Monte Carlo: letters from the front


Monte Carlo: letters from the front

Bermuda Re reports upon the major developments, discussion points and controversies affecting the Bermuda re/insurance industry at this year’s Monte Carlo Rendez-Vous.

Rates, their heading and who will come out on top in the ongoing tussle over likely heading—insurers or reinsurers—inevitably emerged as the lead talking point at the Rendez-Vous this year. Podiums, roundtables, coffee tables and bar stools alike formed the platform for conversations in which the necessity of rate rises were outlined by reinsurers, while brokers and insurers pointed to conditions conducive to continued flattening. Consensus was never likely, but what is clear is that a confused picture of heading has emerged.

As David Cash, chief executive officer at Endurance outlined, reinsurers have become victims of their own success with the mismatch of supply and demand “the true cause of soft pricing”. And Cash was not alone in his assessment of market conditions, with a number of the rating agencies similarly pointing to overcapitalisation as the culprit of the continued soft market. Standard and Poor’s suggested that excess capital had created a level of comfort that would likely negate calls for rate increases and that ongoing stability in the sector—reflected in a swathe of affirmations—was unlikely to change the supply and demand dynamic any time soon.

Not that such comfort was evident in calls from reinsurers looking for rate increases. Significant catastrophe losses over the last 18 months and recent model changes—RMS 11’s US wind model in particular— had made rate hikes a must, according to David Brown, chief executive officer at Flagstone Re. He said that while there would be resistance to rate increases, insurers needed to recognise that “when events happen, rates need to go up”. He added that the existing dynamic was however changing on certain lines, with capacity disappearing on some programmes. This would place pressure on rates, and would likely act as a more significant driver than recent catastrophe losses and adjustments in technical pricing. Brown’s view was echoed by a host of other reinsurers, Swiss Re’s chief executive officer, Stefan Lippe, indicating that “enough factors are now in place for the market to turn and start to harden”, although he admitted that the industry would face tough negotiations with cedants who would fight hard to resist calls for price increases.

Nevertheless, there was some acceptance among reinsurers that a major uptick in pricing is not in the offing. As John Bender, president of Allied World Reinsurance Company, outlined, reinsurers can expect only “short-term fixes” to those conditions that are keeping reinsurance rates down. He said that given downward pressure following catastrophe losses, recent model changes and pressure on casualty lines it was surprising that a turn has not already occurred. Evidently overcapitalisation continues to outweigh upward drivers, with Bender suggesting that reinsurers should concentrate on those factors they can control, namely “underwriting discipline” and pursuing more creative ways of doing business. Bender’s notion of short-term fixes proved similar to the viewpoint expounded by Willis’s deputy chairman, Martin Sullivan, who said that the industry can expect protracted “soft rates with localised spikes” going forward. Such a situation would become “the norm” Sullivan said, with overcapitalisation again proving the major mover on likely future heading.

Aon Benfield Analytics’s chairman, Bryon Ehrhart, painted a similar picture of pricing, with hardening on certain lines, but no wider turn. Despite the $70 billion worth of catastrophe losses during the first half of the year, Ehrhart said that only those events that impact the four key pillars of US wind, US earthquake, European wind and Japanese earthquake would prove sufficient to prompt a wider turn. Rather, reinsurers would need to explore more creative alternatives in the current soft market.

It seems that the tug of war over rates looks set to continue, with brokers, insurers and reinsurers all having arguments available to them as to why rates should move in the direction they want them to.

Asset side cats

Another key concern to have emerged in the last 12 months and one that was discussed widely at Monte Carlo, is the threat posed by dangers on the asset side of the portfolio. The sovereign debt crisis in Europe and the US, troubles in Japan and the possibility of animploding euro all raised the spectre of asset side ‘cats’ in 2011. And while Bermuda players are far less exposed to the most toxic of asset liabilities in geographies such as Greece, Ireland, Italy and Spain than say their European counterparts, concern was nevertheless evident about the potential danger of a double dip recession, inflation or interest rate rises.

Tatsuhiko Hoshina, chief executive officer at Tokio Millennium Re said that while the industry often talks about the implications of catastrophe events, they can in fact be far more significant on the asset side. “Take 2008 as an example: financial events that year proved a far more significant driver of rate changes than recent cat events”—and this is despite near-record losses over the last 18 months. Should global economic conditions deteriorate to the lows of 2008, the asset side of the business may yet throw up cats enough to trouble the industry and potentially turn the market.

Tad Montross, chief executive officer at Gen Re, expressed similar views, indicating that “unprecedented volatility in the financial markets” was demanding a “fundamental rethink regarding what is a ‘risk-free rate’”, with the sovereign debt crisis creating “numerous challenges” on the asset side of the business. Rather than being a complement to the underwriting side of the business, reinsurers are finding liabilities aplenty on what has previously been secure, nearrisk- free return.

‘Hurricane RMS’

Catastrophe modelling grabbed numerous headlines at this year’s event but, most would argue, for all the wrong reasons. Recent RMS 11 model changes proved a major talking point in Monte Carlo, having caught out many in the industry, with expected and actual modelled exposures on the company’s US wind models proving to be widely divergent. RMS admitted that there had been some disconnect between expectation and results, but the divergence was evidently significant, with a number of Bermuda players describing the new model as ‘Hurricane RMS’.

The model changes acted as a not insignificant upward driver on rates during the mid-year US renewals, but as Bender indicated, many firms are still in the process of digesting its full implications. What does seem likely is that further upward pressure will be exerted by the RMS model changes on US January 1 renewals, with Hurricane RMS highlighted by most in the industry as the most significant driver of rates beyond actual catastrophe events.

But RMS changes are creating opportunities for the industry, saidCharles Dupplin, chief executive officer at Hiscox, Bermuda. He was clear the new model changes had encouraged reinsurers to re-examine their pricing, adding that “when you get that, you start to get a divergence of pricing on some perils. This, in turn, can mean opportunities”.

Furthermore, the model changes are acting as a rare upward driver of rates in a landscape that appears largely devoid of positive news for reinsurers. Admittedly, rate increases reflect heightened modelled exposures, but most reinsurers would be happy to see any upward movement considering the limited impact that 18 months of catastrophe losses have had on the protracted soft cycle.

AIR Worldwide and Eqecat meanwhile responded to accusations of irresponsible step changes being levelled at the modelling industry, by detailing their collaborative approach and by differentiating their offering from that of RMS. What does seem apparent is that less reliance on single model results and a greater examination of assumptions will be in the offing, as reinsurers fully digest the implications of RMS 11 and what it means for the wider reinsurermodeller relationship.

Strategic growth

It wasn’t all doom and gloom at Monte Carlo this year, with a number of Bermuda players taking the opportunity to outline their plans for strategic growth. Allied World announced the launch of its Swiss operating company, a move that Scott Carmilani, the company’s president and chief executive officer, said would afford “greater proximity to our clients in Continental Europe and will broaden our product offerings in this jurisdiction”. Ambitions for further development were also outlined by Alterra and Tokio Millennium Re, the former detailing its intention to build a presence in Switzerland— and this is on top of recently opened offices in Argentina, Brazil and Colombia—the latter a potential North American launch. As Hoshina made clear, “the US would make good sense for us and tops our list of geographies of interest”.

Despite soft market conditions, Bermuda players are confident that continuing opportunities for growth will emerge. As Dupplin outlined, if reinsurers listen carefully to cedants, opportunities will inevitably emerge “around the edges of the market”. And as and when they do, Island players will be well positioned to leverage their increasingly global footprints and the strength of their underwriting expertise to seize upon such moments. While it has been a difficult few years, it would seem that Bermuda reinsurers are well placed to take advantage of any turn, no matter how slight it might in the end prove to be.

Monte Carlo, Bermuda, reinsurance, Rendez-Vous

Bermuda Re