Sept. 11 Altered Reinsurer Risk Outlook

Reinsurance Editor

Monte Carlo

The terrorist attack on Sept. 11, 2001, redefined the worlds conception of risk and had a big impact on the reinsurance industry's approach to writing business, according to a report released here by London-based Aon Ltd.

“Never had it been deemed possible that a single catastrophe, and particularly a man-made one, could affect such a wide range of business,” said the report, entitled: “Reinsurance–A Retreating or Resurgent Market?”

Constituting the largest loss in history, the World Trade Center disaster will cost the industry between $30 billion and $50 billion, said Charles Cantlay, deputy chairman of Aons U.K. reinsurance group, who discussed the report during a press conference here at the annual reinsurance Rendez-Vous de Septembre.

Although the reinsurance market will absorb two-thirds of the total WTC loss, it is “alive and kicking,” he said. “I think its responded to the challenge, which is as severe as anybody could possibly imagine.”

The markets performance has demonstrated that it provides “an extremely valuable product”–indeed, the preferred product to provide balance sheet protection, he said.

Just about every class of business was affected by the loss, he said. “So peoples view of correlated and uncorrelated loss has fundamentally changed, and therefore their perception of risk and underwriting risk and a portfolio of risk is totally different”

“At the heart of all this is the shareholders perception of volatility,” he said. “Thats changed a great deal. If theres one thing that shareholders dont want, it is volatility.”

The new understanding of the volatility of the reinsurance business post-WTC has “caused an awful lot of managements to take a long and hard look” at the risks they are willing to bear, he indicated.

In a section called “New Rules for Reinsurance,” the report said that this reassessment has led many reinsurers to retreat, realign or reduce their exposures, and change corporate strategies. Examples of such moves include:

The spinoff of Zurich Re as Converium from Zurich Financial Services.

The exit from non-life commercial treaty reinsurance by Generali.

The withdrawal by CNA from writing reinsurance business outside the United States.

The steps taken by AXA to separate its reinsurance operations.

The move to sell Gerling Group.

The plan by St. Paul to spin-off its reinsurance operations as Platinum Re.

“There is a strong belief that this retreat from risk is more structural than cyclical, aimed at generating returns against capital employed rather than in response to the immediate financial impact of WTC losses,” the report said. “The pattern is likely to continue as corporations with reinsurance interests come under increasing shareholder pressure over volatility in earnings.”

The report went on to say that reinsurers now are forced to underwrite for a profit since investment income is reduced.

In addition, reinsurers are unbundling risk and seeking clarity, the report said. “Composite pricing is back in vogue. Every risk is evaluated on its own merits; nothing is thrown in for free,” Aon added. “Unbundling has inevitably increased prices. Much of the unbundling process takes place at the primary level, where carriers are directly exposed to the original risk.”

In addition, the report said, reinsurers are requiring better data. “Insurers must now supply a much greater volume of information to increase transparency for reinsurers,” Aon noted.

The report discussed the flight-to-quality as another new rule for reinsurance in todays risk-averse climate. Rating strength is a big factor in a reinsurance buyers choice of provider, according to Aon. “Better prices from a lesser-rated carrier are losing their appeal. An increasing number of contracts include clauses specifying that if a reinsurers rating falls below a certain level, the client can remove them from a risk.”

The flight-to-quality has led many buyers to seek an “AA” rating or better in their reinsurers, the report said. This can be very constraining, said Mr. Cantlay, because it takes away choice from the client.

The Aon report discussed a survey it completed identifying the concerns of reinsurance buyers and underwriters. The survey shows that reinsurance buyers are:

Philosophical over price.

Seeking stronger security.

Looking to retain more risk.

Responding to reinsurers information needs.

Taking their time to explore their options.

Buyers were “somewhat disgruntled at what they perceived to be delaying tactics in the reinsurance market, [in terms of reinsurers] delaying giving their price and product until a very late stage in the renewal season,” Mr. Cantlay said.

They also were upset about what they perceived as “a lack differentiation, a commodity-tariff approach to pricing, and not taking account of peoples management philosophy, risk management skills, loss experience, diversification of portfolio,” he added.

Having said all that, for the most part, reinsurance buyers “were reasonably philosophical about the prices that were being charged,” he said. “Theyve understood the sheer magnitude of this event, and that there was a need to recoup some money.”

Aon said most buyers recognize the need for transparency and full provision of data, adding that instead they focus on capacity and quality issues.

Underwriters surveyed were unanimous in focusing on profitability, the report said. Indeed, Mr. Cantlay said he has never heard so many people in the last six months talk about “the religion of return on equity,” and a return to technical underwriting levels.

Most underwriters “are requiring more and better information from clients as the best way to achieve this goal,” the report said. “Several underwriters also stress the importance of developing core business relationships.”

Most underwriters surveyed “are keeping a wary eye on the Bermudian underwriters growing tendency to diversify beyond property-catastrophe business,” Aon added. Some underwriters believe the new Bermudian capacity “is likely to dilute rate increases and contribute to some loss of market share for other established international reinsurance centers, and London in particular.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 16, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Sept. 11 Altered Reinsurer Risk Outlook

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