News identifying new areas


he reinsurance industry needs to take a positive, proactive approach to business, of opportunity and


21.10.14 TUESDAY


Adopt a proactive and positive outlook T


spreading the message that the industry is an important facilitator of economic growth and development. That is the view of Chris Klein, head of EMEA strategy for Guy Carpenter. “There remains substantial unfulfilled


demand for reinsurance,” he said. “Perhaps 80 percent of economic losses are uninsured and some of those risks are well known to us—natural catastrophes, for example: we understand that they may be happening in areas which don’t have the same coverage of models that we have for the peak zones, but broadly speaking we understand those natural perils. “There are lots of clever people in this


business and it would be possible to make reasonable estimates, or develop reasonable models which could help fill some of those gaps, whether it’s by peril or by region.” He also anticipates that the private sector will


increasingly be called upon by governments to pick up some of the liabilities they face as they strive to reduce structural deficits and national debt. “At the moment if there is anything they can do to shift costs and liabilities into the private


“The big challenge there is how do you


price it when you lack experience and data? Certain types of investor will be interested in deploying their capacity only if they can get a quantitative framework around it. “Uncertainty normally demands an enhanced


risk premium so the big question is: are people prepared to pay for cover for these new risks and do they even see that there is a need for protection against them? I suspect we might well have to see some losses, which may emerge wholly unexpectedly, to provide a stimulus for demand.” Klein believes that a more positive attitude


Chris Klein


“At the moment if there is anything they can do to shift costs and liabilities into the private sector they will do it. Flood is one example.”


sector they will do it. Flood is one example.” On top of this, Klein adds, there are plenty


of opportunities presented by new types of risk, such as cyber risk.


is needed in order to take full advantage of the opportunities that are currently emerging, and that as part of this, those in the industry should be more vocal about the socioeconomic benefits of insurance. “We should be much more confident


about talking about the social benefits of insurance which enable other people to take entrepreneurial risks. “Insurance is an enabler: it can foster and


facilitate economic growth and development, and it can improve the quality of life during the financial crisis. We should be optimistic and proud,” Klein said. n


Solvency II may bring unwelcome surprises T


here is potential for unwelcome surprises in the short time before Solvency II goes


live, given the challenges facing insurers in relation to the capital model and, in the UK, matching adjustment approvals. That is according to a research note by Morgan


Stanley, based partly on a conference held in the UK last week by the Prudential Regulation Authority (PRA) which focused on the implementation of Solvency II. The event brought regulators and insurance firms together to examine the challenges both sides face to ensure they are prepared for the introduction of the new regime. Morgan Stanley warned there could be some tricky challenges ahead for both sides. “We think it would be wrong to ignore the


potential for unwelcome surprises in this final 14 months of Solvency II preparation. There are clearly major challenges ahead in relation to key issues such as internal and standard formula capital


“We think it would be wrong to ignore the potential for unwelcome surprises in this final 14 months of Solvency II preparation.”


modelling plus, for UK annuity underwriters, the matching adjustment,” the report said. It identified three key challenges. One is


internal model approval. “The PRA is of the clear view that some firms


are behind schedule in terms of their internal model development process. It will not hesitate to withhold approval if necessary. Firms are being encouraged to develop robust contingency plans in case their internal model is rejected for use. “We believe that this is an issue not just for small to medium sized firms—some larger insurers


16 | BADEN-BADEN TODAY | DAY 2: Tuesday October 21 2014


could also struggle to meet the full internal model approval standard,” the bank warned. The second is standard formula model


approval. “The PRA expects 90+ percent of insurers to go down this path. However, insurers have to consider where the standard approach is inappropriate for them. This may attract PRA capital add-ons. For the first two years post Solvency II’s inception, these need not be disclosed. However they become a reporting requirement thereafter,” it said. The third is matching adjustment approval,


described by Morgan Stanley as a key sensitivity for UK annuity underwriters. “A high standard is being set for approval given the significant benefit it brings. Investment strategies may need to be adapted if concerns over asset classes such as callable bonds and equity release mortgages can’t be overcome,” the report said. n


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