Severe tornado and hail eventsacross the U.S. have significantly impacted the results of U.S.insurers (severe storms caused $25 billion in losses in 2011),leading them to re-evaluate coverage and pricing considerations andto look for products that specifically address these risks, saysChristina Cronin, senior vice president of standard lines atPartnerRe.

“We see our [primary insurer] clients addressing the problem ina variety of ways,” says Cronin. “While some have elected towithdraw from a particular line and/or geography, others areaddressing the issue via rate and deductible increases. We'vealready seen a number of carriers implement mandatory percentagewind deductibles in certain non-coastal areas. Others areintroducing more restrictive underwriting guidelines or excludingoutbuildings and other structures. And some are changing thevaluation provisions for roofs from a replacement-cost basis toactual cash or agreed value, or excluding coverage for cosmetic(nonstructural) roof damage. In many cases, these coverages can beadded back or expanded for an additional premium.”

Cronin says PartnerRe is seeinggreater demand for aggregate protections, as well as significantinterest in quota-share structures: “Clearly, clients are lookingfor reinsurance products that help manage concentrations andeffectively implement the transfer of risk via our assumption ofvolatility.

“The difficulty reinsurers face is how to properly price thetornado/hail exposure within our reinsurance products. The randomnature of tornadoes makes them difficult to model, and vendorcatastrophe models are generally considered to be less reliable forpricing the tornado peril than for other perils such as hurricaneand earthquake. Typically, the industry relies heavily on acompany's actual loss experience to develop a loss load, ratherthan on vendor models. But given the rise in industry losses inrecent years, it is difficult to forecast whether this trend willcontinue or whether it will revert to previous norms.

“But we are actively looking for opportunities to deploy ourcapacity at the right price and terms,” she adds. “Given thedifficulties in pricing the tornado/hail peril, we look to haveopen discussions with our clients and are willing to consider theimpact of re-underwriting and other portfolio improvements whenpricing their reinsurance covers.”

MUNICH RE: PRICING MUST EVOLVE AS INVESTMENT RETURNSWANE

The capital base of insurers and reinsurers remains strong—butlow interest rates are taking their toll on business models, saysMunich Re.

“More than ever, our industry faces the challenge of achievingstable earnings in its core business and further reducing itsdependency on the investment result,” says Torsten Jeworrek, MunichRe's reinsurance CEO. “The key question will be how quickly and towhat extent insurers and reinsurers will succeed in factoring thelow interest-rate level into their price calculations.”

To lower interest rates, he says, the insurance industry mustalso add the following challenges: the crisis in the Eurozone andhighly volatile capital markets.

Nevertheless, Munich Re predicts that prices—as well as termsand conditions—will remain stable when treaties are renewed Jan. 1,due to an abundance of capacity.

The reinsurer sees a “trend toward slight [rate] increases” inthe Casualty classes since low interest rates are alreadynegatively affecting profits from this long-tail coverage.

SWISS RE'S CIO DEPARTS

David Blumer, chief investmentofficer at Swiss Re, has announced he will leave the reinsurer onNov. 1.

Blumer started with Swiss Re in 2008 as its head of assetmanagement. In October 2010 he assumed the role of chairman ofAdmin Re, Swiss Re's business unit responsible for acquiring closedblocks of life-insurance business.

Prior to joining Swiss Re, Blumer was a member of the executiveboard at Credit Suisse.

A successor has not been announced.

RAA URGES INTERIM SOLUTION FOR U.S./E.U. REGULATORYCOOPERATION

Frank Nutter, president of theReinsurance Association of America (RAA), testified Oct. 12 at theInternational Association of Insurance Supervisors' Annual Meetingin Washington, D.C. on the need to establish a near-term frameworkfor regulatory cooperation between the E.U. and U.S. onreinsurance.

“While E.U. and U.S. efforts to modernize their regulatoryenvironments to facilitate cross-border business continue to moveforward, the reality is that implementation of the E.U.'s SolvencyII, and adoption by the states of the NAIC Model Credit forReinsurance law under the umbrella of the NAIC's SolvencyModernization Initiative, is unlikely to occur for years.”

Recognizing that, Nutter urged the E.U. and U.S. to considerinterim measures under existing authority to advance a mutualunderstanding about a framework for global reinsurance companiesfrom the U.S. and E.U. that provides uniformity, greaterefficiencies and lower costs for providing capital support fordomestic insurers.

“The RAA is not wedded to a particularapproach, but the potential options for further analysis includethe authority of FIO [the Federal Insurance Office] underDodd-Frank to enter into agreements with trading partners; and theauthority in the E.U. under the 2005 Reinsurance Directive, adoptedto authorize cross-border reinsurance by proposing treaties withthird countries regarding reinsurance supervision.” 

REINSURANCE BROKERS 'NOT GETTING THEIR CUT'; SHOULDCHARGE FEES FOR SERVICES

Reinsurance brokers can no longer rely on the traditional meansof commission compensation for placing risks and must begincharging fees similar to other professionals billing for services,says a business professor studying the industry.

In an interview with NU,Paula Jarzabkowski, a professor at Aston Business School and aMarie Curie Fellow, says the current compensation structure forreinsurance brokers is becoming obsolete as large insurers seek toplace business directly with an increasingly smaller group ofreinsurers.

“Brokers are not getting their cut,” says Jarzabkowski, who leda three-year study of the reinsurance industry that was released ina report late last month titled “Beyond Borders: Charting theChanging Global Reinsurance Landscape.”

That report, sponsored by the InsuranceIntellectual Capital Initiative (a consortium of organizationsassociated with the Lloyd's insurance market), says the industryis seeking to bundle more and more risks, especiallycatastrophic risks, into single, complex programs that could openthe industry to financial meltdown.

Discussing the role of brokers in the reinsurance-placementtransaction, Jarzabkowski does not fault brokers for theseplacements, noting that they are following the desires of theirclients—and her thoughts on broker compensation do not reflect abelief that the role of brokers is any less vital. In fact, sheargues, broker services are just as necessary as they have been,perhaps more so.

In the past, brokers did the work of designing, structuring anddeveloping a program, then placing it. Brokers were then paid a feefor the placement.

What is happening more often today is that brokers work on aprogram and then are not adequately compensated because they do notplace the coverage.

“Increasingly, those services have to be valued just like anyother consultant,” says Jarzabkowski. “If you got KPMG or someonelike that to do consulting services, you would pay KPMG for theirservices.'”

She continues, “In the past, the broker was the sales machine.Now, they are not the sales machine; they are more of aninformation and knowledge broker. And in some cases, I think,[brokers are] a very important aspect of the transparency of majorfinancial deals that are global.”

One of the impediments to changing the compensation model istradition, she notes. Some brokers are attached to their clientsand find it difficult to change a long-standing relationship fromits commission compensation model to fee basis.

“It can be a hard cultural change to make,” shesays. 

S&P: REINSURERS ARE UNDERESTIMATING CATEVENTS 

A recent Standard & Poor'sreport says that although reinsurers' catastrophe losses appearedto be contained in 2011, modeled large losses closer to home (theU.S. or Europe, for most reinsurers) could prove to betrickier.

The report, “Catastrophe Risk Insurance: Just How Much CapitalIs at Risk?” concludes that modeled reinsurance exposures to topU.S. and European zones clearly exceed those in Japan and NewZealand, and a large U.S. or European catastrophe is more likely tobe a major capital event (defined by S&P as an event thaterodes more than one year's worth of earnings).

S&P says such a home-field event could stress reinsurers'risk-management framework—even more than the events of2011—providing a harsher test of efficiency.

“Some reinsurers with thinner tails may be underestimating theirCatastrophe risk exposures, and consequently may be overexposingtheir capital and investors to major catastrophe events,” saysS&P credit analyst Miroslav Petkov.