Monte Carlo: postcards home
This year’s Monte Carlo Rendez-Vous was not dominated by the usual concerns—catastrophe losses, their implications for rates and the likely heading of the market come January 1. Instead, it involved an examination of what, in other years, might have been deemed rather more peripheral concerns. Low to negligible investment returns, the eurozone crisis, the rise of insurance-linked securities (ILS) and contingent business interruption appear to have been the major talking points this year. And the industry took the opportunity to grasp the nettle and approach these issues with some vigour in a year when catastrophe losses have not been their usual burden on its time and energy.
The low interest rate environment was perhaps the most pressing topic of conversation at this year’s event. Few spoke about market conditions without touching upon its effect upon investment conditions. Of particular concern are the implications of a troubled investment environment for long-tail lines. As Torsten Jeworrek, member of the board of management at Munich Re indicated at the company’s press conference at Monte Carlo, the investment environment and the lack of returns are particularly troubling for life and savings products. He argued that low interest rate margins on the investment side would inevitably affect earnings, while the potential for inflation could mean higher absolute claims. “This in turn would call for higher rates. The worry is whether consumers would be willing to pay,” he said.
Andreas Molck-Ude, managing director and chairman of New Re, spoke in a similar vein. He argued that re/insurers in Europe and beyond need to be wary of the potential “double whammy” of a low interest rate environment and rising inflation, which would result in declining investment returns and rising claims. He said that while rates on casualty lines have been largely flat, worsening investment conditions have led to real-term declines in profitability. He argued that pricing would necessarily have to reflect such concerns, or else the “situation could become quite problematic”.
Investment conditions are also encouraging firms to take a much shorter-term view of their investments, said Philippe Regazzoni, chief executive of Amlin Re Europe. With little possibility of achieving decent investment returns, those writing long-tail business should be wary about locking capital in for the long term. “The challenge is where to put assets in today’s environment,” said Regazzoni. He said that Amlin Re’s approach was to invest in products with a very short duration in order not to be tied into asset positions that could become a future liability. “The yield on such products is hardly stellar, but we are happy that such an approach will not leave us over-exposed.”
With a preponderance of local players at the Rendez-Vous, and European business and the eurozone crisis all on Monaco’s doorstep, it was perhaps unsurprising that the troubling European conditions were the source of much debate. The rating agencies painted a gloomy picture of the situation, with Stefan Holzberger, managing director of AM Best Europe, indicating that conditions have been “far from good for earnings and top- line growth”. He predicted that conditions would be particularly difficult for European insurers with significant exposures to troubled European economies, a number of which have faced ratings downgrades in recent months.
A survey by AM Best found that under stressed conditions many European insurers displayed worrying capital adequacy levels, presenting concerns for reinsurers doing business with such cedants. Counterparty risk, declining premium levels and increased retentions are all raising the spectre of further European nightmares.
As Philippe Derieux, deputy CEO of AXA Global P&C explained, macroeconomic conditions have reduced levels of insurance premium bought by European economies. This has in turn led to a “reduction in the global insurance cake”, with Derieux suggesting that in order to maintain their customer base insurers and reinsurers would have to respond by keeping their costs down. Such comments hardly bode well for rates.
The rise of alternative capital such as ILS also attracted considerable interest at the event, with the $4 billion of new issuances achieved by the mid-point of 2012 encouraging debate regarding the potential of alternative capital to both complement the reinsurance industry’s traditional offering and derail its profitability.
"A survey by AM Best found that under stressed conditions many European insurers displayed worrying capital adequacy levels, presenting concerns for reinsurers doing business with such cedants."
Jamie Veghte, chief executive of reinsurance at XL, was bullish about the role of such capital and its longevity within the market. “Alternative capital may not be permanent in nature, but such forms are certainly here to stay,” he said. Addressing questions about the longevity of such forms of capital, Veghte argued that more, not less, alternative capital would enter the market post-event, with “intelligent capital” replacing the traditional bricks and mortar reinsurers of previous years.
Veghte was not alone in his predictions of a strengthening ILS market. Bryon Ehrhart, chief strategy officer at Aon Benfield, speaking at Munich Re’s fourth annual ILS roundtable, said that the ILS market has grown increasingly sophisticated as more institutional investors have involved themselves in the space. He predicted that growth would continue and that when the market reached the $50 billion mark its mass would attract still further institutional interest. Andreas Müller, head of ILS investments at Munich Re, was similarly confident regarding the market’s potential, noting predictions that there will be $6 billion of issuance by year-end of 2012, “and there is still more investor demand”.
Many in the industry have, however, questioned whether alternative forms of capital would damage the position of traditional reinsurers. Müller referred to an article in the September 2012 edition of Bermuda Re in which the issue was debated, asking the panel whether they thought alternative forms were cannibalism or evolution—in reference to the title of the article. The panel generally responded positively, arguing that the influx of new forms of capital would be complementary, with Steve Emmerson, head of ILS at Tullett Prebon, indicating that such alternative forms are an opportunity, not a threat, for the industry.
Guy Carpenter made similar conclusions at its press briefing, arguing that capital market capacity now represents a core risk management tool on a par with traditional reinsurance. David Priebe, vice- chairman of Guy Carpenter, said that alternative forms of capital, once considered a niche product by the re/insurance industry, now form a core part of buyers’ strategies, particularly for peak perils. Guy Carpenter Securities estimated that $34 billion of property catastrophecapacity now comes from non-traditional sources, of a total capacity of $240 billion from all sources globally. It seems that accommodation and evolution is the only possible route for the industry.
That said, ILS does have its detractors. Ulrich Wallin, chief executive at Hannover Re, took the opportunity to argue that while ILS would complement the traditional reinsurance offering, it cannot compete with the promise to pay extended by traditional reinsurers. He said that loss development over an extended period would present a challenge to those operating in the alternative space, with cedants likely to set greater store in the capabilities of traditional reinsurers under such circumstances. In that respect he said that traditional forms remain superior, with alternative forms still limited to catastrophe perils in peak zones.
At its press event Moody’s warned that ILS and alternative products were “stealing reinsurers’ sweet spot” when it comes to catastrophe risk—an area that has traditionally provided good returns for the reinsurance industry. Kevin Lee, Moody’s vice president and senior credit officer, added that reinsurers will also struggle to compete with the fact that cat bonds are fully collateralised. He indicated however that sidecars provide something of a silver lining for reinsurers in the alternative space, allowing them to substitute what has been, at times, troubled underwriting with more stable fee income.
Finally, the lack of major catastrophe losses encouraged companies to examine some of the less immediate threats facing the industry. Munich Re took the opportunity to raise concerns about the danger posed by contingent business interruption, particularly following losses associated with the Thai floods of 2011. The reinsurer urged the industry to consider once again its exposures in the face of record flood losses resulting from events in Thailand. Swiss Re, for its part, announced that it would be releasing a new catastrophe modelling tool that would enable the company to better understand flood risk in Thailand and beyond. The company said its research had highlighted a number of other geographies of concern, with the availability of reliable data in such regions creating unique challenges.
Understanding and tackling these risks head-on is the responsibility of the industry, argued Mike McGavick, group CEO of XL, in a controversial speech at Monte Carlo in which he argued that the industry must innovate or risk irrelevance. Citing a litany of exclusions that have sidelined the industry following major loss events—including losses associated with Deepwater Horizon, that were shouldered by BP’s Jupiter captive and kept firmly out of the commercial market—McGavick argued that the industry “cannot solve every problem immediately, but there is no excuse for not trying. We must invest in solving modern risks and put our best people to work on them”. His sentiments are shared by others. It took a quiet year for such sentiments to truly gain voice.