The Geneva Association has confirmed what most of us already knew: insurance is not like banking and it does not pose a systemic risk to the financial world. In a nutshell, insurers are more stable than banks because they are funded by upfront premiums, giving them strong operating cash flow. Insurance policies are long-term with controlled outflows, which aids stability: you won’t have “a run” on an insurer.

During the credit crunch, the Geneva Association observes, insurers maintained relatively steady capacity, business volumes and prices, unlike investment banks. Some insurers did get into bother but that was through their quasi-banking activities, namely derivatives trading on non-insurance balance sheets and their mismanagement of short-term funding from securities lending.

Recognising that, the industry association has put forward five recommendations to address those activities and further strengthen stability. As well as suggesting ways of strengthening risk management it suggests implementing a principle-based supervision framework that captures any non-insurance activitities, such as excessive derivative trading. It adds that it would agree to “macro-prudential monitoring with appropriate insurance representation”.

But Nikolaus von Bomhard, Munich Re CEO and chairman of the Geneva Association, adds something that will resonate with his peers in the industry. “In the public debate, the business model of insurance is not always sufficiently demarcated from the business models of other financial services providers, such as banks,” he said.

That’s why many believe that any reform of insurance regulation prompted by the financial crisis must be proportionate and fit for purpose. Insurers are the shock absorbers of the global economy and through their longterm investments they actually contribute to stability.

They have proved that and regulators should be careful not to undermine them with unnecessary rules that could even cause instability in the sector.

Marine insurers whose premium income has been hit by the devastating fall in volumes and values in global trade and by the dramatic drop in ship values, must be on watch for more risks on the horizon, according to the executive committee of the International Union of Marine Insurance (IUMI).

At the group’s annual winter meeting at Lloyd’s, IUMI president Deirdre Littlefield of Starr Marine outlined a catalogue of problems facing the industry, which could feed through to insurers.

She said: “Newbuild cancellations and deferments are increasing, but a huge amount of tonnage still is due to be delivered this year and next. Regrettably, we have not seen a significant leap in the scrapping rate of old ships, which is almost beyond belief in the present crisis.”

Owners and charterers are doing all they can to reduce costs possibly leading to skimped maintenance and deferred repairs, Ms Littlefield warned. “It’s bad news for insurers who cover hull, cargo and liability risks. The situation is compounded by the emergence of new problems.”

These are mainly technical but could lead to big headaches for underwriters, she suggested. Fuel management is becoming an urgent issue as more stringent MARPOL rules for reducing emissions mean that the type and quality of bunker fuels are of vital concern. If onboard fuel management goes wrong, there can be potential catastrophic consequences.

Of equal concern is the impact on machinery from the growing trend of slow steaming, now being implemented by a number of operators to cut fuel costs. Large, high-speed diesel engines are designed to operate only at sustained high service speeds.

In another area, underwriters, through surveyors, need to monitor the standard of repairs carried out at yards which have been equipped for new construction only but which are now desperate for work, Ms Littlefield said.

Laid-up ships are another worry and underwriters need to pay close attention to the conditions of cover for vessels which have been idle without being deactivated, or just lying at anchor or drifting awaiting firm orders, often with minimum maintenance and prone to collisions or typhoon damage.

More than ever, the IUMI president concluded, there is an acute need for underwriters to focus clearly and selectively on the risks presented to them, and aim for a price that is realistic yet fair.

Tags: IUMI

Did you see the weather forecast? I mean the long range forecast for Atlantic hurricane activity.

In the US, highly respected wind watchers Philip Klotzbach and William M Grey of the University of Colorado department of atmospheric science have put their money on the 2010 hurricane season being “somewhat more active” than the average 1950-2000 season.

 After the lull of 2009, Klotzbach and Gray predict that activity will return to levels more typical of recent times. They expect to see between one and 16 named storms, six to eight hurricanes and three to five major hurricanes.

 Over in London, fellow scientists Adam Lea and Mark Saunders of the Aon Benfield UCL Hazard Research Centre also predict an active hurricane season. They reckon there will be 13.9 (+/- 4.9) tropical storms, 7.4 (+/- 3.1) hurricanes, 3.4 (+/- 1.8) intense hurricanes. Or put another way, the University College London team thinks there is a 62% probability that the hurricane season will be above average and only a 14% chance that it will be below normal.

The thinking behind Klotzbach and Gray’s early prediction is that 2010 is unlikely to be an El Nino year. (El Nino refers to the warming of the sea in the Eastern Pacific.) The absence of big windstorms in 2009 was attributed to the moderate to strong El Nino event.

According to the latest research from the US Climate Prediction Center, the current El Nino will persist into the Spring – but peak before June 1, the official start of the US hurricane season.

The odds on there being a consecutive 2010 El Nino are very low based on previous experience, Klotzbach and Gray say, so conditions are ripe for a return to hurricanes.

Lea and Saunders take a similar tack citing weaker than normal trade wind speed over the Caribbean and North Atlantic and higher than normal sea surface temperatures in the North Atlantic as key predictors.

Both sets of forecasters admit that the precision of such an extended outlook is low. But some insurers need reminding how lucky we were in 2009. A big insured event would have shaken the industry to its capital foundations in 2009, at a time when the financial markets were in recovery mode.

How will the markets respond if the wind blows a hole in insurers’ balance sheets in 2010? Has the insurance industry really reloaded sufficient capital?

http://www.tropicalstormrisk.com/

http://www.cpc.noaa.gov/products/analysis_monitoring/enso_advisory/

Tags: Hurricanes

Liability insurance is growing all over the world. In 2008, businesses spent around USD142bn on liability insurance worldwide, around half of which originated in the US.

Importantly, emerging countries’ share is expanding. China generated USD1.2bn in 2008 with its market growing at an annual average rate of 22% per annum since 2000. Other emerging markets grew at an average annual rate of 10% over the same period. Central and Eastern European markets generated an additional USD2bn and have grown at an annual average rate of 19% since 2000.

These numbers come from a Swiss Re sigma study, which warns that there are challenges as well as opportunities in commercial liability insurance. Swiss Re’s researchers are worried that insurers are underpricing and under reserving the business. “Commercial liability rates are declining in all markets especially in the US, since 2004” according to Swiss Re’s Thomas Holzheu. “Because interest rates are low, business cannot be cross subsidized with investment results… prices should instead be increasing.”

Liability business, whether it relates to products, pollution or professional services, is a longtail business. Unlike property insurance it provides broad coverage often with high limits. It is affected by inflation which can send losses soaring.

Also, emerging risks to do with technological and social developments are a constant challenge and insurers have to closely monitor changing standards around food safety, employment practices and financial loss compensation, for example – compensation culture is another growing problem.

The big challenge for insurers (and governments and businesses) is keeping liability risks insurable in this complex environment. It means insurers monitoring drivers of liability claims and building them into actuarial models. But most important, Swiss Re stresses, is maintaining prices that reflect claims trends.

Liability premiums and GDP (USD bn), 2008:
Source: Sigma no. 5/2009

One of the recurring industry stories of 2009 was how insurance bosses were becoming increasingly alarmed about oversight. Broadly, there was a growing concern that the insurance industry was going to suffer under tighter regulation prompted by the financial crisis.

Despite having stood firm while the rest of the financial services industry wobbled, insurers were going to be tarred by the same brush as banks, it seemed – and they didn’t like it. But all is not as it seems, according to a KPMG survey that says many insurance executives actually believe that increased regulation will be positive for the insurance industry in the longterm.

“As the dust settles following the financial crisis, the reality of the long road to recovery has become clear to the insurance industry,” Frank Ellenbürger, global sector leader of KPMG’s insurance practice told Reactionsnet.com in a commentary to the findings. “Many executives have come to the conclusion that new regulation may not be a pleasant medicine in terms of short-term growth but ultimately it’s good for the industry,” he said.

In conjunction with the Economist Intelligence Unit (EIU), KPMG asked about the possible effect of expected increased regulation for the industry over the next three years: 62% of respondents felt that it would help improve risk management, 56% felt it would create better financial stability, while 55% felt it would encourage a longer-term view of business.

The majority of respondents did cite increasing regulatory intervention as the biggest barrier to growth, however, the main impact being increased capital requirements.

The picturesque German spa town hosts the pre-renewal reinsurance congress at the end of October every year. It’s a great big talking shop, much like the Monte Carlo Rendez-vous in September – but the temperature is cooler and mood is more business like.

The usual Baden scene is of executives with collars turned up against driving rain, criss crossing between the posh hotels where they meet to earnestly discuss the cathartic effect of the latest natural or financial disaster.

But this year it is different in lots of ways. The sun is shining for a start. Also, while the financial crisis hasn’t actually gone away, the markets are more settled than this time last year. Just as important, it has been a benign year so far in terms of catastrophe losses.

It is Autumn and there is still plenty of time for a windstorm in Europe – but for a lot of the reinsurers here it feels a little like Spring.

There are a number of reasons for that. One is that, having come out of the credit crunch relatively unscathed reinsurers have proved the resilience of their product to their clients, according to underwriter Sharon Gallagher of Kiln Reinsurance 510. “Reinsurance capacity is stable and that’s valued by clients. It is incredible in the circumstances just how stable reinsurance pricing is,” she said. 

Richard Chattock, active underwriter with Montpelier Syndicate 5151 agrees that there is increasing recognition of the value of secure reinsurance. “Everyone is aware that the capital markets could go bad again,” he said. 

Reinsurers are even optimistic about the possible effects on their business of Solvency II, the regulatory regime that will take effect in 2012. In his traditional breakfast press call in Baden-Baden, Munich Re director Ludger Arnoldussen said that Solvency II would lead to a renaissance for reinsurers.

Under the new Solvency II rules, recognition of reinsurance and its capital relief effect is no longer limited to 50% (as under Solvency 1) with unlimited cessions possible. “The value proposition of reinsurance companies is greatly improved as a result,” Arnoldussen said.

Reinsurance brokers in Baden-Baden have an extra spring in their step too. They point to a growing trend for cedants to spread their reinsurance shares a little more widely in order to reduce counterparty credit risk. Nick Frankland, chief executive for Guy Carpenter Europe said it makes sense for insurers to achieve a spread of reinsurance within a band of acceptable security: “It is better than having a concentration in that same band,” he said.

Lloyd’s franchise performance director Rolf Tolle, holding court from a comfy chair in the Brenners hotel, said he discerns a willingness among cedants to diversify their reinsurance panels. He believes that Lloyd’s will be a beneficiary of the trend: “We see the amount of business being offered to Lloyd’s is increasing,” he said. “We’re in a good position in terms of being able to offer syndication with good security.”

Of course, Baden-Baden is not completely changed in character and arguments about the necessary direction of the market still fill the air. Mr Tolle, who has been attending the meeting since the late Seventies, has witnessed the market’s ups and downs over the years.

This year is his last as a representative of Lloyd’s because he steps down at the end of the year, handing over to a new director of underwriting, Tom Bolt. “It is clear that an improvement in pricing, terms and conditions is needed in both the reinsurance and underlying insurance business. But I suspect the market will stay flat,” he predicts. “In a sense the market is a victim of its own success because capital has not been destroyed – it has been replenished.”

Tags: Baden-Baden, Renewals

Insurers are still renewing North American commercial property and casualty insurance programs at deeply depressed rates, according to a new Benchmark Survey from RIMS, the risk manager’s association.

The survey, which tracks changes in insurance policy renewal prices as reported by North American corporate risk managers, finds that commercial insurance buyers are getting good deals because the global economic recession has suppressed demand for insurance capacity, making underwriters fight for diminishing premium dollars.

The survey cites average general liability premiums, which fell 3.7 percent, and average workers’ compensation premium, which was down 4.5 percent as evidence. Declining sales and payrolls, which are used to calculate premiums, were behind the falls, it explains.

Advisen’s Dave Bradford, editor-in-chief of the survey, said carriers are posting underwriting losses, “but in this recession, they have found it nearly impossible to push through rate increases except in a few especially distressed areas.”

Property insurance policies renewed in the third quarter with essentially no change in average premium. Directors and officers liability (D&O) policies also renewed with no change in average premium.

RIMS spokesman Daniel H. Kugler, a risk manager at tool maker Snap-on, Inc. commented that many companies are buying less insurance, and underwriters feel pressured to keep prices low to hold on to the remaining premium dollars. “It’s still a buyer’s market, and it looks as if it may stay that way for a while,” he said.

Another new report, this time from broker Willis, echoes RIMS findings, saying that “marketplace forces that have led to sometimes frenzied competition among insurers may remain in place into 2010”. The detailed report goes on to explain exactly how benign weather and different marketforces have combined to keep prices down, right across the P&C board.

But Willis’s chairman Joe Plumeri says in his intro to the study that buyers should curb their enthusiasm: “While undoubtedly appreciating the windfall of softening rates, risk managers must also consider the issues of market security and counterparty risk as never before.”

Sage advice: chasing reductions is fine but quality cover does come at a price – and this is the worst possible time to find that your insurer isn’t there when you most need him.

Insurance rates for Directors’ and Officers’ coverage tell you a lot about what’s happening in different sectors of the economy. In its recent quarterly market overview for US business, Aon found that D&O rates for financial institutions are increasing significantly: capacity is shrinking and coverage terms are tightening.

On the other hand, the market for all other sectors continued to be extremely competitive with rates trending down, ample capacity and the broadest terms and conditions seen in years, Aon says.

Most insureds should expect to see stable rates in the short term, brokers agree, while rates for financial institutions are expected to continue to increase.

Willis in London also says that the commercial sector continues to resist the sharp rate increases for D&O insurance seen in the financial institutions sector, with the average premium for commercial business falling 5% in the second quarter. In contrast, some financial institutions have seen “double digit” premium increases, in percentage terms.

Willis stresses that the 5% reduction is for commercial clients with strong risk profiles.

But even these buyers could soon be seeing prices trend up, both brokers warn. “The delicate balance between the forces holding D&O prices down and the need for rate increases could soon shift in the favour of underwriters,” said Michael D. Rice, national practice leader of Aon’s financial services group.

Commenting on the findings of the Willis survey, Julian Martin, executive director of Willis FINEX Global, warned, “Owing to the economic downturn, we are experiencing an increased level of scrutiny and underwriting analysis, meaning that is essential for renewal negotiations to begin early in order to deliver timely renewals.”

You have been warned.

Tags: Renewals

In a release timed to coincide with the Ferma conference taking place in Prague this week, Lloyd’s broker Aon outlines a utopian vision of risk management in the future.

Aon predicts that corporate CFOs will have more say in structuring risk transfer solutions and at the same time, more [non-financial] companies will appoint chief risk officers to complement their risk managers.

Aon also envisages greater use of technology to accurately capture business risk information in order to satisfy the growing demands of insurers fed up with spreadsheets. Better still, the systems will utilize risk data standards so everyone talks the same risk language.

That in turn will lead to greater risk differentiation and clients not being tarred with the same brush by insurer.

Growth in enterprise risk management will be accompanied by insurers innovating around new risk transfer products that hedge commodities prices, for example, and weather related risks. Very big industrial companies will tap the capital markets for facultative capacity.

Compelling as it is, something is missing from this picture and that’s the new risks that are lurking over the horizon and will challenge risk managers and their insurers in the future.

Effective risk management with a systematic approach to structures and risk transfer is to be welcomed. But knowing about the potential risks around the corner so that systems can be adapted to the real world is crucial as well.

That’s why forward looking projects like Lloyd’s 360 Risk Insight and the Lighthill Risk Network are so important.

Tags: 360, Lighthill Risk Network, Risk management

Marine insurers meeting in Bruges this week for the International Union of Marine Insurance annual convention will have plenty to discuss over their moules frites.

OK, pirates are making the headlines but the sector’s main worry, according to IUMI president Deirdre Littlefield, is the global economy and how conditions in their clients’ business will affect marine insurers.

Littlefield says that trading conditions for the shipping industry are dire and the short-term prospects are bleak. “Every sector is in trouble despite one or two bright spots. A lot of companies have already folded or filed for bankruptcy, and more will follow,” she said in a press call on Sunday.

This is putting a lot of pressure on marine insurers who are trying to cope with greatly reduced ship and commodity values, and far fewer ships trading as more go into lay-up or lie idle.

The number of total losses has stabilised, but the future claims picture is very worrying Ms Littlefield says, because owners are deferring essential repairs and maintenance.

Yet marine insurance market capacity continues to be plentiful. The danger now is that many underwriters will be tempted to cut rates and make other concessions in order to maintain market share as the amount of new business available continues to dwindle.

“We have seen this cut-throat situation before, of course, but never at a time like this when the shipping industry is literally on its knees,” she told IUMI delegates.

While it is true that there is a downturn in the global economy, some regions are suffering more than others. Those differences are feeding through to insurers and, as one broker recently pointed out, marine insurance is becoming more regional in character.

In its recent outlook paper for the marine insurance sector, Aon points out that regional centres have a different take on pricing. US insurers are pressing for rate increases and seem to be losing business to London as a result. In mainland Europe, different countries such as the Netherlands have their own dynamics.

Norwegian underwriters likewise are said to be defending their business against ‘outside’ interests. Meanwhile, Singapore is growing as the marine insurance hub for Asia, albeit on the back of London companies moving in.

What an interesting evolution: at a time of globalisation the regional marine insurance markets are becoming more and more differentiated in terms of pricing. And yet the main beneficiary in terms of share and stability, according to Aon, seems to be London.

Tags: IUMI