Reinsurers Must Rethink Fundamentals
London Editor
Auchterarder, Scotland
The reinsurance industry faces a fundamental problem in that it rarely makes money out of the products it sells and instead relies on investment income to make up the shortfall, according to Graham Dimmock, chief executive officer of the Paris-based Partner Re S.A.
The estimated global combined ratios of the reinsurance industry over the last decade show that "we have not been able to generate a technical profit out of our business in the last 10 years or more," he said during a recent seminar held by the London-based International Underwriting Association.
Mr. Dimmock said that a combined ratio of 102 is the best that the reinsurance industry has managed for many years.
This soft-market, hard-market cycle, which never gets quite hard enough, is a serious threat to the reinsurance business, he said, noting that its driven partly by the estimated $50 billion of surplus capital in the industry.
"Again and again, we just get back to a marketplace in which pricing is sustainable over the long-term andwe throw our knowledge out of the window and we end up back where we were again," he said. (Similar concerns about the cycle were voiced at the IUA meeting in speeches by other industry leaders. See NU, May 7, page 1.)
Mr. Dimmock emphasized that the industry needs to find a way of killing the cycle, which he said has damaging effects on relationships with clients.
"I think the constant withdrawals of capacity from our industrydiminishes customer confidence in the product that we deliver," he said.
He said that clients want reinsurance to remove volatility, which isnt possible if prices are volatile.
Mr. Dimmock also discussed future trends in the global reinsurance market during his speech.
The reinsurance industry in five years time will still be heavily dependent on premiums from countries in the Organization for Economic Cooperation and Development, he said.
"Its 80 percent of our revenues today and it will be about 78 percent in five years time," he said.
Growth in the world insurance industry has averaged about 1 percent annually over the last five years, he said. "Over the next five years it will probably grow to 2 percent," he predicted.
There are higher growth rates in some of the developing countries, some of which have seen growth rates of over 15 percent, he said, noting, however, that many developing nations have had negative growth rates in the past five years.
A key factor is cession rates–the percentage of business ceded to reinsurers–which in developing territories is about 20 percent, he said, compared to 12 percent in developed markets.
Discussing trends in some lines of business, Mr. Dimmock said that 61 percent of reinsurance business is proportional, which has dropped from 80 percent in 1990.
He guessed it would drop still further to 55 percent by 2005. He emphasized, however, that the majority of the business that the reinsurance industry will write in five years time still will be proportional.
"We ignore it at our peril. We have in recent years ignored it at our peril," he said. "Not many people are making money out of the single biggest source of revenue for our industry and that worries me."
He also predicted that non-proportional business will grow substantially.
"Insurers are becoming risk adverse; theyre becoming more like bankers. They want to shift volatility," Mr. Dimmock said.
A reinsurers size also will continue to be an important factor in the market in the coming years, he indicated.
"Within the next five years or so, the top 10 reinsurance companies–because they have the financial resources to attract talented people and to develop the technologies required to run global businesses–will increase their share of the world reinsurance market very significantly," Mr. Dimmock said.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 28, 2001. Copyright 2001 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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