We decided to broadly maintain our exposure by peril/zone, but up—although I am not privy to the logic the ratings agencies use—I
with the updated internal models. This represents a substantial reduc- do know that they are not exclusively looking at a company’s capi-
tion in our perceived capacity and we think that most of the market tal. They look closely at management and at the company’s track
reacted in a similar manner, which reduced overall market capacity. record.
After having received the official upgrades for market cat mod- That means that quite a few of the start-ups were in reality way
els, we have benchmarked our own in-house assumptions and were ahead of their initial rating as far as capital was concerned, but
pleased to see that our first estimations were quite reasonable, and their rating was lower because they had yet to build a track record,
that our January renewals were correctly aligned with the capacity which makes sense.
derived from new standards.
If I look back at 2005, we made a £70 million profit as a group
The attitude of the rating agencies was to adopt a strict approach
after a bottom line hit of £85 million from the year’s hurricanes.
on their methodology, but we have not seen a complete change in
The reason for that success is a diversified portfolio made up of all
their approach. For instance, one major rating agency became strict
sorts of insurance and reinsurance businesses. We look to mirror
in enforcing the so-called stress tests. Basically, this stress test consists
that in Bermuda, and that sort of performance would fit in with
of taking into consideration a second major event (the normal capital
the expectations of most ratings agencies.
adequacy ratio takes one major event into account) with its collateral
effects: corresponding additional burden on the reserve loading and
on the recoverable loading, including a global downgrade of all the Bert Golinski, Managing director
recoverables by one notch. Guy Carpenter & Company, Inc., Bermuda
The new rating agency guidelines for capital requirements have
We would say that this stress test is particularly difficult to shoul-
been one of the factors that are increasing pricing. The fact that
der with success as it is based on the 2005 balance sheet, which was
reinsurers are now required to have, at a minimum, 20 percent
already adversely affected by the exceptional losses of 2005. Taking
more capital at each grade level in order to write property ca-
one major event for the normal model and then, on top of that,
tastrophe exposures significantly impacts the amount of capacity
stressing again with another major event is arguably extreme. It is
being offered.
as though three major events in a row were hitting the steady-state
balance sheet. For example, A.M. Best has revised its methodology with respect
As a conclusion, I would say that these constraints tend to decrease
to confirmation of second event stress testing in BCAR analysis,
market capacity and increase the demand coming from the cedents,
access to additional capital and analysis of the type of capital avail-
as they will also have larger calculated exposures to hedge. As the
able. Best now includes demand surge, storm surge and secondary
number of new companies that are truly active on the market is not
uncertainty in the model results used to complete the SRQ (as well
as high as one could have imagined in November or December of
as for inclusion in BCAR analysis). In addition, rating agencies are
last year, we think that the most foreseeable trend will obviously be
requiring more disclosure of model results and attention to non-
some kind of market crunch leading inevitably to price increases, at
modelled loss components such as inflation.
least for catastrophe covers. Only the strongest actors in the market
As for the modelling firms, prior to the 2005 storms, modellers
will be able to take advantage of this new situation, and we will be
were still incorporating lessons learned from the 2004 storms.
in that group.
Many clients saw a significant divergence in results between actual
claims and modelled losses. As a result, AIR, RMS and EQECAT
are all planning new model releases shortly. For this reason, many
Robert Childs, Chief executive officer
reinsurance companies are manually adjusting the current output
Hiscox Bermuda
for anticipated frequency and severity adjustments. These expected
The modelling companies are reassessing the expected cost of ca-
adjustments are certainly another factor causing property reinsur-
tastrophes, and in lots of scenarios the cost will be up significantly.
ance pricing to increase throughout the United States in places
The implications are that if the insured cost of catastrophes is greater
where wind is a significant peril.
than people thought, companies will need more money to support
that type of business. However, an additional requirement for capital
To date, we have not seen the capacity offered by the ‘new’
can be offset either by increased premiums or by increased capital.
Class of 2005 reinsurance companies mitigate the increased proper-
ty reinsurance pricing to any great degree in the marketplace. The
I think that what is happening, bearing in mind the shortage of
rating agencies’ capital requirements and expected changes to the
capacity in certain zones, is that the market is charging increased
catastrophe models are not allowing the new companies to write as
premiums to offset the increased risk.
much business as they would have been able to before Katrina.
Our plan at Hiscox was based on a diverse portfolio of business,
We saw about $10 billion of ‘new’ capital move into the rein-
because we balance our external business with non-correlating and
surance space post-Katrina, but another $10 billion could be used,
diversifying internal business. That was always a deliberate plan on
based on the demand that we are seeing for more coverage. The
our part to write a balanced portfolio, a book that meets our own
same factors (rating agencies and catastrophe models) are causing
internal guidelines for a diversified portfolio.
primary insurance companies to buy additional limits. They need
Since we only started at the end of 2005, I would be surprised if more coverage, which increases demand, but the reinsurers are re-
the agencies did not take that into account. When a company starts stricted by these same factors in providing enough limit.
BermudaReinsurance . June 2006 19
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