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Excess capital of about 8 percent in the balance sheets of the major

reinsurers would lead to further rate decreases of 8 to 15 percent, apart from key high loss incidence lines, Guy Carpenter spokespeople said. Aon Benfield described capital levels among insurers and reinsurers as being at an “all-time high”, leading to price reductions across most of the market.

It led, as always, to a backlash from the reinsurers. But instead of the

usual messages of price discipline and ‘we won’t touch cheap business’, reinsurers this time offered a more considered argument.

In an interview in Intelligent Insurer’s daily newsletters, Gen Re chief

executive Tad Montross said the ‘capital versus pricing’ debate was made irrelevant nowadays by technical pricing, modelling and thorough actuarial assessment that had become pervasive throughout the international markets.

Montross said: “There have been numerous comments made with

respect to the reinsurance industry having excess capital, with estimates ranging from $18 to $85 billion. My first response is that there may well be a perception of over-capitalisation, but if we had a one-in-500-year tail event, that perception would change very quickly,” he said.

He took issue with commentators who said that excess capital was a

reason to reduce prices, adding: “A lot of those estimates of excess capital were followed by a statement that reinsurance pricing would fall. I would counter that they should have no relation, in the context of technical pricing. If there is excess capital, this should not affect the exposures that the industry has taken.”

Montross added that transactions underwritten on their own merits should not be subject to price speculation.

“To talk about the frequency and severity assumptions, and ask whether

rates are up 10 percent or down 10 percent, is irrelevant. People will take a view on the right technical rate,” he said.

Swiss Re said the excess capital observations in the context of pricing obscured the true question and attempted to bring the debate back to the reinsurer’s expertise, innovation, risk management and security.

Brian Gray, Swiss Re’s chief underwriting officer and a member of the company’s executive committee, went a step further saying that the real cause of excess capital is the interest rate environment.

“Much lower interest rates and weaker underlying underwriting

performance are battling against excess capital in the market. The environment is likely to remain choppy. A broad brush market movement is not expected in the run-up to the January renewals.”

He warned that excess capital in the industry could be quickly eroded if interest rates go back up.

“As an industry we’re often very focused on shocks from the claims side but in our view a bigger shock right now is this one on the financial side,” he said.

20 | INTELLIGENT INSURER | November 2010

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