Don't Mess Up Hard Market When It Comes, Says Munich Re Exec

During a session entitled, "The Reinsurance Sector: Achieving Profitability," he noted that in 2006, the reinsurance industry made its first underwriting profit in over 25 years–posting a combined ratio less than 100, also making an underwriting profit in 2007.

"We should be looking at ways to continue that process, and absent the events of 2008, I'm not convinced we would have gone there," he said.

As a result of the financial crisis and catastrophe losses that will exceed $35 billion for the year, "we believe there's a market turn," he said. "Why don't we use the market turn as a way of changing how this business gets done going forward."

Mr. Kuczinski said that at this point reinsurers have enough information in their extensive data bases to price business to technically correct levels.

"Sometimes the technical gets persuaded by the emotional. We have to figure out a way of saying, no, the technical really does drive the outcome," he advised.

"At the end of the day, we are in a cyclical business, but we determine the market," said Mr. Kuczinski.

During the first half of his talk, Mr. Kuczinski presented slide after slide of historical data setting the stage for his call for reinsurers to stop a history of unprofitable results from being repeated.

Referring to the two isolated years of profit–2006 and 2007–he said, "the only reason we had those results, or at least the primary reason, was because of Mother Nature," referring to the lack of catastrophe losses in those years.

At one point, he displayed a graph of dollars of underwriting profit and loss from 1991-2007 for the U.S. reinsurance industry. Profits of $1.3 billion in 2006 and $1.7 billion in 2007–only $3 billion together–were not even enough to cover the underwriting losses in the earliest years on the graph, 1991 and 1992, he said, referring to numbers that ranged from an $800 million loss in 1991 to a $3.6 billion loss in 2000.

Despite the fact that Munich Re and other reinsurers have been trying to maintain discipline, downward pricing trends for the past three years have moved the industry overall "dangerously close" to inadequate pricing, he said.

Illustrating the industry's failure to get pricing right during another part of his presentation, Mr. Kuczinski displayed a history of accident year loss ratios (including loss adjustment expenses) evaluated at the end of each accident year, assuming that these loss ratio picks serve as a basis for pricing.

He then superimposed revised loss ratios for each accident year evaluated 24 months later and 36 months later on the same graph, revealing that in each subsequent evaluation–12, 24 and 36 months after the start of each accident year–the ratios remained strikingly similar.

"Three years after we made our decision on what the pricing was, there's not much change" in the loss ratios, he said.

But ultimately–beyond 36 months–the ratios moved very far off the initial estimates, he showed. "In hard markets and soft markets, there is a big dispersion between the ultimate loss ratios and the original loss ratios" and periods of underestimation far outweigh the overestimated periods, said Mr. Kuczinski.

In an attempt to put to rest the idea that the discrepancy is driven by catastrophic events, he noted that for accident year 2001, which encompasses losses from the 9/11 attacks, the gap between the original loss ratio and ultimate loss ratio is about the same as it was for corresponding gaps for several accident years preceding 9/11.

"It's not because of the event that we were that far apart. It's because we got it wrong to begin with," he said.

"Cycles are not impacted by the catastrophes. They may be an impetus for changing conditions, but they are not what get us there in the first place. What gets us there in the first place is getting the loss ratios wrong to begin with," he said, adding that reinsurers don't find out the magnitude of their errors until many many years after they make their initial estimates.