September 2014 16 Bermuda:Re/insurance+ILS
The other side is improving the R. Here at XL we regard improving
the underwriting margin as the most effective way to build long-term shareholder value. The rating environment, particularly in property cat, is working against us as we try to expand margins, but on the primary side there are still pockets of positive rate even if we are starting to see some rate deterioration.
The question is, how do you improve your underwriting margin
in a stable or declining rate environment? It is primarily achieved through risk selection and portfolio construction. At XL we are seeing continued year-on-year improvements to our accident year combined ratios and that’s what we’re focused upon.
Others are focusing on other levers. Investment income is one of those, with some reinsurers pursuing aggressive investment strategies in the current environment—investing more in the alternative space, the equity markets or higher credit risk instruments. Diversification is another option, leveraging your equity to write more non-correlated business in an effort to increase your income. You are seeing some traditional property cat players pursuing M&A or entry into specialty lines in order to pursue diversification strategies.
JEREMY PINCHIN: The first priority is to manage exposure in the face of reducing pricing, especially when it is additionally impacted by broadening terms and a continuing low interest rate environment. It is at this time of the market that quality underwriting, supported by good analytics and risk selection, are more important than ever. Remaining disciplined will always have a greater impact on your long-term ROE than any short-term attempt to “pep up your ROE”. When the risk remains the same but the amount you are earning reduces, you must sell less risk.
JEROME FAURE: For reinsurers, margins have been under pressure for some time due to the influx of additional capacity from the capital markets—with conditions proving particularly acute in property cat. However, when you look at reinsurance results for the last few quarters there have been few major catastrophes, reinsurers have been able to benefit from prior year reserve releases and results have been generally good, even as margins have been under pressure. The insurance side has generally seen less pressure and the environment has been more favourable.
At Endurance, our strategy has been to continue to build a diversified
book of insurance and reinsurance business. We have built a London- based international insurance platform and expanded our US business with additional teams and products, diversifying away from crop insurance which has been dominant at Endurance in the past. We have recruited the best underwriters in the market and the momentum from these new teams has already been evident in our financial results.
On the reinsurance side we are following a similar approach, hiring top-class underwriters—particularly in specialty lines such as trade credit, marine, engineering and agriculture—so that we can attract
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