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Intelligent Insurer EDITORIAL An industry in paradox


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Intelligent Insurer—ISSN 2041-9929 Cover image: © Hannover Re


O


nce again, Europe is at a cross roads. The embattled single currency is threatening to drag not only its member states into yet another recession but, potentially, the rest of the world.


It seems that renewal discussions at this year’s conference in Baden-Baden will take place


against a backdrop of vast economic uncertainty as Europe’s political leaders try to thrash out a solution to the turmoil the financial mess in countries such as Greece has caused.


There remains hope that a solution can be reached—the markets need certainty more than anything and if


that could be achieved, a true global crisis may yet be averted. However,


having already spent billions trying to prop up Greece’s failing economy, nothing is certain. The consequences of a default in Greece are not in themselves catastrophic for insurers and


reinsurers—most companies have reduced their exposure to this already. But the knock-on effect could be more serious.


The industry is already under tremendous pressure thanks to the pincer effect of soft rates combined with poor investment returns—it is becoming increasingly tough to make a profit as a result.


Yet the industry also remains awash with capital. Despite these tough trading conditions,


the insurance industry still represents a favourable option for investors struggling—as are insurers and reinsurers themselves—to find decent returns elsewhere.


A default by Greece would likely lead to other defaults and even more uncertainty in the


capital markets and global economies generally. This could trigger additional losses on investment portfolios and make it tougher than ever to get decent returns.


And so the cycle would go. Insurance and reinsurance would continue to attract capital,


keeping rates low despite negligible investment returns. For all the talk of chief executives about technical underwriting and ensuring profits from


this core discipline alone, this dynamic surrounding the market would make this a truly difficult goal to achieve.


When investors give companies capital, they expect it to be used. That means winning more market share and the only way to do that in this business is by slashing rates.


Some more established players with close relationships with their clients may succeed in holding the line on rates and even achieving some small increases. But, lacking a major natural catastrophe in the next few months or a turnaround in the fortunes of the global economy, most companies will struggle to achieve these things.


It is probably a good time to be a cedant in Baden-Baden. Still, it will give everyone a lot to talk about. See you there.


October 2011 | INTELLIGENT INSURER | 3


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