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Issue 114 - 12th August 2010
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Insurance vital to meet economic threats says Kendricka
Insurance remains “pivotal” to European businesses’ attempts to manage the continued economic downturn according to the Chairman and Chief Executive of ACE Europe. Andrew Kendrick was speaking as the underwriter released a report it had co-sponsored with the Economist Intelligence Unit which found the potential for a global double dip recession and its impact on trade in Europe, is top the list of risks facing businesses. The survey of over 100 European business leaders revealed nearly 30% see a fall back into recession as the biggest potential risk facing the global economy in the second half of 2010. Other risks facing the global economy cited in the survey included sovereign debt default (19%), market volatility (9%) and a future banking crisis (9%). However, fears of a break-up of the Eurozone, prompted by the recent meltdown of the Greek economy, appear to have abated with only 5% of respondents considering it a risk going forward. Mr Kendrick said: “Regardless of whether we face a further global recession or not, the results of this survey show that firms remain vigilant to the risks they face. At a time of economic downturn when risks are heightened, insurance has a pivotal role to play. Insurers and risk managers need to work together to ensure the transfer of these risks from business balance sheets is achieved in the most efficient and effective way. Recession also creates the potential for new or emerging risks to evolve. Therefore, it is vital that insurers continue to offer creative and relevant products addressing the needs of buyers to demonstrate the importance of the insurance proposition in difficult economic times.” The impact of another global financial crash on European businesses could lead to weakened demand for goods and services and the ability of firms to raise capital, according to the report, with respondents saying these are the two main risk challenges facing businesses over the remainder of 2010. Concerns were also expressed about both market and financial volatility. The respondents were also asked about how prepared their businesses were to deal with risks. Confidence in their businesses’ abilities to deal with these kinds of risks was very high with 90% expressing the view that their firms would navigate successfully through the risks over the next six months.
EMEA buyers reaping rewards of continued competition
But it is not all bad news for the European business community with a study by broker Marsh finding that insurance buyers across Europe, the Middle East and Africa (EMEA) are reaping the cost benefits created by greater competition among insurers for their business and the added capacity generated by new entrants to the market.. In its report Competition Nets Rewards, EMEA Insurance Market January-June 2010, Marsh said that many organisations across EMEA were able to secure premium rate reductions for their property and casualty insurance in the first half of 2010. This is despite insurers striving for rate increases, particularly on renewals. Jeremy Cooke, Global Head of Market Relationship Management at Marsh, commented: “While some countries across EMEA are still reporting an upward trend in trade credit and FI insurance rates for the past six months, there are strong signs that increased competition has spurred some insurers to put some of their previous caution aside. “It is still challenging to find adequate cover at reasonable rates for large financial institutions and banks. However, Marsh believes that conditions will continue to improve in the second half of the year, particularly for firms which have good risk profiles and are based in territories with more stable economic prospects in the absence of any significant losses. Marsh added that it expects that the most competitive lines of business in EMEA will remain unchanged for the remainder of 2010, given the excess capacity in most markets and increasing competition among insurers for business and market share.” Among the changes to insurance rates for other classes of business across EMEA in the first half of 2010, compared to July-December 2009, Marsh found, professional indemnity classes were seeing rate reductions of up to 20-30%, compared to minus 10-20%, directors’ and officers’ liability rate reductions were up to 10-20%, compared to minus 10%, and motor classes were seeing rate reductions of up to 20-30%, compared to minus 40-50%.
Cat bond continue to grow in second quarter
The cats are out of the bag as the level of catastrophe bond issuance in the second quarter of the year was at almost record levels. Reinsurance intermediary Guy Carpenter has reported eight catastrophe bond transactions totalling $2.05 billion in risk capital were completed in the second quarter of 2010 making it the second most active second quarter on record. The firm reported continued strong investor demand for new issuance, with conditions for sponsors remaining favourable. “Despite substantial new issuance, total risk capital outstanding in the catastrophe bond market at the mid-point of 2010 declined by 0.80 percent ($105 million) relative to the end of the first quarter of 2010 and by 5.5 percent ($693 million) relative to year-end 2009. Although the majority of second quarter issuance included exposure to U.S. wind, leading into what is expected to be an active North Atlantic hurricane season, the current appetite for additional U.S. wind risk is limited. Significant investor appetite remains for other perils, including U.S. earthquake, European wind and Japanese wind and earthquake perils,” said the report. Bill Kennedy, Global CEO of Analytics, Capital Markets, Specialty Practices and Advisory, Guy Carpenter added: “The number of catastrophe bond investors continues to increase, as does the size of assets under management. We saw this heightened interest, coupled with very favourable issuance conditions, bear fruit in the second quarter of 2010, as issuance activity remained robust week over week. Whether this momentum will continue through the fourth quarter and into 2011 depends on a number of factors, including the Atlantic hurricane season and broader market conditions, but it is fair to say that the catastrophe bond market continues to advance, innovate and welcome new participants – all healthy signs.” The report added that issuance in the third quarter of 2010 is “expected to be light, in keeping with historical precedent, as sponsors and investors review their positions and digest market conditions”. However despite the drop in appetite for U.S. wind, the appeal of non-U.S. wind exposed transactions remains robust, with active, ongoing discussions concerning U.S. earthquake, European windstorm, Japanese earthquake and windstorm and other perils. Guy Carpenter said assuming that the catastrophe bond market can remain competitive with other risk transfer alternatives, second half issuance of between $1.70 billion and $3.70 billion should be achievable.
Russian underwriters still face challenges say Fitch
Ratings firm Fitch has warned that Russian insurers' ratings will continue to be “constrained by the poor reserving and pricing risks that became apparent in 2009, as well as by the challenges of the current operating environment”. In a review of the Russian insurance market the firm added rating pressure will also continue to be exerted by insurers' relatively weak capital adequacy, particularly when compared to peers' in mature markets and by the lack of transparency over insurers' ownership structure, affiliates and related-party transactions and related risks, as well as by the moderate quality of investment portfolios. On the positive side, however, Fitch said it believed that the further strengthening of Russia's regulatory framework should reduce the pressure of speculative players on tariff competition and improve the sector's overall transparency. Fitch assigned a Negative Rating Outlook to the Russian insurance sector in May 2009, reflecting the expected negative impact of deteriorating insurance market conditions caused by the rapid slowdown in the Russian economy and continuing volatility in the country's investment markets. “The Russian non-life insurance segment reported a notable deterioration in its underwriting performance in 2009,” said Fitch. “This was fuelled by the loss ratio and can be explained by a challenging combination of factors, including the emergence of reserve deficiencies in the industry's maturing portfolio when growth ceased abruptly, a deep contraction in the most profitable business lines in 2009, severe price competition across the market and deterioration in claims experience. Levels of acquisition costs and administrative expenses fell slightly in 2009, but this was not sufficient to offset the impact of the increased loss ratio on the sector's average combined ratio.” The deterioration in underwriting performance affected some non-life sub-segments more than others. The effect of reserving shortfalls and price competition was particularly pronounced for motor insurers, which demonstrated the worst underwriting results in 2009. However, commercial insurers proved more immune to the soft phase of the cycle and were able to maintain their combined ratio at strong levels. “The Russian reinsurance segment remains immature, as specialised reinsurers are only able to offer limited capacity and Russian cedants are looking to place less-attractive risks locally,” it added. “Fitch believes that the pressure to identify new niches in other, less-known, emerging markets, as well as weak capital strength, represent two major challenges for Russian reinsurers.”
RMS seek to redraw terror map as incidents increase
Modelling firm Risk Management Solutions (RMS) said it had made “major enhancements” to its terrorism risk solution, to enable a more detailed modelling of international cities of interest to the insurance industry. The firm’s International Probabilistic Terrorism Model (PTM) now covers the international metropolitan areas of London, Rome, Milan, Toronto, Montreal, Ankara, Istanbul, Dublin, and Copenhagen. “The selection of cities is driven by a combination of terrorist activity levels and the concentration of high-value insured properties, such as skyscrapers, stadiums, and Fortune 100 companies, which dictates market interest,” explained Maria Lomelo, director of Emerging Risk Solutions at RMS. RMS’ new methodology for modelling the rate of terrorist plot interdiction is based on terrorist cell size and the complexity of planned attacks, and uses both social network analysis and counterterrorism method data. The model now accounts for the network structure of terrorist supporters, advocates, and active terrorists, and how authorities track and intercept attacks. Understanding the interdiction process is essential to modelling the probability of successful attacks. “Over the past year we have seen high levels of terrorist activity, with most plots having been foiled. The more ambitious the terrorists’ plan, the more operatives it is likely to include - therefore making the plot more susceptible to interdiction,” said Dr. Gordon Woo, catastrophist at RMS. “The terrorism risk in the cities covered by the new model drives the need for a terrorism risk solution in those regions.”
Jon Guy
Editor
Global Broker & Underwriter
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