Reinsurers must work hard to reclaim US casualty business—Aon Benfield

In order to make up the shortfall reinsurers need to work harder to provide something to differentiate themselves from primary insurers in US casualty business, argued Bryon Ehrhart, Chief Strategy Officer and Chairman of Aon Benfield Analytics, during the reinsurance broker’s press briefing in Monte Carlo this week.

Mr Ehrhart pointed out that after the pricing peak of 2004 reinsurers lost a considerable amount of business in this key line as insurers opted to retain significantly more business for themselves.

He said that insurers nowadays typically retain about $20m to $25m net compared with a typical $5m before 2004.

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The change occurred because after 2004 the reinsurers judged the loss adjustment ratio to be closer to 75 while the insurers argued that the number would be more like 60. The difference in view led to a wide price difference and so the insurers opted to retain much more of the business and subsequently enjoyed a period of loss adjustment ratios of between 45 and 50.

“I believe that some sources of business will come back if the observed frequency in claims continues but I also believe that the reinsurers have to work harder on casualty business to help insurers provide something different to differentiate the products from what is on the street currently. It needs differentiation for between six months and three years,” he said.

Mr Ehrhart also said that the insurance industry currently has an opportunity to regain some lost ground, notably to the banks, in its overall role as risk financier to the global economy.

The insurance and reinsurance sector took a large slug of the losses recently suffered in New Zealand for example with total economic losses of about $24.8bn and insured losses of about $17bn.

But Mr Ehrhart pointed out that since 1986 insured losses have decreased against gross domestic product. “It seems that we used to deliver a lot more value as we did then,” said Mr Ehrhart.

The year of 1986 was the cut off point because it was the start of the US liability crisis that saw the arrival of the claims made form, various exclusions and the fact that insurance reserves were no longer fully deductible and became discounted. “This was a big change and the banks took a lot of the risk in 1986,” said Mr Ehrhart.

But he pointed out that since the financial crisis in 2008 the banks have lost their risk appetite and this means that the insurance and reinsurance industry has the potential to make up some lost ground.

Dominic Christian, co-Chief Executive Officer at Aon Benfield, recognised the worth of Mr Ehrhart’s figures but pointed out that given the scale of the industry’s contribution to the New Zealand loss in particular, it ‘should not beat itself up too much’.

“We are doing a hell of a lot on the catastrophe side but we could do better on earthquake and flood,” added Mr Christian.

Michael O’Halleran, Executive Chairman of Aon Benfield, agreed that more could be done in flood, pointing to the fact that only 11% of flood risk is currently insured in Florida, which he described as ‘ridiculous’, given the scale of the exposure.