September 2012 Bermuda Re/insurance


13


going to be significant uncertainty and Bermuda will have to react to that uncertainty.


I’m going to be particularly interested to hear insights on the issue from those based in continental European because there seems to be a rumbling of revolt over Solvency II and it will be interesting to see what they say about it during Monte Carlo.


Few: A long period of soft underwriting conditions combined with


historically low investment returns are two reasons why underwriters are justified in asking for increased rate. Unfortunately, the poor economic environment is depressing demand and returns for all, making paying for those rate increases all the more difficult.


Also the potential collapse of the euro is no longer highly unlikely. Are we ready for the implications on our businesses should such a scenario occur? What will be the financial implications? How will policies denominated in euros respond? These are some of the difficult questions we as an industry need to ask.


Jeworrek: The crisis in the eurozone represents the biggest challenge


for global economic development and the capital markets at present. Political developments will have a great influence upon this, but are difficult to predict. As a consequence, the reinsurance industry is exposed to the risk of potential further upheavals in the financial markets, particularly relating to investment. Some lines of reinsurance could also be affected by a further deterioration in economic development, particularly in the peripheral states of the eurozone.


One consequence of the current sovereign debt crisis, not only in Europe but also in the US, is continuing low interest-rates for highly- rated government bonds. This creates challenges for the pricing of long-term reinsurance contracts. In addition, a rise in inflation could lead to claims inflation and thus to higher claims payments in future. The convergence of these two factors has resulted in negative real interest rates, posing a particular challenge for the property-casualty business of both insurers and reinsurers.


What do you expect the industry to agree upon this year?


Cash: I think there will be unanimity that pricing needs to increase in the US, in particular in product classes that are heavily reinsured— complex casualty classes of business and businesses involving high severity risks—each of which have gone through multiple years of rate reductions. Our industry is at the point where companies’ historically positive loss reserve emergence is starting to wane which together with chronically low interest rates is a recipe for meaningfully lower profitability.


When you put the pieces together, I am expecting to see reinsurers seeking improved underlying rates and reinsurance terms in the US over the next few years.


Driscoll: I think there was a general recognition last year that in some emerging markets there had been insufficient resources committed to understanding the potential for meaningful economic and insurance risk. Rate increases that have since come through in loss -affected territories have been pretty reasonable and have largely reflected those risks. This year I think that there will be general consensus that the cat market is generally well priced, but not excessively so.


Beyond that, I think there is general agreement that the casualty market is probably generally deficient and without the availability of compelling investment income, there needs to be a continued focus on underwriting profits in order to meet our cost of capital.


Dupplin: Generally, you never get anything everyone agrees on at


the Rendez-vous. It’s an interesting stop-gap in the business planning phase and people leave Monte Carlo with impressions of where directionally rates are likely to head.


This time I suppose everyone would agree that investment returns are poor and they’re likely to remain that way for a long time. Shareholders look for a certain level of return from their share capital, with the return on capital a combination of underwriting profit and investment returns. If one side of the book goes down drastically, you’ll have to seek to address the balance and offer a reasonable return for your shareholders by altering the other. Whether that will actually happen in a dynamic market remains to be seen, but it will provide some stiffening to rate sag.


Few: Improving data quality is essential for more accurate pricing, accumulation control and modelling. This is particularly the case for commercial risks involving complex supply chains.


Growth in emerging markets presents exciting opportunities for the insurance and reinsurance markets. As an industry, we should attempt to meet growing demand without compromising the need for a fair return on capital.


Finally, overreliance on model outcomes should be avoided.


The industry needs improved research and development to help understanding of risk such as natural catastrophe exposures, supply chain risk and credit risk.


Jeworrek: I think that all market participants agree that we need more transparency, especially in respect of complex risks. In recent years, we have seen rapid growth in the interconnectedness and complexity of the economic, social and technological environment. This presents a range of challenges for the management of accumulated risks. Local events can increasingly lead to high losses as a result of both their domino effect and resulting loss cascades. The boundary for insurable events is inevitably determined by the identification, understanding and assessment of such risks. This


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