DVS 2010

Please click on the links below to access our show daily coverage form the DVS DVS 2010 Day 1 DVS 2010 Day 2 hideThere are, however, some very good reasons why the reinsurers should not allow themselves to become too carried away with the distribution of their capital. This market may still be stable but it does appear to be right on the cusp of a turn. For starters, everyone – analysts, brokers and the reinsurers themselves – are agreed that there really is not that much fat left on the bone. The reinsurer results have been supported by reserve releases for some time now, just as the insurers results have been, and nobody believes that this can continue. If anything reserve additions are more likely, especially for writers of US casualty business, as inflation threatens to rise and interest rates remain so low. Casualty business written in recent years at ‘competitive’ rates may suddenly look very thin as claims rise on the back of more frequent and higher awards and there is little investment income to counteract them. As was witnessed in 2002-2004, what not so long ago looked like a very profitable market can suddenly turn very bleak indeed and combined ratios that are nudging 100% are simply not good enough in such a climate. Then there is the ‘other side’ of the balance sheet. Monte Carlo is usually dominated by talk of catastrophe losses and their impact on underwriting results and therefore rates and conditions. The outlook for catastrophes is still important of course. But this year an increasing number of experts said that the shock to the reinsurance market is more likely to come from the assets side of the business than the underwriting side. Rates, it seems for many, are more likely to be shifted by interest rates and bond yields than wind or fire in this cycle. Also, a number of the brokers pointed out that it would be far better to allocate this excess capital to innovative new products to help customers through the tough times and cope with the fast-changing risk landscape. This mirrors exactly what was heavily discussed at the DVS conference in Munich, as buyers called for stronger efforts to tackle the seemingly ever widening un-insurability gap. Funnily enough it was Munich Re, with some interesting ideas and words at both the DVS and Monte Carlo, that attempted to respond to this call from both primary and reinsurance buyers with ideas on how it could work with customers to do just that. It will, however, take more than good ideas to convince investors that, given the current macro economic climate, the risk carriers need to reduce their return on equity expectations to allow the reinsurers to put that capital to work on behalf of their customers and maintain an adequate buffer in case reserve additions, or major catastrophes occur after all. The investors will argue, understandably, that if the reinsurers cannot work out how to deliver an adequate return on that capital then the ROE should be maintained or improved through share buy-backs. Whether that argument is remotely justifiable, however, given interest rates of 2% at best is highly debatable. Patrick Thiele, CEO of Partner re, pointed out during a roundtable discussion, hosted by our partner publication Reactions in Monte Carlo, that with interest rate of 1-2%, if investors still expect ROEs of 12-13% then they are actually asking for a return some 1,000 basis points over the risk free rate! Investors would be wise to amend their expectations, he suggested. But, as Bryon Ehrhart, Chief Strategy Officer at Aon pointed out on a number of occasions during the Monte Carlo meeting this year the global insurance industry manages to deliver only about two thirds of the return to investors that the US S&P Fortune 500 does as a whole and yet still manages to offer four times the volatility! The implication of this is surely that until the market can work out how to reduce that volatility through a better way of transferring peak risks, without hitting the ROE via higher risk transfer costs, then customers will presumably have to wait longer for that much hoped for innovation. The alternative is perhaps that buyers take a higher share of the risk themselves, individually or via a pooling arrangement, as was essentially suggested by Munich Re.

DVS 2010

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