Actuarial modelling has been developed to better understand the impact of catastrophe events on particular portfolios; closer scrutiny has been taken of modelling the profitability (or lack thereof!) of reinsurance arrangements; the modelling of future scenarios; dynamic financial analyses of both sides of the balance sheet; more accurate reserving methodologies; and now the insistence by the regulatory authorities of actuarial input in the preparation of financial statements. Thus, data requirements are become ever more onerous with more and more detail required. Certain legacy systems need to be re-written, re-configured or replaced in order to produce this enhanced data. The results of this are several and serve to project a more professional image for the industry. It is interesting to note that there have not been any perceptible price changes as a result – prices still tend to be driven by a combination of ‘technical rates’ and market forces. However, this development has come at a considerable additional cost, a cost which is ultimately borne by the insuring public. I am not aware of any research which has been done to assess the cost / benefit, as that would be the ultimate indicator of the true advantage of this increased and increasing use of actuarial resources.
Terry Ray – Actuarial resources have improved risk management in the short-term reinsurance industry. They have been very involved in building models to calculate the amount of capital required to ensure a reinsurer remains solvent, at a specified confidence level, for example, following a one in 200 year event. These models force management to consider the risks facing their business and to either hold sufficient capital to cover the risks, or alternatively to find ways of mitigating the risks.
In addition to calculating the amount of solvency capital required, capital models enable reinsurers to allocate more capital to the riskier lines of business, and to ensure that premiums are loaded by a sufficient margin to cover the cost of capital allocated to them. Actuaries have also improved some of the methods used to price risks, for example, catastrophe losses and large losses, that have not necessarily occurred in the past, but that reinsurers have an exposure to. There has been a big increase in the number of actuaries and actuarial students working in short-term insurance, and the level of skill is increasing all the time.
Please articulate a) the most pleasing / beneficial, and b) the most problematic, aspect of your current reinsurance relationship(s).
Gary Ankcorn – The most pleasing aspect of our current reinsurance relationships has to be the appetite, both locally and internationally, for South African business. We need to be reminded as an industry that what we have in South Africa is attractive to so many reinsurers. We are an entrepreneurial industry with a lot to do but so many opportunities within which to do it. We haven’t even begun to tap into our developing markets but knowing that with clear business plans and sound implementation we have reinsurers who are willing to work with us, is incredibly exciting.
The most problematic is trying to keep everybody happy. Not being able to give reinsurers the lines they want on a programme is a nice problem to have.
Volatility and unpredictability continue
Mwenda de Jenga and Sajiv Issuree, Munich Reinsurance of Africa
The ever-changing reinsurance buying habits of cedants following global financial market fluctuations has amplified the attention on the quality of the reinsurance partner and pricing of reinsurance products. Primary insurance companies in the past have increased retention levels and displayed an avid appetite for non-proportional programmes. However, owing to the current global economic environment, cedants have displayed a conservative strategy to protect their capital and thus the demand for reinsurance capacity is on the increase, especially with the entry of new UMAs into the market for corporate property, personal lines and marine businesses.
With insurance companies investigating the possible impact of Financial Conditional Reporting (FCR), there is an increased interest in reinsurance as a solution, including structured deals with top grade security. Increased risk sensitivity will place further significant emphasis on management’s responsibility for implementing a clearly defined risk management strategy and capital management processes with effective business decision-making.
Well-devised solutions will remain paramount to manage the concentration and volatility of risk and solvency. Managing of credit risk will require the continuation of a steady supply of quality reinsurance capacity. The presence of locally registered reinsurers will assist insurers with capital margins and smoother back office reliability and swifter technical accounting and claims management.
There is a worldwide expectation that the global recession will come to an end and that economic growth is expected to recover gradually in late 2010 and early 2011. Given that the industry is currently facing subdued expectations on the capital markets and owing to the substantial increases in claims costs and frequencies, it will be particularly challenging to achieve an adequate return on risk-based capital and thus additional focus will be brought to bear on risk adequate pricing.
Renewal terms and capacity will continue to be dependent on the development of the individual lines of business and factors such as client’s retrospective and prospective performance. In addition, socio-economic and political factors are also pertinent in determining whether reinsurers will partake in particular markets. The worldwide economic pressure is expected to continue affecting all lines of business; however, capacity constraints in respect of Directors and Officers liabilities, Financial Institutions’ D&O, Credit and Bonds are expected to continue well into 2010 and 2011.
The high level of accidents and the changing weather conditions will require continuous analysis on motor portfolios, and with the stress from bleak investment predictions has influenced the fact that motor loss ratios will need to improve. On the engineering front, numerous major 2010 FIFA World Cup projects will be completed; however, the emergence of possible claims arising still remain during maintenance phase which will result in engineering capacity coming under stress. The current marine rates require a relook by all players for each subsection of this line of business and Corporate Fire will still remain a challenge in Africa with income liability ratios expected to continue to be an issue coupled with poor risk maintenance and management. The continued losses in the fire corporate portfolio have led to a reduction of insurance and reinsurance capacity for this line of business, despite the entry of new UMAs. Regardless of all the controls, credit risk will be key and requiring continuous monitoring.
In view of the high volatility and unpredictability within all sectors of the insurance market, the development of actuarial resources is crucial for their pricing and modelling skills to ensure that expected returns are achieved. These skills are currently spread across local and international intermediaries, insurers and reinsurers and they continue to grow and complement each other.
Peter Temple, Managing Director, General Reinsurance Africa Ltd
Life reinsurance market
The life reinsurance market remains a competitive market with no withdrawals and yet the introduction of a further competitor – SCOR. The life insurance market has been more focused on regulatory and intermediary issues and therefore the focus on product developments and new innovations has been less than the last few years.
In particular, insurers have focused on their policy retention strategies as the economic downturn has resulted in increased lapses for most insurers.
Resources & Skills
Access to quality technically skilled people still remains a challenge. Actuaries with risk & reinsurance backgrounds are in short supply. In addition, life underwriters also seem to be in short supply. We have seen a trend of actuaries returning from the UK which is pleasing to see and we trust it continues as the South African industry as a whole will benefit from this trend.
Gen Re’s strategy unchanged
Despite the numerous changes to the reinsurance market in South Africa and the economic upheaval of the past 12 months, Gen Re’s strategy remains unchanged, both internationally and locally. We continue to deal directly with insurers and our pricing philosophy remains unchanged. We do not adjust our pricing relative to insurance cycles or market pressure. Our pricing remains relative only to the risk exposure. Our risk appetite, and therefore the capacity we bring to the local market, remains unchanged.
Results have turned the corner
Steve Smith, Managing Director, FlagstoneReinsurance Africa Limited
Based on what we have seen over the past few months, it appears as though developments during the forthcoming renewal period will be very interesting!
Once again, this past year, there have been a number of large single risk losses in the property market. This should have some impact on primary pricing, but already it appears as though new local capacity and a flight of risks to overseas markets are having a dampening effect. We see that these large losses are generally not adequately priced in to proportional reinsurance capacity provided and there still seems to be optimism (largely unfounded?) that things will improve.
Motor / personal lines business is also still a challenge although there are more encouraging signs that results have turned the corner. Certain classes, such as engineering and marine, have performed well, and reinsurance terms have become highly competitive. We are concerned that margins may now be too thin to withstand the larger shock losses that will surely happen at some stage.
General quality of data provided to the reinsurance industry is improving; we believe this is aligned to modelling analysis that the market is doing related to future implementation of Financial Condition Reporting. This is certainly becoming an important factor in judging the quality of potential clients – if they don’t have the data, how can they be managing their business effectively for their own shareholders?
However, there is still a long way to go to match what is available in other parts of the world. We believe that there should perhaps be an industry initiative to collect data that could assist in research on natural perils hazards.
What do Bafana Bafana and locally registered South African reinsurers have in common?
Achim Klennert,Managing Director, Hannover Re Group Africa
Having been in South Africa and being involved the local Reinsurance market for eight years, I have many times noted that South Africans are very patriotic and proud of their country… and rightly so, in my opinion. The country is beautiful and has many things in its favour – which is, I guess, the main reason why I personally keep extending my contract, so that by now, I am one of the longer serving executives in the market.
However, there are two areas in which I miss some more patriotic sentiment of South Africans, or at least, of a significant portion of South Africans.
The first area is the lack of support for Bafana Bafana. Any team needs support and I would really like to urge every South African to support his/her soccer team for the world’s largest sport event, the World Cup 2010.
The second area is closer to the business, and that is the lack of support for the locally registered reinsurance companies. There are currently six active, locally registered, short-term reinsurance companies, who individually, but especially combined, have substantial expertise and capacity, that can digest most of the reinsurance business ceded by South African short-term insurance companies. In terms of expertise, I estimate the number of professionals working on South African short-term business at the six local players is somewhere around 200 people. On top of that, some of these 200 people have access to expertise at their respective head offices. This easily outnumbers the reinsurance professionals working on South African businesses based overseas. Nevertheless, roughly 65% of the short-term reinsurance premiums are ceded to overseas companies.
At one of our recent client functions, I indicated that much of the value that we as Hannover Re have generated in terms of salaries, taxes, retained capital and profits paid out to shareholders, (amounting to over 80%) has actually remained in the South African economy. Obviously, these ratios will look different for every company, but according to my rough calculation, the reinsurers in this market have paid R450 million in taxes to SARS in 2008 alone. Whilst paying SARS for an individual or for a corporate always comes with a bit of pain, I am sure that we can all agree that taxes are largely being put to good use for the further development of the country and its people. Equally, if the local reinsurers do not pay those taxes, SARS will have to find this income somewhere else.
I am not advocating protectionism, and there will sometimes be good reasons to make cessions to overseas reinsurers – be it that the nature of the risk is highly specialised or that the capacity is really exceeding the local market capacity or that overseas captive arrangements or global cession structures need to be utilised – nevertheless, I firmly believe that a very high percentage of business ceded overseas could be easily digested locally at good security, supported by local knowledge and expertise and the availability on the ground.
Legend has it that one main reason for overseas sessions is the ‘pre-Christmas trip’ to London that the reinsurance manager of an insurance company might like, but I refuse to believe this. I have also been told by market experts that there is a high level of frustration with the service levels of local reinsurers and also the perception that local offices only act as post offices, having to get approval for most decisions from overseas. I am not convinced that this is actually true and I can speak with conviction that this is definitely not true for our organisation, Hannover Re Africa. We have not only defined service levels that are easily of the standard of the best the global reinsurance market has to offer, we have also maintained these service levels and I am very happy to challenge anybody to prove me wrong on this. Also, we do have a full mandate to take business decisions locally and do, in fact, take over 95 % of all our business decisions locally. Where, for very specific reasons, we do have to refer to a centre of expertise within the Hannover Re Group, allowing local clients access to international expertise, the turnaround time does not negatively impact on our service levels, which remain unchanged.
It is for the above reasons that I would like to appeal to every professional working in the South African short-term market dealing with reinsurance issues, to challenge and utilise the local players, before accessing overseas capacity. That the local players will not accept every business at all terms, only confirms the local expertise and professionalism, which is absolutely required to keep local reinsurers sustainable and of high security.
Oh yes, before I forget, please also support Bafana Bafana in 2010.
The disciplined approach prevailed
Alex Rimmer, Global Alliance
I wrote last year about the effect of the economic downturn, which became a global recession, and the potential effects that might have on reinsurance and insurance pricing, company results and consumer spending patterns. No big surprises there, and no crystal ball was needed to see the effects property depreciations, share value knocks and job worries and credit squeezes curbing consumerism, would have on insurers and reinsurers globally.
Most professional reinsurance companies were able to weather the storm of embattled share values and investment returns and, whilst reinsurers are in the business of risk, they showed themselves, for the most part, to be attractive to investors seeking a little bit less investment risk. Increases in reinsurance pricing and the effects of capacity pricing were mostly felt in areas exposed to natural catastrophes such as US hurricanes and Asian typhoons which had little to do with the financial markets.
Reinsurers who have always considered their core business to be pricing risk, continued their disciplined approach to business acceptance and with investment returns less certain and certainly diminished from previous years, have still managed to show good results through the maintenance of these disciplines.
The appetite for treaty and facultative business seems to be healthy with the main reinsurers consolidating their books and seeking to build stronger relationships with cedants who show overall historic profitability and cedants seeking the security and stability of the main European reinsurers.
We don’t expect to see any pricing increases from reinsurers in terms of general business, and nor do we expect to see any significant reduction in pricing or improvement in profit shares or commission structures. The insurance companies who have shown, and continue to show, positive underwriting results are usually at the threshold of earning potential from treaty business in that their commission structures are optimised for their positive results over the years.
As an insurer, we look for security and service with our reinsurance placements; now more than ever, international A rated paper is necessary and the continued stability of reinsurers is critical for our business model. Our own credit rating is directly affected by that of our reinsurers and we are not ashamed to say that the quality of our security has helped close many a deal over the years.
The recent movements either from or to the continent of Africa by reinsurers possibly reflects the renewed emphasis on consolidation and centralisation of skills on the part of Swiss Re, and a belief that market presence is a precursor to market success, in the case of SCOR. However, the world is so incredibly small and written communication so instantaneous, that telephone conversations and face-to-face meetings are more and more been replaced by email and instant messaging. As long as the service is constant, consistent and adds value, a reinsurer could be based anywhere. By engaging their cedants through constant service interaction, and acquiring local knowledge they require from their cedants, only legislative issues such as market-protection practices, would impede a reinsurance company’s ability to write business wherever they wish.
The merger of the two biggest names in reinsurance broking seems to have had very little impact on the market; it always seemed to be a two-horse race anyway, other than being a catalyst for some new independent reinsurance consultancies. It is becoming increasingly difficult for reinsurance brokers to add value other than by virtue of facultative placements and accessing markets insurance companies can’t directly. However, insurance companies will continue to rely on reinsurance brokers where they lack the technical and/or marketing skills required to present their results to reinsurers or to structure a favourable reinsurance programme.
Ultimately, with or without an intermediary, relationships built on transparency and trust seem to be the key to successful reinsurance partnerships, as they are with any partnership, and these relationships will always buck the market trends as far as pricing and capacity is concerned.
Marginal increases possible
Bruce Hodkinson, CEO, Swiss Re
Let’s look first at the wider market environment. Except for some lines of business, the non-life market has not hardened to the degree expected, both globally and certainly within South Africa. It is widely reported that retail premiums are significantly under-priced in South Africa, which inevitably has the effect of depressing reinsurance pricesdespite the recent history of large losses, especially in large corporate books throughout the market. However, in terms of losses in 2009, the market has seen a return to normal loss behaviour.
If retail market premiums remain unchanged, reinsurance prices could be flat to marginally increased for the 2010 renewals. To offset low or negative margins, reinsurers will have to focus more on the quality of the business taken on, linked to the ability to provide input into underwriting. This is especially important given the focus of ratings agencies on the combined ratio as a reinsurance performance measure. Reinsurers will also need to address local cost structures, given that dividends are repatriated in foreign currency. Indeed, regardless of industry, I am sure that all multinationals operating in South Africa need to constantly review their local operating costs.
Swiss Re itself had very good 2009 renewals at mid-year and so we believe that our strong brand is still sought by cedants, regardless of the model applied locally. More on this in a moment.
The life market has seen minimal tender activity in 2009, and not much is expected in 2010. Service delivery to ensure that excellent support is provided to existing treaties is therefore a key focus. Life facultative business for sub-standard lives is currently seeing a lot of activity in the retail market. There may be a risk that an under-rated pool will develop as a result of keenness to write new facultative business.
In my view, reinsurance growth in the South African life market will need to come from new lines of business that require reinsurance data and support, along with expansion into selected new African markets.
It would be impossible to comment on 2009 without some words about Swiss Re’s model change in Africa. In many other geographies we have, for some time, successfully used the ‘back-office off-shoring model’. As a result, we have a wealth of experience and confidence in our ability to deliver exceptional service using this concept.
Our commitment to Africa remains as strong as ever and the choices we have made demonstrate our ability to have structures in place that will provide our clients in Africa with sustained and cost efficient support for the long-term.
In essence, the life company is unchanged, but a single office clearly makes economic sense. The non-life business will continue via the proven, successful offshore concept and we are committed to ensuring that we fully comply with the STIA and that the status of reinsurance cover will be approved in our clients’ balance sheets.
Ultimately, it’s people that make our business so I will end with a comment in this area. Our experience of attracting quality actuaries has proved very favourable: in fact our move to Cape Town has had a positive effect in attracting high quality employees. Salary expectations are high and we note that, in order to try and attract the right level of skills and resource at the most efficient cost, other (re)insurers are taking an agnostic approach to whether employees are based in Cape Town or Johannesburg.
A life reinsurance perspective
Terry Ray,Chief Executive Officer, SCOR South Africa
Aging populations are a problem faced by an increasing number of countries, and will become more important with the growing proportion of the elderly in our populations. Long-term care insurance (LTC) is a product which assists clients in providing financial protection against the high costs of frail care at older ages. LTC is a type of risk for which an insurer must measure and anticipate the risks correctly for each market. SCOR Global Life is a worldwide leader in LTC based on its 24 years of experience in this field, recognised expertise and its International Research and Development Centre for LTC. Our extensive French experience (we reinsure 50% of French policyholders), helped to develop this product in Italy, Israel and South Korea. SCOR also monitors developments on other countries with a view to develop LTC products in new markets.
The current economic crisis has seen an increase in policyholder surrenders and lapses. At the same time, an increase in disability claims (commonly associated with periods of economic decline) occurred in many countries, leading insurers to scrutinise carefully submitted claims in an attempt to reduce fraudulent claimants.
However, the correlation between economic crises and the risk of disability is not clear in all countries. The wide variety of social security schemes and private disability insurance products requires case-specific analysis in respect of the risk of economic downturns. The importance of a precise and objective disability definition as well as a strict and enforceable claims assessment is a pre-requisite for sustainable disability pricing and to avoid fraudulent claims.
Owing to significant impairments in investment portfolios some primary insurers are facing issues relating to their solvency ratio and see reinsurance as an alternative to raising capital. SCOR has seen a lot of enquiries from clients seeking protection to relieve pressure on their capital and is actively proposing solutions.
With Solvency II, reinsurance is expected to continue to play a significant role in risk mitigation and capital relief. The impact of Solvency II is somewhat varied, with large international carriers expected to benefit from diversification effect, while local players with a less diversified portfolio could be affected the most. Under Solvency II there will be a full capital-relief via reinsurance, but diversification in the panel of reinsurance is expected, in order to minimise the capital required for counterparty credit risk.
Tele-underwriting is revolutionising the business process in the field of underwriting and SCOR Global Life is positioning itself as an expert in tailored tele-underwriting solutions, via the underwriting services offered through its subsidiary SCOR Telemed. SCOR has used the most advanced communication tools for tele-interviews and includes an expert system that provides automated underwriting from standard to complicated cases. The advantages of tele-underwriting for clients include enhanced customer satisfaction, speed of service, reduction of non-disclosure, strong operational savings and reduction of administration burden for the sales force, allowing them to focus on their core activity.
SCOR recently conducted the first worldwide tele-underwriting survey of insurers to gauge the extent of take-up, how it is being used, and what the experience has been. The survey was conducted with companies in North America, UK/Ireland, Continental Europe, South Africa, Australia/New Zealand, Asia, the Middle East and Latin America/Caribbean. Over 360 companies responded, making this the largest single underwriting survey ever conducted. The results will soon be published by SCOR Global Life.
Internationally Scor’s Peignet calls for greater leadership from P&C Reinsurers
The global reinsurance and insurance markets are facing a number of tough issues going into 2010, ranging from pricing and underwriting discipline to capital allocation and Solvency II, according to Victor Peignet, chief executive officer of French reinsurer Scor’s global property/casualty segment.
Peignet said the property/casualty reinsurance market has weathered the financial storm well in 2009, but underwriting concerns remain, and the market needs more leadership.
“The 2009 accounting year is looking good so far,” Peignet said in an interview with BestWeek Europe. “We’ve had a few catastrophes but no significant ones and we’re nearing the end of the typhoon/hurricane season, which has been looking good, uneventful. We’re hopeful that will remain the story of the season.”
Underwriting this year has been more “nuanced,” said Peignet, as “underwriters have to look at pricing, and pricing has been partly driven by the financial crisis.”
To complicate matters, Peignet said there is no obvious momentum in the market at the moment. He added that reinsurers have shown more discretion than insurers this year.
“Last year, reinsurers were too vocal; they exaggerated their expectations,” he said. “This year, however, there’s a very low tone and not enough drive. Maybe the latter is a reaction to last year. This year there’s more prudence but the result is that the lead reinsurers are not showing the determination that the situation deserves that they show.”
Looking at the major challenges the market is facing, Peignet said it is vital that insurers and reinsurers get a good idea of what kind of impact existing underlying risks will have on a client’s business. They also need to talk to their clients about any underlying trends on their losses so that they have an accurate assessment of their loss expectations.
“The attitude of buyers is also important,” said Peignet. “Some are optimistic, some are cautious. The approach of those dealing with primary risk is more complicated. And long-tail insurance is more uncertain due to the financial crisis and the expectations from it.”
Looking at the after-effects of the financial crisis, Peignet said that agility when it comes to moving capital around is going to be vital. Identifying where capital is behaving best will be important, as companies then move some of their capital to various markets as they see fit.
“They’ll have to be pretty quick on their feet,” he said. “There will still be a lot of portfolio management, with profits driven by the best conditions that we can achieve, as well as the best portfolio mix we can achieve.”
Peignet also identified Solvency II, the new European Union-wide solvency regime that will be brought in towards the end of 2012, as a major topic for discussion for the market. “There have been a lot of discussions about the first formulas that will be announced,” he said.
“The overall indications are that capital requirements will be higher, but how much higher? Will there be constraints? Since the capital requirements are going to be standardized, how much more standardization will be brought in? Can it be tailor-made for each company? Will Solvency II allow us to defend our case?”
Competition and wide choices localy
Chris Grieve, Managing Director, Willis Re (Pty) Limited
The half-year renewal season passed without any major events – with quality renewal information becoming more important for reinsurers to enable them to populate models controlled and audited remotely by their Head Office. This is all well and good provided that one does not lose sight of the real world and the commercial underwriting decisions that need to sometimes take place on the ground. Capacity was adequate and pricing remained flat for profitable portfolios.
The entry of new reinsurers comes as a breath of fresh air and we hear that there could be others that are due to follow. Market conditions have not hardened to the extent that some predicted. The recession and the deteriorating insurance results have not caused the knee-jerk reaction and acceleration towards increased prices that one may have expected. In addition, the erosion of some 20% of capital across the international reinsurance sector does not seem to have triggered a hard market approach and slowly this shortfall is being made up as confidence returns and talk of a more normal investment environment is evident.
Certain sectors may see a reduction in premium income due to recessionary conditions, crime appears to be an ongoing challenge, individual property losses are on the increase and insurers have had difficulty getting rates to levels required to generate the necessary underwriting surplus – competition and wide choice allow retail brokers to move business quite easily where price hikes are imposed by insurers.
Capital hungry classes of business are receiving more attention and there is a fair amount of nervousness in the Guarantee, D&O and PI lines. Marine and Engineering markets remain competitive with an over supply of capacity in these lines of business – both in the insurance and reinsurance markets. The economic conditions will have an impact on growth in both these areas of business which could lead to even more competitive conditions as premium growth comes under pressure.
The Corporate sector remains problematic for insurers with a shortage in treaty reinsurance capacity and hence a big demand for facultative support at rates that are currently seen as uneconomical by reinsurers.
The planned introduction of Financial Condition Reporting (FCR) has, over a period of time, introduced a new dynamic to the reinsurance broking sector of the industry, and has enhanced our relationships with clients. We are able to add value in terms of advice and the delivery of actuarial models that will provide clients with a platform to comply with the needs of FCR. With this development the demand for actuarial resources has grown, not only for FCR purposes but also the role actuaries can play in assisting with the modelling of optimal reinsurance programmes and capital efficiency for clients, using bespoke models such as Willis iFM®
It goes without saying that sound relationships with reinsurers are key to our success but one area that needs improvement is early warning on changes to reinsurance contracts – we find that these are proposed to us by reinsurers at the last minute rather than well in advance of renewal. This creates unnecessary pressure and in future, matters of this nature need to be dealt with at least three months ahead of renewals.
From a Willis point-of-view, contract certainty is not negotiable and our own compliance programme is not kind on us as individuals if we were to fail in terms of this facet of our service ethos to our clients.