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our casualty programme in order to spread risk yet June, which raised £76 million. “The desire of insurers and reinsurers to diversify has been
further,” he explains. “We’ve also continued to go reflected in the lloyd’s market,” according to a report from Aon benfield, Lloyd’s Update:
beyond the credit rating agencies’ recommendations
Capital Positions. “lloyd’s diversification of product line and geography plus unique distribution
by pursuing independent research. And, of course,
capabilities has attracted buyers.”
we’ve ensured our relationships with reinsurers are
Spreading the risk by placing business with a greater number of re/insurers means that there
stronger than ever.”
is less impact if one suddenly fails. Such a change in buying behaviour, with buyers seeking to
relationships remain an essential part of the
diversify counterparty exposure, is likely to favour subscription markets such as lloyd’s. It is also
due diligence process, with buyers looking to their
likely to mean more business for the broking sector, but bryon Ehrhart, chief executive officer
reinsurance partners to provide reassurance. “regular of Aon benfield Analytics, thinks it will benefit the reinsurance market as a whole. “There are
and honest dialogue between both parties is crucial,” says still many reinsurers that have strong balance sheets that are underutilised—particularly in the
Jones. “This is particularly important for Ecclesiastical, casualty area.”
because reinsurance is such an important aspect of our
Ehrhart predicts a continued shift from concentrated direct relationships to broker market
business model...So we share information about our
diversification. “That’s definitely a trend that’s happening, and it’s happening even in Europe,”
business with reinsurers so they are clear about our
he explains. “The kind of trends we saw 10 to 12 years ago in the US, where the direct market
aims. In return, we expect to know a great deal about
was more than half the placement (and is now less than 30 percent) is now happening in
our reinsurance partners and, if necessary, spend time
Europe, where the direct market probably controls 60 percent to 70 percent of the placement.
getting under the skin of their balance sheets to ensure
And because of the credit crisis, you’re very likely to see that deteriorate more rapidly as
there are no potential issues.”
cedants look to diversify their placements.”
but the scrutiny of reinsurer financial strength is not a new thing for cedants, he adds.
LLOYD’S LEADS “Most large global insurers have been really intelligent about looking at reinsurer credit
THE CHARGE
since September 11. That was the wake-up call that the ratings given weren’t necessarily
predictive—they represented reasonable historical performance but weren’t predictive of what
lloyd’s has emerged as one of the winners from the
could happen in stress events.”
financial crisis. The market was in a strong financial
position following two benign catastrophe years in 2006
and 2007, and saw central solvency capital improve
RATINGS UNDER FIRE
again in 2008. With its legacy issues firmly dealt with
Whilst not the only means of gauging reinsurer quality, ratings are the simplest criteria and
in the 2006 Equitas/berkshire hathaway deal and
have long been used as a primary means of assessing counterparty strength. The financial
subsequent rating agency upgrades, a recent spate of
crisis and sudden collapse of banking institutions with strong ratings has led many to question
mergers and acquisitions (M&A) deals were testament
the value of ratings. Some banking products, such as collateralised debt obligations, had been
to the market’s attractiveness. bermuda firms have
rated ‘triple A’ but were then suddenly deemed worthless.
shown particular interest in the market, with Class of
2005 firms validus and Ariel buying Talbot and Atrium
Witnessing these discrepancies has made cedants more cautious and conservative in their
respectively in 2007, both at multiples to book value.
view of ratings. While most insurers and reinsurers came through the financial crisis in good
shape, albeit with depleted capital bases, a select few with strong ratings revealed significant
lloyd’s has continued to draw new capital despite the
weaknesses. On the reinsurance side, the most high profile was Swiss re. As with AIg, Swiss
downturn. Argo group and heritage, Max Capital and
re’s problems stemmed from its non-insurance business and, in particular, two credit default
Imagine, and Flagstone and Marlborough Underwriting
swaps (CdS).
Agency were just some of the deals from the seven
that took place in 2008. In May 2009, renaissancere The company disbanded its Financial Markets activities after the business produced a full-
launched Syndicate 1458 in partnership with managing year loss of ChF6.0 billion, including mark-to-market losses of ChF2.0 billion for structured
agent Spectrum Syndicate Management ltd. It then CdSs. despite shoring up its balance sheet with a ChF3.0 billion capital injection from
announced in June that it had agreed to buy the agency Warren buffet’s berkshire hathaway, and better than expected second quarter results, there
and its parent, Spectrum Partners ltd. remains intense scrutiny from the company’s stakeholders.
Stamp capacity at lloyd’s was up three percent at This does not mean that cedants should expect other reinsurers to experience problems,
the start of 2009 to £16.6 billion, and since december says Ehrhart. “Most of the intelligent insurers have figured out that underneath each of these
2008, managing agents have raised a total of £663 stories [i.e. AIg and Swiss re] is something special. A number of the banks found very cheap
million in new equity capital. One of the latest capital debt and used a lot of it—their fatal flaw was they didn’t use that debt to the term that they
injections came from Amlin’s equity placing in early needed to match their liabilities. The debt came due at exactly the same time that they couldn’t
14 | INTELLIGENT INSURER | September 2009
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