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September 2012 Bermuda Re/insurance


through whatever means necessary. Validus has a consistent track record of returning capital to shareholders in our seven years history, as has the wider market.


With respect to M&A, it is difficult to say. We have done two deals in our history and they have been not only incredibly successful economically, but transformative for our company in terms of our business scale and profile. That being said, these transactions can be difficult to accomplish successfully and so I would hesitate to say that we will see a broad amount of M&A, but you never can tell what will happen.


Dupplin: The industry is in an interesting state, because in terms of the amount of business it’s seeing, the vast majority is Western European and North American—where there’s a culture of risk transfer—but there hasn’t been any real growth in these regions for some time. If you look at growth elsewhere, obviously the developing nations have a lot more potential risk to place, but there isn’t the risk transfer culture—a factory owner in China doesn’t as a matter of course insure every risk, whereas an owner in Germany does. It’s a cultural difference, but I think that culture is changing and you’ll see far greater risk transfer in emerging markets. I’m predicting a future that’s fairly static in the Western world, with decent growth in developing countries.


There’s also a lot of discussion regarding the changing capital


structure of the reinsurance industry. There are precious few stock companies being born nowadays, while there are an awful lot of collateralised entities being established around the world. The perennial issue when one gets a wave of new insurers is that while there are some people who know what they’re doing, there are a fair few who are rather green. I dare say one or two of the green collateralised boys will slip up on banana skins along the way, but in general collateralised players appear to be here to stay, and the industry’s having a good long think about what the future shape of capital structure should be. One reason you don’t buy a new stock


company today is because it’s like buying a motor car—you buy it for $1 billion, but when you put it on the stock exchange, it’s only worth $900 million. That’s not very enticing for the formation of new companies, whereas if you put £1 billion into a fund, then it’s worth $1 billion the next day. Admittedly you pay the fund people to run it, but it’s fundamentally doing the same thing and earning money from risk transfer. I feel that’s a very interesting debate for the industry. There’s no right or wrong approach, it’s whatever’s convenient for the world, and I think we’re looking at a period where elements of the capital structure are likely to change for the long term and that’s to be reflected upon, discussed and accepted.


Few: Diversification remains a key strategy for many despite the international loss activity that characterised 2011. I expect that reinsurers will however focus on making sure that diversification considerations do not detract from all products paying their own way and contributing to return on capital targets.


In addition, I expect that reinsurers will continue to be cautious in underwriting long-tailed lines until such time as the underwriting rate better reflects historically low investment returns and the possibility of significant inflation in the future.


Jeworrek: There is no one-size-fits-all strategy for reinsurers. It largely depends on the business model of each company. Diversification, of course, is one of the most important assets of a global group such as Munich Re. Increasing premium volume can only be sustainable if premiums are adequate for the risks covered, and this applies all the more in the difficult economic environment we face at the moment. The big question will be how quickly, and to what extent, reinsurers succeed in compensating for the reduced interest-rate level with price increases at the next renewals. Ultimately, our industry is faced with the challenge of achieving stable earnings and reducing its dependency on investments. This will only be possible with healthy returns from our core business.


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