Reinsurance Market Review

Transcription

November 2002
Willis Limited
Ten Trinity Square
London EC3P 3AX
Telephone: +44 (0)20 7488 8111
Website: www.willis.com
REI/0924/12/02
A member of the General Insurance Standards Council
Contents
Introduction
1
Mergers & Acquisitions
2
Capacity News
5
Property
11
Casualty
17
Alternative Risk Transfer
20
Retrocession
22
Healthcare
23
Accident & Health
25
Facultative
26
Marine
27
Contact details
For further information please contact your account executive.
For additional copies please contact the Reinsurance Publications Department
Tel:
+44 (0)20 7488 8093
Fax:
+44 (0)20 7488 8525
E-mail: [email protected]
Willis Limited
Ten Trinity Square
London EC3P 3AX
United Kingdom
© Copyright 2002 Willis Limited All rights reserved: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording,
or otherwise without the permission of Willis Limited. The information contained in this report is compiled from sources we consider to be reliable; however, we do not guarantee and are not responsible for its accuracy.
This report is for general guidance only and action should not be taken without obtaining specific advice
Printed by The Astron Group
Introduction
Marine Liability
These different speeds are creating some real business difficulties for insurers, and
below is a brief summary of how each class of Marine business is reacting:
Marine Hull
In September 2002, Hull underwriters were applying a 20% - 25% cash increase
for loss-free accounts; following the losses these base rises are up to 35%. Adverse
results are being treated harshly and rises of 100% or more are not uncommon.
Deductibles are generally not changing unless they are clearly below average.
Marine War
The immediate response to the events of September 11 was to increase prices
across the board for both Marine Hull War and Cargo War. All shipowners were
charged large increases, and Passenger Vessel owners, being potentially high
profile targets, incurred still higher rates. These Hull War rates have generally
remained steady since then with any inclination by insurers to reduce the rates
being stemmed by the highly publicised "Limburg" terrorist loss.
The global insurance and reinsurance industry is facing the January 1, 2003
renewal season having lost USD175 billion of capital over the last two years. This
unprecedented erosion of capital has arisen from a combination of underwriting
losses, under-reserving on earlier years, and investment losses. Partially offsetting
this loss of capital, the global insurance and reinsurance industry has attracted
over USD40 billion of new capital, most of it raised following the World Trade
Center disaster.
Protection and Indemnity (P&I)
Despite an improvement in underwriting conditions, investment losses and the
need to boost reserves on past years have overwhelmed reinsurers' results for the
first two quarters of 2002. Allied with many reinsurers' need to raise additional
capital, these poor operating results are having a severe impact on many quoted
reinsurers' share price. Whilst there are numerous specific reasons behind any
individual company's share price performance, it is notable that US and Bermudan
companies with access to the broader US capital markets, and a longer history of
active capital and shareholder management, are performing better than European
reinsurers. Of greater concern to those companies still seeking to raise additional
funds, are the growing signs that capital markets' appetite to invest in the
reinsurance industry is reducing. This trend is only likely to be reversed once
reinsurance companies can demonstrate an ability to earn the returns capital
market investors require, and share price performance improves.
As the P&I Clubs suffer losses to their equity portfolios, coinciding with a time of
poor results, the pressure is on the underwriting to stabilise reserves. The P&I Clubs
have recourse to both advance and supplementary calls to balance their accounts,
but the size of these calls has a bearing on the competitiveness of the Club and,
hence, on its long-term viability. During this year’s renewal, increases are likely to
be substantial and will incorporate an additional provision to allow for a big
increase in their reinsurance costs. For reinsurance, The International Group of P&I
Clubs has enjoyed preferential terms from the market (the three-year deal
concludes in February 2003), as the collective reinsurance placement has been
broadly arranged with the insurance market allowing this substantial
"reinsurance" contract to sidestep the demands of the retrocessional market.
Unlike previous hard market cycles, the global reinsurance industry is facing an
unprecedented range of pressures which require immediate action to rectify. For
example, there is a definite need to overhaul investment policies and stem any
further losses. European-based companies, who invested more heavily in equities
during the last few years, are comparatively more exposed than their Bermudan
and US counterparts in this regard. However, in spite of the fact that some
companies are less exposed to equities, all insurance companies are exposed to
increased defaults in their corporate bond portfolios. On the underwriting side, the
view is that reinsurers need to ensure that they will achieve acceptable margins
going forward, and, in many cases, such margins will have to be wider than
previously targeted to offset poor investment results.
During 2002, rises of 20% were broadly applied, and whereas insurers will be
looking for a similar percentage increase for 2003, the availability of capacity will
probably mean that the rises will be closer to 10% than 20%. Closely related to
P&I, the Marine Liability market is always keeping a wary eye on the fluctuations
of the reinsurance market to balance its portfolio.
In such difficult times, rating agencies have not been slow to react with
downgrades far outweighing any stable, let alone improved, ratings. Again this
situation is unlikely to be reversed until such time individual reinsurers can rebuild
their balance sheets and show the same degree of capital flexibility they enjoyed
in the late 1990's.
Marine Cargo
Local, indigenous Cargo business is generally profitable and continues to be
underwritten according to local requirements. The London Cargo account, with its
higher limits, specialist treatments and bespoke needs, saw a general increase of
20% in 2002 and anticipates a further 15% increase in 2003. The larger limits are
proving more challenging as capacity for big volume placements has significantly
shrunk. Standalone storage can be problematic in view of the uncertainty of
Reinsurers' approach for 2003.
28 Willis Re Market Review November 2002
With respect to Cargo War, the immediate reaction was to increase rates for the
War & Strikes coverage and to focus closely on the extent of the onland (Storage)
coverage. This gave rise to the Termination of Transit (Terrorism) Clause, which
defines the length of coverage after arrival at port or warehouse etc., and, again,
the almost universal application of this clause in reinsurance contracts has meant
that this guideline is holding strong and will continue to do so for 2003.
As the forthcoming January 1, 2003 renewal approaches, it is clear that
reinsurance buyers must continue to budget for increased reinsurance costs and
restrictions in cover. There is no sign of an end to the hard market, but the degree
of hardening will vary according to the class. With this background, the key issue
for primary insurance companies is how quickly they can achieve improvements in
their own direct underwriting, and how effectively they can manage the gap
between reinsurers' requirements and their own clients’ ability to pay. Primary
insurance companies who are able to manage this difficult transition will prosper,
but those who are not will face a difficult 2003 with continued pressure on their
own margins and capital base.
Willis Re Market Review November 2002 1
Marine
The prolonged soft market up to the end of 2000, the record losses in 2001,
including the events of September 11, and the poor investment returns as equity
markets began to decline in 2000, have caused the insurance and reinsurance
companies to reassess their exposure to risks, to withdraw capacity from certain
types of business, and to strengthen their reserve provisions and their
balance sheets.
These factors are reflected to a large extent by the mergers & acquisitions and
other corporate movements during the period under review, and this section also
captures new capital entering the market, or existing participants increasing their
capital base, to take advantage of the now prevailing hard market environment.
2002
Target
Buyer
Details
Feb
ABA Seguros
(Mexico)
GMAC Insurance Holdings
(US)
GMAC Insurance Holdings, a subsidiary of General Motors, completed
the acquisition of motor insurer ABA Seguros, giving the company access
to the Mexican market. ABA Seguros underwrote more than USD200
million in premiums in 2001 and has 35 offices throughout Mexico
MBf Insurans Bhd.
(Malaysia)
QBE Insurance
(Australia)
MBF Capital Bhd. Malaysia, announced that the proposed merger
between its wholly-owned subsidiary MBf Insurans Bhd. and QBE
Insurance (Malaysia) Bhd. had been approved by the regulatory
authorities. The merger would involve the transfer of MBf Insurance's
general insurance business to QBE (M) and subscription of new shares
as a result of which MBf Insurance would have an equity interest of
49% in QBE (M)
Feb
Feb
Amanah General
Insurance
(Malaysia)
Tokio Marine and Fire Insurance
Co., Ltd
(Japan)
Tokio Marine and Fire Insurance Co., Ltd. acquired this Malaysian
non-life insurer for Yen3.5 billion as part of its expansion in Asia
Feb
CGNU (UK)
(in respect of its
Portuguese general
insurance operation)
Ergo Group
(Germany)
CGNU agreed to sell its Portuguese general insurance operation,
(which had gross premiums of Eur21 million as at December 31, 2000
and a net asset value of Eur4.6 million), to Victoria Seguros, a subsidiary of the
Ergo Group, itself a subsidiary of Munich Re
Feb
Hermes
(Germany)
Euler
(France)
Allianz agreed terms for the proposed merger of its two credit
insurance operations, Euler and Hermes. Euler, owned by AGF, in which
Allianz is the majority shareholder, will buy 97.3% of Hermes for
Eur535 million, valuing the company at Eur550 million. More than half
of the operation is to be financed through debt; a capital increase is to
be carried out, and "self-controlled shares" will also be sold. The
remainder will be covered by cash deriving from a distribution of Hermes
dividends. On completion, AGF will control 56% of the new group,
"Euler & Hermes", with Allianz having a 10% stake. “Self-controlled
shares" are to be reduced to about 2%, and 32% of the capital is to
be floated
Royal Sun Alliance
Personal Insurance
Co (US)
Connecticut Specialty
Reinsurance Co (US)
Axis Specialty Limited
(Bermuda)
This sale forms part of a series of disposals by RSA to raise an estimated
£800 million. The two companies will be renamed Axis Specialty
Insurance Co and Axis Specialty Reinsurance Co. Axis Specialty Insurance
will write business on a surplus lines basis in 38 states and Axis Specialty
Re will be licensed to write insurance and reinsurance in all 50 states,
the District of Colombia, and Puerto Rico
March
Reinsurance terms were sharply increased for 2002: retentions increased by
substantial amounts, premiums rose and exclusion clauses were created and/or
reintroduced. The increased retentions were not tested until late September and
early October, when, in a two-week period, the following losses occurred:
–
The Mitsubishi's Shipyard in Japan had a massive fire on the "Diamond
Princess", causing a loss suspected to be up to USD300 million.
–
The "Hual Europe" (owned by Leif Hoegh) grounded and was declared a Total
Loss (USD55 million Hull & Machinery and Increased Value combined) and a
potential Cargo loss of up to USD40 million.
–
The "Limburg" tanker was attacked outside Yemen and has incurred damage
(classified as War in the Marine market) of up to USD30 million.
–
Hurricanes Isidore and Lili have also wrought damage to jack-up rigs
(towards USD100 million) and to Casino Boat "Treasure Bay", valued at
USD18.5 million, resulting in a Total Loss.
In the context of the worldwide catastrophe reinsurance market these amounts
may appear unsubstantial, but in the context of a world-wide bluewater (including
building risks), premium income of, say, USD3 billion, the Mitsubishi loss alone
represents up to 10% of this premium. A very significant amount indeed!
The impact of these losses has been felt broadly. The Japanese, London and
Norwegian Hull markets have been hit hard, but not as hard as Marine Reinsurers,
whose involvement on the Japanese Pool and other prominent reinsurance
placements has concentrated the losses into the hands of a few carriers.
The underwriting results of marine reinsurers were supposed to revert to profit in
2002 following on from the miserable 2001, with the combination of better
original insurance terms improving the smaller proportional treaty portfolio, and
the more stringent terms producing a choice return on the non-proportional
Excess of Loss business. Excess of Loss, however, operates to its own timetable:
results may be mitigated by higher retentions and enhanced premiums (along with
reinstatements), but is always vulnerable to the extra ordinary loss. The Mitsubishi
shipyard loss is certainly extra ordinary in the context of Marine Hull values:
approximately 95% of all bluewater vessels (by insured value) are valued at less
than USD50 million. Any Marine Hull Loss over USD50 million, let alone two such
losses, will inevitably have a disproportionate effect on reinsurers.
Reinsurers are also incurring higher costs to buy their own retrocessional
coverage. The remedial action imposed by retrocession underwriters for 2002
meant increased premiums on the one hand, but also higher retentions, which
have ensured that this market should not be greatly affected by recent losses.
Reinsurers are likely to be charged more in 2003, but will have received little
benefit from their protections in 2002.
Therefore, reinsurers are likely to offer yet more restrictive proportional treaty
coverage, although current underwriting guidelines from insurers should make
proportional coverage more practicable for 2003. In respect of Excess of Loss,
reinsurers will probably acknowledge that a lot of the remedial work was applied
for 2002, with the premium and retention increases, but will still be seeking
higher premiums. Renewals will be based on a reasonable increase for all, but
with a specific increase to apply to reinsurers with losses.
The list of clauses is likely to extend to an amended radioactive exclusion clause
and a bio-chemical / electromagnetic weapons exclusion, which should plug any
loopholes between Marine and Non-Marine reinsurance wordings. Long-term
Cargo storage is also under scrutiny, and exclusion clauses are being proposed to
try to reposition the storage into the Property market, which will constitute a
substantial change in practice and in mindset for the Marine Cargo market.
Marine Reinsurance is closely linked to the fortunes of the Marine insurance
market. In recent years, the reinsurance market has reacted severely to the adverse
results, whereas the Marine insurance market has adopted a more pragmatic
approach to remedial action.
Facultative
Property
Casualty
A year after the terrorist attacks of September 11, the market may no longer be in
turmoil, but all the features of a hard market are still prevalent. The renewals of
facultative underwriters' treaty protections during 2002 have been difficult, and
there are no signs of relief for the forthcoming January 1, 2003 renewal season.
Capacity remains a major issue while increases in rates and restrictions in
conditions continue to apply. The key difference between the casualty facultative
and the property facultative market is that many of the new reinsurers have not
committed their capacity to the casualty facultative market as enthusiastically as
they have to the property facultative market. It has become increasingly apparent
that the commercial liability reinsurers have been losing money over the last ten
years. The low interest environment and, in addition, a worsening development of
earlier underwriting years, are blatantly exposing this fact. In these circumstances,
the new capacity that has entered the market is yet to be convinced that a
sustainable return can be earned from underwriting commercial casualty
facultative business.
The substantial rate increases and the tightening of terms and conditions seen
during 2002 look set to continue, though the pace of rate increases is showing
signs of slowing, primarily due to the influx of new capacity to the market.
Although this new capacity is most timely, it is proving to be highly selective and
subject to strict underwriting control. Proportional capacity remains limited, thus
making it difficult to obtain capacity for sums in excess of USD500 million.
However, sufficient capacity for major risks can be obtained on an excess of loss
basis, provided the rate is adequate and assuming such risks are not located in
areas of known catastrophe exposure. In addition to capacity, the following issues
will remain to the forefront in 2003 taking into consideration market trends which
have evolved in the course of 2002:
–
insurers and reinsurers can set their own prices and conditions on risks
requiring large limits
–
in order to attract capacity, large buyers and their brokers have to make
considerable efforts to differentiate themselves
–
if some room for negotiation has appeared, this does not mean that
premiums are reducing, but rather that underwriters may be prepared to
show some flexibility in considering the limit and scope of the cover in respect
of certain risks
–
notwithstanding the fact that the cost of insurance continues to rise, those
buyers who paid large increases in the immediate aftermath of September 11
will be seeking a sympathetic review
–
as insurers and reinsures revert to technical underwriting standards, they are
relying more heavily on their own in-house engineers to assess the quality of
individual risks. This is leading to a substantial increase in the data required
for the study of the risk, and to prolonged delays in obtaining support
It is anticipated that the demand for facultative cover will increase as a result of
the restrictions being applied, not only to facultative reinsurers' own treaties, but
also to the acceptance of facultative reinsurance and co-insurance under the
primary insurers' property treaties. In the case of medium-sized insurance buyers,
whose property insurance requirements have previously been covered under
primary insurance companies' treaties, the need to approach the international
facultative markets to obtain capacity will prove difficult. Such first time facultative
insurance buyers are likely to find the terms and conditions required by the
international property facultative markets difficult to manage. Nevertheless,
despite these difficulties, the return to basic underwriting principles and real
capacity - not inflated by treaty capacity - ultimately bodes well for the property
facultative market which will eventually provide a more stable product to original
insurance buyers.
The new capacity that is entering the casualty market is aimed towards higher
excess layers - with no signs yet that the capacity problems of primary layers are
likely to be solved in the near future. The restriction of capacity on primary layers
has continued during 2002 as some well-established underwriters were no longer
prepared to write 100% of primary layers, and some of the Lloyd's leaders in this
segment reached their premium limits. The number of "mainstream" primary
insurers has reduced from 16 in 2000 to 6 at the time of writing. The situation is
less severe for excess layers as the Bermudan companies who are writing casualty
facultative business are prepared to provide support at this level. Overall, global
liability capacity has reduced from approximately USD2 billion any one risk in
2001 to USD1.6 billion in 2002. It must be noted that this figure is only available
for a "perfect" risk and, in practice, overall capacity is much lower. This is
particularly true for difficult risks such as pharmaceuticals and railways, which are
becoming standard exclusions under many facultative reinsurers' treaties, thus
reducing their capacity to a net line.
Pressure on the scope of coverage continues unabated, though the reinsurers'
main focus remains on achieving adequate pricing. Although substantial rate
increases have been achieved during 2002, reinsurers are still continuing to put
out a strong message that they require further increases to reach acceptable levels
so as to provide an adequate return on capital. With no anticipated softening in
the terms of treaty protections for the January 1, 2003 renewal and the low
interest rates environment persisting, there are no signs of a reduction in the pace
of hardening rates and coverage restrictions.
2002
Target
Buyer
Details
April
CGU Courtage
(France)
Groupama
(France)
Groupama plans to combine CGU Courtage with its existing broker
market operation, GAN Eurocourtage, and the acquisition gives
Groupama third spot in that sector in France. The takeover will also see
Groupama assume CGU Courtage's participation in the French
aerospace pools, La Reunion Aerienne and La Reunion Spatiale
May
Royal & Sun Alliance
Insurance Group (UK)
(in respect of its
Benelux-based portfolio)
Achmea
(The Netherlands)
In a series of disposals to raise an estimated £800 million, RSA is selling
its Benelux-based life and general insurance business for £77 million
May
La Fondiaria
(Italy)
SAI-Societa Assicuratrice
Industriale
(Italy)
SAI and Fondiaria, Italy's 3rd and 4th largest insurers, agreed to a
merger that would give control to SAI. The deal creates the second
largest Italian insurer by domestic premium. However, the country's
anti-trust authority is investigating Mediobanca's ties with Generali and
SAI - Fondiaria but stated that it will not refer the case to the European
Commission
May
Huatai Insurance Co.
(China)
ACE Ltd.
(Bermuda)
ACE has agreed to acquire 22% of China's fourth largest property &
casualty insurer, Huatai Insurance Co., for around USD150 million. ACE
will have three seats on Huatai's board, which will be taken by Brian
Duperreault, Dominic Frederico and Peter O'Connor
June
(in respect of its Isle
of Man insurance &
investment portfolio)
Friends Provident Life &
Pensions Ltd (UK)
Continuing the series of disposals to raise £800 million, RSA is to sell its
Isle-of-Man based offshore life assurance and investment subsidiary,
Royal & Sun Alliance International Financial Services Ltd. for £133 million
- included in the sale is Royal & Sun Alliance Investment Management
Luxembourg s.a.
July
Karlsruher Group
(Germany)
Munich Reinsurance Company
(Germany)
As part of the reorganisation of their shareholdings, Munich Re will take
over Allianz's 36.1% stake in Karlsruher with effect from July 1, 2002,
thus increasing Munich Re's share to 90.1%. As a result, Karlsruher will
be integrated into Ergo, Munich Re's main primary insurance group
July
Plus Ultra C.A. de
Seguros y Reaseguros
(Spain)
Groupama
(France)
Groupama announced plans to acquire Plus Ultra for Eur246 million
from Aviva (UK), which said that it would continue to build its Spanish
life assurance business through Plus Ultra Vida and its bancassurance
links with Spanish banks
July
Storebrand
(Norway)
(in respect of its
non-life operations)
Den norske Bank
(Norway)
DnB and Storebrand revealed they would divest their non-life operations
as part of a bancassurance merger deal. In the event, the merger talks
collapsed. But analysts say that a breakdown could open new opportunities
for both companies: DnB would be free to pursue a merger with Union
Bank of Norway and Storebrand could become a takeover candidate by a
foreign bank
July
Naviga
(Belgium)
SMAP - Societe des Administrations
Publiques (Belgium)
CMB, the Belgian shipping company has decided to sell its insurance
subsidiary, Naviga, subject to regulatory approval
Accident & Health
2002
Target
Buyer
Details
July
CNA Re
(UK)
Tawa
(UK)
CNA Financial Corp. confirmed that it is to sell its London reinsurance
unit to Tawa (UK), a subsidiary of French investment group Artemis,
subject to regulatory approval. The share purchase agreement includes
all business underwritten by CNA Re UK, since its inception, which will
be run-off according to a 10-year strategy
July
Sheffield Insurance
(US)
Combined Specialty Group
(US)
Combined Specialty Group, which is formed by Aon's underwriting units,
has acquired Sheffield Insurance Corp. from Vesta Insurance Group, and
the company will be re-named Combined Excess & Surplus
July
Newmarket
Allied World Assurance Holdings
Underwriters Ins Co
- A.W.A.H. (Ireland)
(US)
Commercial Underwriters
Insurance Co (US)
A.W.A.H. acquired from the US subsidiary of Swiss Re, the two US
companies, which are authorised to write excess and surplus lines
insurance in 48 states
July
Duomo Assicurazioni
(Italy)
Cattolica Assicurazioni
(Italy)
Cattolica completed its acquisition of 100% of Duomo, with Cattolica
buying from Banca Popolare di Verona e Novara (BPVN) the remaining
20% stake it did not already own for Eur55.7 million. In return, BPVN
has agreed to the purchase of a 50% stake in the brokerage and asset
management group Creberg SIM from Cattolica for Eur11.4 million.
BPVN will also acquire about a 4% stake in Credito Bergamasco from
Cattolica for Eur45.7 million
Aug
National Insurance
Corporation
(Sri Lanka)
Janashakthi Insurance
(Sri Lanka)
The Sri Lankan government has awarded the remaining 39% stake in
the state insurer to private firm, Janashakthi, after the National Savings
Bank dropped out. Janashakthi purchased a 51% share of N.I.C. last
year- with the remaining 10% of the State holding being offered to
employees
Sept
PZU s.a.-Powszechny
Zaklad Ubezpieczen
(Poland)
IFC - International Finance
Corporation (US)
EBRD - European Bank for
Reconstruction & Development (UK)
IFC and EBRD have both expressed an interest in buying a stake in PZU,
according to the country's finance ministry
Oct
Europ Assistance
Holding
(France)
Assicurazioni Generali s.p.a.
(Italy)
Generali will acquire the 40% shareholding it does not already own in
Europ Assistance Holding from Fiat for Eur124 million. Europ Assistance
sells healthcare, motor, travel and household insurance, and provides
travel and medical assistance services to both individuals and companies
in some 200 countries and territories throughout the world
Oct
Ping An Insurance
HSBC
(China)
(UK)
(in respect of a 10% share)
To date, 2002 has provided the Accident and Health (A&H) arena with a far more
stable trading environment compared to recent years. With the unsettling activities
of previous years seemingly behind us, and with the significant market correction
on pricing and coverage which took place last year-end, 2002 has in general
witnessed a more consistent response from the Reinsurance market.
Terms and conditions on Personal Accident reinsurance business have however
continued to tighten throughout the course of 2002, and retrocessional coverage
still remains extremely scarce. The more recent terrorist activities in Bali have
ensured that Terrorism coverage is still commanding an additional premium of a
varying magnitude dependant upon location. Exposures to potential nuclear,
chemical and biological terrorist activities remain extremely difficult for reinsurers
to quantify, and thus to rate appropriately, which means that rarely can they gain
enough comfort in order to cover this liability. Pricing on Catastrophe protections
continued to rise steadily throughout the course of the past year.
The US Medical reinsurance market has been enjoying equally favourable trading
conditions this year, and actuarial predictions reflect that this sector will return
profits for both this and last year. The more significant volumes of cash flow in this
class, coupled with the less catastrophic nature of the business counterbalances
the Accident class when written in conjunction. Whilst the expected profit margins
will obviously not be as potentially significant, the ultimate outcome is somewhat
more predictable.
In looking forward to 2003 Willis Re envisage a continuing difficult trading
environment whilst remaining optimistic on our clients behalf, that the market may
see a slight improvement in conditions in Accident and Health reinsurances in the
years to come.
Despite the obvious attractions of this sector from a reinsurer’s perspective, there
have been very few new entrants to affect the state of the market. Opportunistic
markets have continued to write Personal Accident exposures, but only when given
a Rate on Line more reflective of Property pricing than A&H rates. Many direct A&H
reinsurers are carrying significant accumulation of risks net of reinsurance due to
the adverse fluctuation in pricing last year.
Given the absence of any significant market-wide Accident losses in 2002,
reinsurers should be in a position to be returning a significant margin of profit on
their portfolios this year. This, it is thought, will perhaps prompt a number of
interested 'observing' parties to enter the market during 2003.
HSBC agreed to pay USD600 million for a 10% stake in Ping An, subject
to regulatory approval. Ping An is China's second-largest life assurer and
operates the third-largest property and casualty business
Capacity news
Medical Malpractice Market Segments
Lloyd’s Market
Primary Hospital Professional Liability
Physicians & Surgeons
This market segment's capacity has been greatly affected by the withdrawal of St.
Paul, the liquidation of PHICO, and exacerbated by the downgrading of certain
carriers such as the Reciprocal Group of America. The regulatory barriers for entry
to this segment are significant unless new entrants elect to use excess and surplus
lines paper. This segment needs new capacity over the next few years, but it will be
difficult to attract new entrants with such poor recent industry results. There is
more careful scrutiny of submissions and a major push to have insureds retain risk
through various self-insurance vehicles. Primary HPL buyers can expect to see
double to triple digit increases for the next two years. The good news is that the
London / European reinsurers have created a market for this business.
While there have been downgrades of certain companies in the last two years, this
market segment remains financially strong if the focus is the provider-sponsored
companies (PIAA). There are less than a handful of physician carriers able and
willing to write (or front) on a national basis. Of much greater concern is the
affordability and availability of insurance in certain US states, and territories within
a state. Certain specialties have been dramatically affected such as obstetrics,
emergency medicine, neurosurgery, and radiology, resulting in some physicians
having to leave their practices or discontinuing services. Hospitals and health
systems will be challenged to create innovative malpractice insurance solutions for
their medical staff, so that the quantity and quality of services is not affected.
These solutions must also be able to withstand legal scrutiny under the Medicare
and tax laws. Nationally, physicians and groups will see double digit increases, and
for groups with adverse experience, or those located in US states with poor tort
environments, these increases could be higher.
Excess Hospital Professional Liability
With the significant increase in Excess HPL premiums, the increase in retention,
and the pairing back of limits, this segment has seen at least five new entrants to
the market. These new underwriters bring additional capacity but are committed to
strict underwriting, and holding the line on pricing.
Reinsurance
With the insurance industry hardening as a backdrop, healthcare liability
reinsurance has witnessed an even more extreme hardening in 2002. Reinsurers
have acutely felt the impact of the severity trend in recent years. Reinsurance
pricing is now subject to stringent actuarial analysis, not just from the lead
underwriters but from the majority of reinsurers on the placement. There is more
capacity in this segment due to new entrants, but their pricing has been
conservative in an attempt to avoid the underwriting mistakes of the 1990s.
Reinsurance buyers can expect to see at least double digit increases in the next
two years, with the focus on increased profit margins, and containing the actuarial
loss picture within the parameters of the programme.
–
In May, as trading conditions remained strong, Amlin arranged a new
£50 million qualifying quota share facility with Montpelier Re - now giving
Amlin the ability to underwrite up to £900 million of income for the 2002
year of account.
–
In June, Amlin announced that it was raising £80 million through a share
placing so it can put together an offer to buy out the Names that control the
remaining 27.7% of the syndicate.
–
The Lloyd's market was one of the main markets to respond to the opportunities
that this 'crisis' created, resulting in a large number of facilities (approximately 15)
being created, which over the last two years has shrunk to around six, with the
premier programme, Sapphire, being the Willis facility.
Ascot, whose syndicate 1414 is backed by AIG, increased underwriting
capacity for 2002 by 66% from £117.5 million to £196 million. The syndicate
writes a diverse spread of specialist lines led by property, energy and
reinsurance, but also including marine cargo, fine art and political risks.
However, the syndicate decided to pull out of the marine hull market as a
result of the continuing poor state of the sector.
–
Beazley successfully completed its floation on the stock market raising
£150 million - thus valuing the company at £167.5 million. The Group will
use the cash to increase its underwriting capacity to £660 million this year.
–
Berkshire Hathaway extended its involvement in Lloyd's through a deal with
Trenwick, Bermuda, that will boost capacity on its Syndicate 839 by
£141 million. The deal will increase the total premium capacity of the
syndicate for the 2002 year of account by 70% to £341 million, comprising a
£62 million rise in stamp capacity and £79 million via a qualifying quota
share reinsurance facility.
Catlin Westgen Group Limited (CWGL) have raised USD482 million of new
equity capital as well as a USD50 million term loan facility. The transaction
will allow CWGL to increase its underwriting capacity at Lloyd's through
Syndicate 2003, its dedicated corporate syndicate. Additionally, CWGL will
begin underwriting through its Bermudan insurance company, Catlin
Insurance Company Limited.
Meanwhile, Ecosse, a new insurance company, officially opened in Glasgow.
The insurer, a 100% owned subsidiary of Catlin Underwriting Agency's
Syndicates 1003 and 2003, will write commercial combined, business liability
and excess of loss business solely for the Scottish market.
In March, Amlin announced that it had agreed a quota share facility with XL
Re that increased capacity for the 2002 year of account by £50 million. This
arrangement will also cover the 2003 year of account.
–
–
In February this year, Amlin confirmed that shareholders took up 39.7% of the
rights it issued to raise £43.2 million, net of expenses - sub-underwriters
subscribed for remaining shares.
The Long Term Care marketplace
The Long Term Care or Nursing Home marketplace was approximately two years in
advance of the hardening of the physician and hospital market, where Nursing
Homes, hit by a surge of litigation, gave rise to multi-million dollar verdicts based
on the quality of care.
Amlin Underwriting Limited, agreed last November that State Farm
Automobile Insurance, an existing shareholder, would provide a credit facility
of up to £100 million to support its underwriting through Syndicate 2001 for
the 2002 year of account. This facility will continue in 2003 and 2004.
Chaucer announced plans to raise £39 million in additional capital through a
placing and open offer to increase capacity and take advantage of improved
market rates. Chaucer's marine syndicate 1084 has seen premium increases
of 41% and its non-marine Syndicate 1096 has seen increases of 31%,
compared to 21% and 18% respectively in 2001.
Subject to regulatory approval, Chaucer said it would use £16 million of the
new funds in 2002, thus increasing the capacity of Syndicate 1096 by
£40 million. Part of the new funds will also be used to increase the group's
fund at Lloyd's to support the group's expected £210 million economic
interest on the Chaucer syndicates for 2003. Chaucer expects in-house
managed capacity of £358 million for the 2003 year of account.
–
Cox Insurance Holdings plc signed an agreement with Lloyd's that will isolate
the existing corporate members and contain any further exposure to liabilities.
Restructuring will include a £70 million placing and open offer of new shares
which will consolidate backing for a new corporate member funding Cox
retail business in Syndicate 218. In acknowledging the attractive rating
environment, Cox's managing agency announced its intention to increase
underwriting capacity from £361 million to £443 million, and said it will
proceed with its qualifying quota share arrangements that provide access to a
further 20% of capacity. The extra capacity will bring about an increase in
gross premiums written from £600 million anticipated for this year to more
than £700 million by the end of next year.
–
Euclidian's Syndicate 1243 achieved a total capacity of £213 million for the
2002 year of account, after Berkshire Hathaway provided the Lloyd's
managing agency additional capacity of £50 million by way of a whole
account qualified quota share arrangement. Euclidian is looking to see
whether establishing a company in Bermuda or London is a viable option and,
if so, will proceed with a specific capital raising exercise next year.
–
GoshawK increased the underwriting capacity of its Syndicate 102 at Lloyd's
as its capital increased from £150 million to £185 million (see also
“GoshawK" under "Company Market").
–
Hardy Underwriting Group confirmed it intends to raise £25 million through a
placing and open offer, which has been underwritten by Numis Securities
Limited. The group, which owns around £43 million of the £54 million total
capacity for its managed Syndicate 382 for the 2002 year of account, intends
to use the extra capital to further increase the underwriting capacity of the
syndicate to £100 million for the 2003 year of account.
Brit Syndicate 2987 is the new combined syndicate formed through the
merger of Brit Syndicates 0250, 0735, 0800 and 1202 - Syndicate 0250 was
renamed 2987 from January 1, 2002. The £450 million capacity represents a
46% increase on the merged syndicates' capacity (see also "Brit" under
"Company Market").
Healthcare
–
–
–
Hiscox raised £110.5 million in a rights issue, which was fully underwritten it was supported by 62.7% of its shareholders. However, Chubb, the US
insurer that held 28.3% share of Hiscox, did not support the capital raising
and, consequently, will see its stake reduced to 18.9%. Hiscox said that
capacity for syndicate 33 will be raised from £504 million to £655 million,
through a qualifying quota share reinsurance arrangement for £151 million.
With favourable trading conditions expected to continue into 2003, Hiscox
said that it planned another increase in capacity next year, taking the figure
to at least £706 million.
–
The St Paul Cos. restructured its business at Lloyd's by focusing upon four
main Business Units viz. Aviation (Syndicate 340), Property, Marine (Syndicate
1211) and Personal Lines (Cassidy Davis). St Paul decided to exit non-marine
reinsurance, marine excess of loss and financial and professional services (see
also "St Paul" under Company Market").
–
SVB Underwriting Limited (SVBU) received confirmation from Lloyd's that it
will not be required to reduce its capacity for 2002, subject to an undertaking
from SVBU that the premium income attributable to SVBU will not exceed
£371 million. This further clarifies the situation in the context of the drawing
down of funds at Lloyd's announced earlier in the year. In addition, SVB has
arranged a qualifying quota share reinsurance for £15 million with Berkshire
Hathaway for its wholly owned Syndicate 2147.
Jago Managing Agency Ltd. placed Syndicate 205 into run-off on
March 28, 2002, having determined that market conditions in the syndicate's
core areas did not provide a continuous business plan. The syndicate was
largely backed by Gulf Insurance Co. for 2002.
The merger of Syndicate 1241 and Syndicate 2147 has been approved by
capital providers and is subject to Lloyd's consent. The operation of the
merged syndicate should allow some realignment of business and together
with Syndicate 1007, provide the platform for SVBU to take advantage of the
current market conditions for the benefit of all capital providers.
Kiln increased the underwriting capacity of Lloyd's Syndicate 807, which it
manages, through a qualifying quota share reinsurance arrangement with
Montpelier Re, Bermuda, giving it a £75 million capacity for the 2002
underwriting year of account.
In February, Kiln announced that it had entered into two further qualifying
quota share arrangements with third parties. Subsidiaries of W R Berkley
Corporation would add approximately £86 million to Kiln’s underwriting
capacity for 2002, whilst a further quota share agreement with Arch
Reinsurance Limited will equate to a further 10% of Syndicate 510’s capacity
of £388.6 million.
–
–
In April, Kiln announced that W R Berkley, the US property and casualty
insurer, is to raise its shareholding from 5% to 20.1% as part of a
£47.6 million rights issue - thus becoming the largest shareholder of Kiln plc.
The capital raised will mainly support increased underwriting on
Syndicate 510.
With underwriting capacity up 76% on the previous year, Kiln said that
Syndicate 510 was now strongly placed to take full advantage of market
conditions as they continue rapidly to improve.
–
–
Markel Syndicate Management Ltd. provides a capacity of £200 million
through Syndicate 3000, which is the new combined syndicate formed
through the merger of Markel Syndicates 702, 1009, 1228 and 1239.
Syndicate 3000 has recently been given an extra £60 million of capacity for
the 2002 year of account following approval by market authorities.
Soc group, a members’ agent at Lloyd’s that acts on behalf of investors or
names, will set up a vehicle aimed at providing capital to a number of
syndicates. The vehicle, known as Socif, hopes to provide up to £1.2 billion of
underwriting capacity.
–
–
Market update
Claim severity
The medical malpractice insurance industry has been in a state of turmoil over the
last two years. A significant number of malpractice insurance companies have
either failed, withdrawn from this line of coverage, or received ratings downgrades
due to the significant deterioration of their financial results. The industry's
combined ratio was a poor 139% in 2001 and is projected to go higher in 2002.
A.M. Best are of the opinion that soaring verdicts, settlements, and rising legal and
related expenses to defend cases, have caused medical malpractice insurance to be
the worst performing line of all property and casualty coverages. Premiums have
rocketed for institutional and individual providers, thereby directly impacting the
affordability and availability of health care, resulting in malpractice coverage
becoming an issue for many buyers whether they are institutional or individual
providers.
Many commentators have noted that the current problem in medical malpractice
insurance has been the "frequency of severity": the unprecedented numbers of
large verdicts and settlements experienced nationally. While frequency is thought
to be flat, Jury Verdict Research reported a 43% rise in the median medical
malpractice awards between 1999 and 2000, hitting the highest median ever of
USD1 million. This in turn has increased loss pick trend factors of between 10% to
15% for excess Hospital Professional Liability (HPL) loss picks1, which has resulted
in a dramatic effect on corresponding reinsurance/excess insurance
HPL premiums.
Rate adequacy
We will comment briefly on current and future trends within malpractice insurance
and reinsurance, together with certain segments within medical malpractice
insurance and reinsurance, such as Primary Hospital Professional Liability,
Reinsurance, Physicians & Surgeons Insurance and Long Term Care.
Despite the huge rate increases being taken by malpractice carriers, there is no
certainty that this will restore profitability in the long term. The concern is that the
pricing increases are being offset by the continuing dramatic rise in the number of
large awards and settlements. Actuarial predictability has been lost in the current
environment.
Current and future trends
Talbot Underwriting Ltd., the managing agency formed by the former
Alleghany Underwriting management team, said it had some £85 million in
capital support for its underwriting at Lloyd's through Syndicate 1183 and,
allowing for quota share arrangements, the syndicate has an underwriting
capacity of £180 million for the 2002 year of account.
Tort reform
Malpractice carriers have responded in a number of ways in an attempt to restore
profitability, including:
Wellington Underwriting plc announced a major initiative whereby certain of
Berkshire Hathaway's wholly owned subsidiaries have agreed to provide a
30% qualifying quota share reinsurance to Syndicate 2020 for the 2002 year
of account, and also to provide the funds at Lloyd's necessary for Wellington
to form a new £150 million syndicate which will underwrite on a consortium
basis with Syndicate 2020 for the 2002 year of account. These arrangements
will increase Wellington's managed capacity from £625 million to
£963 million for the 2002 year of account, thereby enabling Wellington to
meet its original planned premium income of £950 million for the current
underwriting year (see also "Wellington" under "Company Market").
Very few US states have a favorable malpractice climate due to the absence of tort
reform. There are some states such as Pennsylvania, Nevada, and others that are
attempting to remedy their poor environment through legislation. The prospects
for federal tort reform are not promising, unless a convincing case can be made to
establish that malpractice reform is linked to affordability and availability of health
care. Without much hope for near-term tort reform relief, malpractice carriers must
rely on accurate pricing to restore profitability.
Wren Syndicate Management Ltd. set up personal lines Syndicate 2400 with
a capacity of £30 million, with backing from GE Frankona (95%) and BRIT
(5%) - its sole source of business is Bluesure, which sells personal lines
package policies. However, Bluesure has ceased to accept new business
because its management was unable to secure future underwriting support,
but it will continue to provide full services to all policyholders on risk and pay
valid claims in full.
XL London Market, the London subsidiary of XL Capital, is seeking to merge
Syndicate 990 into Syndicate 1209 - both 100% backed by XL, with current
capacities of £80 million and £360 million, respectively.
–
Withdrawing from this line of coverage
–
Double to triple digit rate increases
–
Restrictive underwriting of certain classes of business and in
certain territories
–
Raising attachment points/mandating deductibles
Interest rate movements
–
Offering lower limits of liability
Low interest rates have reduced investment income resulting in underwriters
focusing on underwriting profits. Low interest rates also reduce discount loss picks
which, in turn, increase premiums.
There has clearly been a renewed emphasis on pricing terms and conditions not
seen since the mid-1980s. Willis Re believes that the healthcare industry can
expect these efforts by malpractice underwriters to restore profitability, with this
trend likely to continue for at least the next two years.
There are a number of significant factors that will influence healthcare industry
insureds and malpractice carriers over the next two years, including :
–
Claim severity
–
Rate adequacy
–
Tort reform
–
–
Influx of new capital
The influx of new capital
The number of new companies entering this line of insurance is encouraging. Most
are providing additional reinsurance and excess lines capacity. However, these new
markets are being selective as they underwrite new business, although they have
the added bonus of entering the market without the burden of poor results from
prior years.
1
Loss picks are levels chosen by underwriters’ actuaries at which they would be comfortable attaching their capacity, both from an individual and aggregate claims level.
This level of ‘loss pick’ has been moving up during the last 6 months.
Retrocession
Company Market
As in other sectors, the retrocession market is being affected by poor results
caused by the World Trade Center (WTC) disaster, poor investment returns and
under reserving of back years. As a result, we believe the market will remain firm
with some further rate increases, especially for business written on a worldwide
basis where demand will far outweigh supply, possibly resulting in the need to
break down into territorial sections at certain levels.
To date, 2002 has been a very good underwriting year with no significant US wind
activity and hopefully some much needed profits will be generated. The only
meaningful loss was the European Floods, which we understand could be in the
region of USD3 billion, and may affect some European retrocession programmes.
In addition, whilst WTC in 2001 is a major loss, most people seem to be
adequately, if not, over-reserved.
Whilst the industry has seen a significant amount of new capital being raised,
most predominantly in Bermuda, the majority of the new markets are targeting
direct catastrophe business and have a limited appetite for retrocession, if any.
Retrocession continues to be viewed as a difficult specialist class which is not as
transparent as direct reinsurance and therefore more difficult to rate and to model,
which historically has limited the number of serious players. In addition, due to its
heavy risk weighting against capital, many markets find it difficult to allocate
capacity to retrocession in the current market environment.
We anticipate therefore, another difficult renewal season in terms of finding
capacity, but hopefully this year things will start earlier. Last year we were
embroiled in basic coverage issues, such as changing to named peril slips, and
excluding terrorism and cyber risks. This caused protracted renewal negotiations
which hopefully have now been resolved and will not need revisiting.
Furthermore, we anticipate a significant reduction in capacity from some of our
existing European renewal markets as they revise their underwriting strategy in
light of the poor results.
The expected new entrants to the market, which we believe would have seen
retrocession as a core business, have yet to materialise and are unlikely to be in
place by January 1, 2003. It seems the appetite of the investment community for
new reinsurance ventures is not as positive as it was after September 11.
–
ACE Ltd. announced plans to sell up to USD500 million of 5-year senior
notes and use the proceeds to repay outstanding debt, and for general
corporate purposes.
–
American Re's reserves were increased when its parent, Munich Re, injected
USD1 billion last year as a result of heavy third quarter losses. Munich Re said
it would add a further USD2 billion to bolster American Re's reserves.
–
Arch Capital Group filed a shelf registration statement to offer
USD500 million of common stock, preference shares and unsecured debt
securities, as it expands its underwriting operations.
–
Axa s.a. announced that it would move forward later in the year with a
shake-up of Axa Corporate Solutions, after the holding company had injected
some Eur260 million into its reinsurance unit since the beginning of the year.
Accordingly, the reinsurance operation will now revert to its old name, Axa
Re; the unit that was once the Global Risks Group will become Axa Corporate
Solutions Insurance; and the run-off business will become Axa Liabilities
Managers - all three units are under the chairmanship of a member of the
executive board, who is also chief executive officer of Axa Re.
We continue to have a significant involvement in the loss warranty market, where
we think rates will be largely unchanged. This is a product that certain markets
who would not write traditional retrocession entertain, because the exposure is
easy to quantify due to the warranty trigger.
The risk excess market continues to present opportunities. Rates remain high both
for Worldwide Direct and Facultative, and Retrocession Risk Excess of Loss, and
catastrophe exposures have been significantly reduced.
–
–
Gerling then proceeded to restructure its operations and announced the
strategies of its four Group divisions viz. industrial insurance, commercial and
private insurance, credit Insurance, and reinsurance, adding that the Group
was looking for a strategic partner for its reinsurance unit. Subsequently, the
Group decided to put Gerling Global Re Corporation of America (GGRCA), its
US property and casualty reinsurance business, into run-off, to enable the
reinsurance division to employ its capital in other reinsurance markets and
target segments.
Gerling continued to search for an investor, or to sell part of its reinsurance
business, but, in view of its lack of success thus far, it said that the Group
would consider withdrawing from property and casualty business, through
Gerling Global Re, but that life reasurance was not affected by the situation.
Brit Insurance Holdings has increased the capital of Brit Insurance by
£80 million to £150 million thus enabling Brit to write in excess of
£300 million of gross premium income in 2003. (see also "Brit" under
"Lloyd's Market").
–
CNA Financial confirmed a £43.2 million cash boost for its direct insurance
operations in Europe. This takes the funds of these operations, which include
CNA Insurance, formerly Maritime Insurance, and CNA Insurance (Europe)
to £105 million.
–
Fuji Fire & Marine Insurance Co., reached agreement for a capital and
business alliance with AIG and Orix Corp. whereby AIG and Orix will each
take a stake of about 20% in Fuji making them top shareholders. The
companies will also co-operate with the insurer in product development and
sales.
–
GE (General Electric) has already said that it is examining ‘strategic options’
for its insurance subsidiary, Employers Reinsurance Corporation (ERC).
According to market sources, GE was planning to spin off ERC with a partial
initial public offering, but has delayed the move due to losses at ERC, and the
slump in the stock market. Meanwhile, it has been reported that Berkshire
Hathaway, the insurance and investment group led by Warren Buffett, has
emerged as a leading candidate to buy ERC, but is said to have offered less
than the USD8 billion that GE reportedly wants for the unit. However, people
close to the situation said that contacts between the two companies where at
an extremely early stage. GE issued a profit warning for 2002 mostly due to
ERC’s poor performance and injected USD1.8 billion into ERC - thus bringing
its reserves to a level where it will be easier to sell.
Gerling Group sustained a particularly difficult year in 2001 due to the
adverse developments of capital markets and a very high deficit posted by its
reinsurance division, Gerling Global Re. Consequently, the capital base of the
Gerling Group was reinforced by two capital increases in December 2001 and
March 2002 amounting to a total of Eur708 million, and a further
contribution of Eur102 million to strengthen underwriting funds and
provisions of the reinsurance unit.
Finally, Gerling announced that it would shut down its non-life reinsurance
activities but that, while all existing contractual commitments will be duly
fulfilled, any new business will not be written. It said at the same time that it
would reorganise its life reinsurance business, Gerling-Konzern Globale
Rueckversicherungs AG, under a new company name, Gerling Life
Reinsurance GmbH.
–
GoshawK Re, Bermuda, opened for business in the last week of January this
year with a capital of £100 million to write five main classes of business viz.
non-marine catastrophe risks, marine excess of loss, marine retrocession,
aviation excess of loss, and finite reinsurance (see also "GoshawK" under
"Lloyd's Market").
–
Groupama announced that it had abandoned plans to sell its UK property
and casualty operations and was making a "long-term commitment of at
least five years" to its UK subsidiary, Groupama Insurance.
–
Hannover Re raised over Eur800 million in capital last year, including
Eur94 million equity last December, with the aim of increasing its premium
volume for aviation, marine and London market reinsurance business.
Hannover Re intends to effect a Eur300 million capital increase at its E+S
Ruck unit in the fourth quarter of this year to take advantage of the strong
rise in premiums.
–
HCC Insurance Holdings, Houston, announced that it was discontinuing its
London-based Accident & Health underwriting agency LDG Reinsurance. HCC
plans to transfer the unit's responsibilities and outstanding business to the
Wakefield, Massachusetts office of its Houston Casualty unit.
Tokio Marine & Fire Insurance Co., Ltd. scrapped plans to merge its life
insurance operations with Asahi Life. The two companies said they were
unable to agree on details of a merger plan proposed in November 2001 and,
following the announcement, Dai-ichi Kangyo Bank (DKB), Asahi's main
creditor with an estimated Yen135 billion in subordinated loans and capital,
stated it would continue to support Asahi. DKB is considering injecting up to
Yen100 billion into Asahi Mutual Life's capital base by way of converting
subordinated loans DKB has already extended to the insurer into its capital
base. Asahi said it would still proceed with plans to demutualise and come
under the holding company of the Millea Insurance Group by 2004.
Meanwhile, the US regulators declared effective the USD750 million shelf
registration of securities being offered by HCC Insurance Holdings, which
intends to use the proceeds primarily to fund acquisitions and boost
operating capital.
HCC Insurance Holdings, Inc. announced recently that subject to regulatory
approval, it had reached agreement to acquire St. Paul Espana, Cia. de
Seguros s.a., Madrid, a property and casualty insurance company and, on
completion of the deal, the company’s name will change to HCC Europe.
–
International General Insurance Company, Amman, Jordan, began operations
on March 1, 2002, with a paid-up capital of USD25 million, targeting Arab
and foreign markets rather than the Jordanian market and offering marine,
energy and property insurance, while focusing on servicing major foreign
clients especially oil companies and contractors.
–
Liberty Mutual Insurance decided to withdraw from the Japanese property
and casualty insurance market, citing its inability to develop the scale needed
to run a profitable operation there.
–
Merrill Lynch & Co. Inc. said that it formed a (Class 3) reinsurer in Bermuda
but did not release further details. Following Goldman Sachs and Lehman
Brothers, which have set up Bermuda units, it is thought that the recentlyformed operation will focus on acting as a vehicle for the securitization of
insurance for risks such as earthquakes and hurricanes, hoping alternative
reinsurance involving capital markets will become more attractive now that
traditional reinsurance rates have soared.
–
–
–
Montpelier Re, set up in November 2001 with an initial capitalisation of
USD1 billion, completed recently an initial public offering which now gives
the company a total market capitalisation of some USD1.7 billion.
–
MS Frontier Reinsurance Ltd., (MSFR), Bermuda, has repositioned itself as a
catastrophe risk reinsurer to take advantage of the hardening of premium
rates in the reinsurance market, and, as part of the Mitsui Sumitomo
Insurance group's strategy of expanding its overseas inward reinsurance
business, MSFR's capital has been increased from USD10 million to
USD100 million. MSFR will focus on high-layer catastrophe risks in Asia,
Europe and the Americas. MSFR will also assume the role of the MSI group's
catastrophe risk retention vehicle to more efficiently manage the global MSI
group's exposure.
–
Olympus Reinsurance Ltd. announced it would write property catastrophe and
other short-tail lines of business, backed by a capital of USD500 million.
Olympus Re is said to have a quota-share agreement with member companies
of White Mountains Insurance Group Ltd.
–
Overseas Partners Ltd. (OPL) announced its decision to restructure OPL and
cause most of its operations to begin an orderly run-off. Specifically, OPL
discontinued writing new business in Bermuda with immediate effect and put
its Bermuda operations (OP Re, OPAL and OPFinite business) into run-off.
While the company entered into discussions with parties potentially
interested in hiring the Bermuda finite and accident & health underwriting
teams, the Company entered into an agreement with Renaissance
Reinsurance Ltd. whereby RenaissanceRe would assume the policies of OPCat,
thereby assuring continuity of coverage for the clients.
Meiji Life Insurance Co., and Yasuda Mutual Life Insurance Co., ranking fourth
and sixth in the life industry sector, are set to integrate their operations in
April 2004. The companies combined assets total Yen27 trillion, making the
merged entity the third largest life assurer in Japan following Nippon Life
Insurance Co., and Dai-ichi Mutual Life Insurance Co.
Millea Group's three non-life insurance companies, Tokio Marine and Fire
Insurance Co., Ltd., Nichido Fire and Marine Insurance Co., Ltd. and Kyoei
Mutual Fire and Marine Insurance Co., were planning to merge their life
insurance subsidiaries by April 2003. Meanwhile, Tokio Marine & Fire
Insurance Co., Ltd and Nichido Fire & Marine Insurance Co., Ltd have
integrated their non-life operations under one holding company in
April this year.
Kyoei Mutual Fire and Marine has withdrawn from the planned merger with
the Millea Group. Instead, Kyoei confirmed it was joining forces with
Zenkyoren, the National Mutual Insurance Federation of Agricultural
Co-operatives.
Overseas Partners US Reinsurance Company (Opus Re) would nevertheless
continue its reinsurance operations until a buyer was found.
–
The PRI Group, the new UK insurer specialising in underwriting professional
indemnity insurance, as well as providing other areas of cover such as
Directors & Officers' liability insurance, has raised £125 million of new money
in a placing on the Alternative Investment Market (AIM), and the company
will have a market capitalisation of some £140 million. To obtain UK and
European regulatory licences, PRI has bought the former UK arm of Sirius
International, whose UK subsidiary closed to new business in 1994 and has
no historical underwriting liabilities.
Apr 2002
Scor Group announced the placing on the capital markets of
Horizon, a Eur130 million index-linked securitisation of liabilities
designed to lower its risk profile in credit reinsurance over the next
five years. This structurally innovative cover is linked to Moody's A
and Baa ratings indices which comprise weighted credit risk
populations rated between A1 and Baa3. The indices were picked
for their match with Scor's credit exposures in terms of quality,
geographic diversity and range of sectors.
May 2002
Swiss Re Capital Markets Corporation (SRCMC) completed an
innovative USD40 million transaction applying collateralised debt
obligation technology to efficiently pool, tranche and transfer a
diversified pool of insurance risks. The deal also divided the pool
into four tranches of various levels of catastrophe risk. SRCMC
structured the deal and was able to create and place synthetic
equity and mezzanine risk tranches in a portfolio of insurance risks.
Investors in the two junior tranches accepted a higher risk profile to
obtain a more attractive yield than is generally available to
investors in the insurance-linked securities sector.
May 2002
Nissay Dowa General Insurance Co., announced a 3-year
USD70 million transaction, arranged through a special purpose
vehicle, Fujiyama Ltd., to cover potential losses from earthquakes in
Japan. Swiss Re Capital Markets Corporation (SRCMC) acted as sole
manager for the transaction and, in conjunction with RMS, created a
parametric structure in which losses to the bond are directly linked
to earthquake event parameters published by the Japan
Meteorological Agency (JMA). The parametric "box" structure fits
Nissay Dowa's exposure and covers seismic sources giving rise to
earthquake events affecting exposure in Cresta Zone 5 (Tokyo,
Chiba and Kawasaki), as well as the neighbouring prefectures to the
southwest, Shizuoka and Yamanashi.
Jul 2002
Swiss Re raised USD255 million from a 4-year bond for protection
against natural catastrophes. The company signed a financial
contract with Pioneer 2002 Ltd., a special purpose vehicle in the
Cayman Islands and the issuer of the USD255 million of securities.
The proceeds from the offering fully collateralise Pioneer's financial
contract with Swiss Re, and will serve to replenish Swiss Re's capital
should any of the specified natural catastrophes occur. The
protection is based on parametric indices tied to natural perils.
Under these indices, Swiss Re's recovery after an event is tied to
physical parameters such as earthquake strength or wind speed.
Five of the indices address individual risks viz. North Atlantic
hurricanes, European windstorms, California earthquakes, Central
US earthquakes, and Japanese earthquakes, while the sixth is a
combination of the other indices.
Sep 2002
Horace Mann Educators Corporation, Illinois, committed themselves
to a USD75 million capital agreement with Swiss Re. The facility is a
3-year option agreement that allows Horace Mann to maintain
financial flexibility and capital strength in the event of a major
property and casualty loss from catastrophes in the US. Subject to
the terms of the agreement, if at any time over the 3-year period
Horace Mann incurs catastrophe losses exceeding a pre-determined
level, the company has the option to issue up to USD75 million of
cumulative convertible preferred securities to Swiss Re Financial
Products Corporation, or to enter into a one-year quota share
reinsurance agreement with Swiss Re America.
Alternative Risk Transfer (ART)
The last 12 months have seen significant changes in the ART arena. It is probably
easier to identify these by examining different parts of the market separately.
Jan 2002
Finite transactions have been severely constrained in terms of use and
acceptability. Increasing scrutiny from regulators and the accounting industry
together with a much more conservative view on the key accounting issues, has
meant the demise of many multi-year or smoothing structures.
The continuing fall-out from Enron, HIH, Independent and other high-profile
failures is likely to mean a continuation of this stance.
Capital Market deals have been mostly concentrated in the equity markets. Most
investors looking for some insurance-linked assets in their portfolio seem to prefer
the root of equity investment in a start-up (and increasingly subscribing to rights
issues). This has meant a relatively low level of activity in the cat bond arena, but a
few issues have been done as listed below.
Mar 2002
Prospects generally for a resurgence of cat bonds or other insurance risk linked
securities are mixed. While the secured credit-worthiness of instruments has
obvious and lasting appeal, it is less certain that improved liquidity or the growth
of an active secondary market will reduce spreads on these instruments.
Apr 2002
Structured deals are the logical next step from a curtailed finite structure. Utilising
some of the characteristics of finite structures, in terms of well understood upside
and downside, the analysis of exposures is what gives comfort to the transacting
parties' confidence in the deals. This is increasingly the way in which "difficult" or
idiosyncratic exposures may be reinsured.
Apr 2002
–
QBE operations in the US have received an additional capital injection of
US50 million from the Australian parent. The transaction increased the
policyholders' surplus of QBE Reinsurance Corporation to more than
USD250 million, and the policyholders' surplus of its primary subsidiary,
QBE Insurance Corporation, to more than USD75 million.
–
Quincy Mutual Fire Insurance Company have decided to withdraw from
writing an inwards account of reinsurance treaty business,and will no longer
write new or renewal business from its Branch Office in London. The decision
is based on the inherent difficulties of balancing world-wide mono-line
exposures against a conservative premium base and the expense of
retrocessional cover.
Generali France Assurances bought Eur17 million of reinsurance
cover by means of an index-linked reinsurance treaty that will
protect its local account against windstorm risks.
–
Renaissance Re announced it would sell up to USD500 million in debt
securities, and an extra USD64.3 million in previously registered but
unsold securities. The proceeds would be used as working capital, capital
expenditures and acquisitions.
–
Royal & Sun Alliance Insurance Group (RSA) announced that it was not
launching a rights issue but was instead proceeding with a restructuring plan,
including :
Under the arrangement, the reinsurance is triggered when wind
speeds in high-risk areas exceed a certain threshold. The overall
programme is a mixture of alternative and conventional techniques.
The trigger is based on a daily calculation of the cumulative
maximum wind speeds taken at a network of Meteo France weather
stations. Each weather station is weighed in line with Generali
France's exposure in that area. The wind speed in kilometres per
hour is then converted into a financial amount. From this point on,
cover could be provided either by reinsurers, or in capital markets, in
the form of an option using the standard International Swaps &
Derivatives Association (ISDA) documentation.
There has been a marked decline in the explicit trading of credit as well as the
assumption of credit exposure in support of Collateralised Debt Obligations (CDOs)
and the like. The announced losses from many market participants have hastened
the reduction in such activities.
Parametric or indexed structures have continued to grow. The health of the
Industry Loss Warranty (ILW) market has been an indicator of this, as well as the
continued development of the weather markets using Cooling Degree Day (CDD),
Heating Degree Day (HDD), precipitation or windspeed indices. We see the growth
of parametric covers (with or without a buy-back of basis risk) as the low-cost
parallel of the cat bond market.
Scor Group announced that it had placed a second multi-year
reinsurance protection of USD150 million intended to cover claims
linked to natural catastrophe events from January 1, 2002. The
cover was placed through Atlas Re II, a special purpose vehicle
incorporated in Ireland, to protect Scor for a period of three years
against the occurrence of earthquakes in California and Japan and
windstorms in Northern Europe. Atlas Re II complements the
USD100 million per event cover of Atlas Re, which already protects
Scor against the occurrence of a first event of the same nature. Atlas
Re II provides coverage for a second or third event during a given
year, with a USD100 million per event limit and a USD150 million
limit over three years.
Hannover Re completed the "K3" deal which provides the reinsurer
with an equity substitute in the amount of USD230 million. The deal
is a structured financing involving a portfolio-linked securitisation,
comprising a variety of non-proportional reinsurance covers for
natural perils (hurricanes and earthquakes in the US, windstorms in
Europe and earthquakes in Japan), and worldwide aviation business.
The term of the transaction is three years with an option for the
investors to renew for two more years.
Hiscox announced the private placement of USD33 million of
catastrophe risk linked notes. The placement provides Syndicate 33
at Lloyd's, which is managed by Hiscox, with a new source of
catastrophe insurance protection for earthquake events in the
California and New Madrid seismic regions of the USA. Earthquakes
occurring in either of these two seismic regions with a magnitude of
not less than 5.0 are qualifying events and trigger a loss
calculation. St Agatha Re Ltd., a Bermuda-based company
established for the transaction, issued the notes.
–
disposal of its Asia Pacific business through an initial public offering
–
the sale of RSIU, its surplus lines business in the US
–
the reduction by a third of its underwriting British Personal Lines
business, such as motor and household, by a combination of closure
and disposal
–
Sompo has now taken up all the new shares issued by Taisei F&M for
Yen1 billion. Therefore Taisei F&M becomes a wholly owned subsidiary of
Sompo, and the main elements of Taisei F&M, excluding the reinsurance
department, will now be folded into Sompo.
–
The St Paul Cos allocated earlier this year an extra USD100 million in share
capital of its reinsurance arm, St Paul Re, by way of a cash investment, after a
year of catastrophic losses, and acted to exit certain lines and re-focus its
operations going forward. Subsequently, The St Paul Cos. announced its
intention to transfer its reinsurance operations to a newly-formed reinsurer,
Platinum Underwriters Holdings, Bermuda, and to participate in Platinum's
raising approximately USD1 billion of capital through an initial public offering
on the New York Stock Exchange. Continued turbulence in the US equity
markets caused the postponement of Platinum's initial public offering
scheduled for June this year. However, Platinum Underwriting Holdings and
The St Paul Cos. finally announced the initial public offering of 30,040,000 of
Platinum's common shares at a price of USD22.50 per share at the end of
October, and the shares made a strong debut on the New York Stock
Exchange (see also "St Paul" under "Lloyd's Market").
–
Special Risk Insurance & Reinsurance (SRIR), Luxembourg, set up with a
Eur500 million of committed capital began operations. SRIR insures property
against acts of terrorism and offer policies to cover property damage,
business interruption and extra expenses incurred after a terrorist act. SRIR,
which focuses mainly on European business, writes a maximum of
Eur275million in a given 600-metre geographic area. The company was set up
by Allianz AG Holding, Hannover Re, Scor, Swiss Re, Zurich Financial Services
Group, and XL Capital Ltd.
–
Travelers Property Casualty Corporation, spun-off by Citigroup, filed a
statement to sell up to USD1 billion in Class A common stock in an initial
public offering. Concurrent with the offering, the company is offering an
undisclosed amount of Upper Debt Exchangeable for Common Stock and
purchase contracts to buy shares of the company's Class A common stock.
The company said it would use net proceeds from the IPO to pre-pay
intercompany debt to Citigroup.
After the implementation of these disposals, RSA predicts the Group’s
available capital would exceed its capital requirements by £750 million
–
Scandinavian Re, the Bermuda-based reinsurance subsidiary of ABB, stopped
writing new and renewal business after making losses of USD90 million
last year.
–
Scor sold its 35.3% stake in the French export credit insurer, Coface, for
Eur290 million to French bank, Natexis Banque Populaire, who thus increases
its shareholding from 19% to 54.4%. Scor said the move would yield a profit
of Eur96 million and would free another Eur180 million in risk capital, which
it will reinvest in its core business.
Scor said it had reached a definitive agreement to sell its Arizona-based
Fulcrum business unit, to the Argonaut Group - the unit was acquired when
Scor took over Sorema.
Sompo Japan, formed through the merger of Yasuda Fire & Marine Insurance
Co., and Nissan Fire & Marine Insurance Co., commenced operations on July
1, 2002. The originally planned April launch had been postponed due to the
demise of Taisei Fire & Marine Insurance Co., which had been due to form
part of the new company.
On November 18, 2002 Scor announced a revision of its projected estimated
net loss to Eur400 million for the full year to 2002. As part of the recovery
plan ‘Back on Track’, the Board announced on November 21, the launch of a
rights issue to raise up to Eur381 million. This capital increase, 75%
guaranteed by a group of investors and by the banking syndicate, will enable
Scor to put into action its recovery plan. Scor had earlier confirmed that
around ten existing shareholders, holding approximately 50% of its existing
shares, had already indicated their intent to exercise their subscription rights
and even to increase their stake.
Engineering
–
Trenwick announced it had placed LaSalle Re's operations into run-off, and
effected the sale of LaSalle Re's property catastrophe business through a
100% quota share reinsurance arrangement with Endurance. The deal, which
took effect from April 1, 2002, gave Endurance the renewal rights to LaSalle
Re's property catastrophe reinsurance contracts.
As part of the move to restructure Trenwick’s business, the company
announced that its subsidiary, Trenwick America Reinsurance, has entered into
an underwriting agreement with Chubb Re, the reinsurance arm of Chubb
Corporation. The underwriting facility will allow Trenwick to underwrite up to
USD400 million of US reinsurance business on behalf of Chubb Re for the
remaining period in 2002 and for 2003, with Chubb Re retaining final
underwriting and claims authority on any business generated.
Trenwick also announce that, with immediate effect, it will cease to
underwrite US Specialty Programme Business, which was previously
underwritten under the name of Canterbury Financial Group and through its
subsidiaries, Insurance Corporation of New York, Chartwell Insurance and
Dakota Specialty Company.
–
–
Wellington Underwriting plc announced the raising of £448 million to fund
the proposed formation of Wellington Re, a London-based, FSA authorised
insurance company which will support the future growth of Wellington’s
underwriting capabilities. Wellington Underwriting also announced its
intention, subject to market conditions, to raise equity finance to increase
Wellington’s economic interest in the holding company of Wellington Re,
strengthen Wellington’s balance sheet, support its share of the future
development of Syndicate 2020’s underwriting, and provide permanent
capital to support the expansion of Wellington’s US business through
Wellington Underwriting Inc. Subsequently, Wellington Underwriting said it
would raise £120 million through a placing and open offer to finance a
further investment of up to £76 million in Wellington Re. The remainder
would be used to strengthen Wellington's financial base to support its
increased participation in Syndicate 2020 at Lloyd's for the 2003 year of
account and beyond (see also "Wellington" under "Lloyd's Market").
–
–
Overview
Large losses
XL Capital Ltd. announced that it plans to integrate its reinsurance operations
following the ratification in January this year of XL's previously announced
acquisition of a 67% majority shareholding in Le Mans Re. The plans will see
the merger of their branches in Singapore; XL Re plans to reduce the scope of
its operations in Australia and, while business will continue to be
underwritten in Sydney, management of the Australian branch will be directed
from Singapore. The Le Mans Re underwriting operations in Miami are to
cease, and the Le Mans Re office in France will become responsible for the
management and run-off of its existing portfolio, while the Le Mans Re's
continuing Miami based business are to be merged with XL Re
Latin America Ltd's operations.
Subsequent to the events of September 11, 2001, and in conjunction with an
already contracting market, engineering reinsurers imposed a number of
substantial remedial underwriting measures during the 2001/2002 renewal
season. These included increased rating and deductibles, tighter terrorism
exclusions and the introduction of loss participation clauses, sliding scale
commissions, and cyber exclusions.
Whilst there has been the normal level of attritional losses expected on this line of
business, we are not aware of any major market losses over the past 12 months.
Zurich Financial Services (ZFS) gained the backing of its shareholders for a
USD2.5 billion stock issue to help finance a restructuring intended to return
the company to profitability, and take advantage of the upturn in the world
insurance market.
The past 12 months have seen a number of withdrawals from the engineering
market and the companies which remain, therefore, have more power to influence
terms and maintain market standards. A “back to basics” approach now prevails
and tighter underwriting discipline is being re-established to ensure a return to
technical underwriting profit. Wordings, particularly brokers’ manuscript wordings,
are being restricted.
ZFS is restructuring various operations, including its Nordic operations where
it is selling part of its general insurance lines in Denmark and Norway to Tryg,
Denmark’s largest non-life insurer. ZFS will stop writing new consumer and
commercial insurance business in Sweden. ZFS also said that the corporate
business in Finland and the Baltic countries would be repositioned by the end
of 2002.
Following such activity, it is thought that the 2002/2003 renewal season, which is
now under way, should see relatively few changes. However, reinsurers continue to
remain under pressure for an adequate return on capital and this, in turn, places
cedants under pressure to convince the market that the engineering class has
realistic expectations of profitable future performance.
Markets
As mentioned, there has been a reduction of engineering capacity with RSA Re,
Copenhagen Re, Wuerttembergische, Gerling Global Re, Cox and QBE withdrawing
from the market. This has impacted on both treaty and facultative business.
However, many important markets remain dedicated to engineering as a class, and
the trend for machinery breakdown being extracted from All Risks
programmes continues.
On the other hand, following a restructuring process within Munich Re, there has
been a change of emphasis with regard to engineering underwriting as a result of
which a more property-influenced approach is discernible, which is being filtered
down to cedants.
In addition, reinsurers are expected to remain keen that insurers should monitor
and control exposures in known catastrophe areas; Event Limits are now a
common feature of excess of loss treaties. Indeed, the level of account information
required by reinsurers has never been greater, and strong emphasis is placed on
producing the quantity and quality of information required to ensure true
transparency in the relationship between cedant and reinsurer. In some cases, prerenewal underwriting reviews are conducted.
A number of market initiatives are gradually being introduced, including the use of
rating models specifically designed for engineering business, premium payment
warranties, and the advent of maximum lines sizes on co-reinsurance, typically
25%. These initiatives can be expected to feature during the 2002/2003 renewal
season, along with continued hardening of excess of loss rating.
Winterthur Swiss has seen its equity base severely eroded by the fall in stock
markets and its parent, Credit Suisse, announced that it was injecting
SwFcs1.7 billion of capital into Winterthur Swiss to ensure that it retained an
adequate capital base.
Property
The way that issues such as the above have come to dominate market debate over
recent months is a firm indicator of the almost complete evaporation during 2002
of the "market share" ethos that underpins such a large part of most reinsurance
cycles. But this is belied by other developments, both within the Casualty field and
in other markets.
The latest news from the Gerling Global Re has prompted a rash of telephone calls
as reinsurers have scrambled to position themselves to attract additional shares of
key market programmes that were previously written by the Gerling Global Re.
Whilst this is encouraging (as an indicator that the Gerling Global Re portfolio
generally carried wider respect), it also suggests that softer times are just around
the corner.
More broadly, news of demands to "double our gross capacity" from some
property per-risk insurers, and the news of a standard "ten percent off" on
renewals of the American property facultative portfolio coming to London, both
imply that the wider appetite for commercial and industrial insurance is returning.
This in turn is bound to feed competitive instincts.
In addition, the incipient hints from some of the more traditional reinsurers of
interest in more substantial positions for some casualty treaty business, are
beginning to be matched by statements of openness to casualty business from
newer markets. The "New Bermudans" have generally started out with a sharp
focus upon mainstream property classes, but a number of them have certainly
indicated interest in non-property fields. Naturally it takes time before insurers are
ready to entrust longer tail reinsurance risks with reinsurers of less fully
established presences, and the true depth of appetite from these reinsurers has yet
to be tested, but the peak of the cycle is clearly coming into view.
Undoubtedly there is still considerable soul-searching in progress, as the range of
the issues set out above indicates. Renewals into 2003 have to expect some fairly
firm - even confrontational - discussions. But older habits are discreetly reemerging: the edge of fear has gone from the main European reinsurers.
The meetings in Monte Carlo, Baden Baden and Los Angeles (NAII), addressed the
wider issues pertaining to the forthcoming renewal season. Now the focus is on
the job in hand, or more specifically: on what buyers expect from this year’s
renewal ?
In short, the answer to this question is dependent upon whether the buyer is
looking to purchase a product which has an over-supply or under-supply of interest
from the reinsurance community.
Single territory excess of loss catastrophe products are currently attracting the
most interest and, therefore, the simple laws of economics will play their part
when final prices are determined. Multi-territory products or inclusion of USA
coverage in international protections, will offer a greater challenge, but capacity
still exists subject as always to rating adequacy.
Single Risk capacity on an excess basis, although not in abundance, is still
sufficient to meet demand, and, if prices were to continue to increase, a great deal
more capacity would become available. Similar comments also apply regarding
single or multi-territorial issues.
It seems therefore, with no great surprise, that the buyers biggest challenge for
2003 in the property arena will be to obtain proportional reinsurance capacity.
Notwithstanding the fact that original business may have achieved 100% rate
adequacy (100% plus in certain areas), the capital available in the reinsurance
world seems fixed on the view that non-proportional products are the only
vehicles that fit the business plans, which attracted the investor communities in
the first place. In effect, the majority of the reinsurance world old or new, are
presenting a sign of no confidence in following the fortunes of their cedants,
preferring to keep direct control of pricing the original risk through the excess
layering route. It seems that reinsurers are no longer willing to cover catastrophe
perils in proportional contracts, not at least until their cedants can show they are
adequately charging for the catastrophe hazard within their original pricing.
History has shown what happens when there is over-supply of capacity and a
divergence of views on strike prices. The 2003 renewal season shows little signs of
creating new precedents and therefore the writer’s expectations are for the market
to compete in specific areas where the products on offer fit business plans
perfectly, and prices are adequate in each carrier’s view. At the same time, one
should also expect a reinsurer to exit historical products which have failed to
produce an adequate return on capital, namely, proportional covers, which in turn
could further fuel the over-supply of non-proportional capacity. This said, overanxious buyers will need to be careful if they are looking to drive prices too far
away from technical levels. The apparent over-supply of capacity could dry
up rapidly!
In addition to rating adequacy one should be prepared for significant debate over
coverage definitions. Single risk definitions and the interplay of contingent
business interruption exposures will continue to be a major theme. In addition,
second or third generation Asbestos Risk and Toxic Mold will be standard exclusion
for many reinsurers notwithstanding their relevance. Finally, a renewal season in
respect of catastrophe business would not be complete without some discussion
regarding preferred hours clause/occurrence definitions. The European wind and
flood losses of 2002 will ensure a re-think in event definitions, with perhaps the
reinsurance market trying even harder to widen the gap between the covers they
offer, and the actual catastrophe to which clients are exposed.
The key theme for this year’s renewals would seem to be pricing adequacy. Much
has already been written suggesting that technical prices have not yet reached the
desired level, depending on the product and the quoting market. This raises an
interesting issue for the 2003 season. The 2002 renewal season may have been
challenging in some respects, but at the same time it was in many ways
straightforward. Reinsurers were unanimous in insisting that depleted surpluses
needed to be replenished by means of rate increases across the board. The 2003
renewal season however seem to be rather fragmented with some already
suggesting price adequacy, whilst others are hoping for further improvement.
Casualty
WTC - terrorism coverage
The terrorist attacks of September 11, 2001 in the US are expected to produce
losses of between USD36 billion and USD54 billion, with property damage and
business interruption claims deemed to represent 60% to 70% of this amount.
One of the immediate consequences of these tragic events was the withdrawal of
terrorism coverage for risks located in the major markets of North America and
Europe. Subsequently, some reinsurers softened their initial reaction to the events
so that terrorism coverage became available, albeit selectively.
Inevitably the reverberations of the impact of the World Trade Center atrocity have
continued to claim the centre of the reinsurance "stage". This has applied as much
to Casualty Treaty reinsurance as it has to Property. However, the intensity of the
demands from reinsurers for comprehensive Terrorism exclusions on all conceivable
lines of business has started to evolve into a phase of more balanced debate as
regards appropriateness.
The more general malaise of both the insurance and reinsurance sectors'
capitalisation, together with the depressed state of global stock markets and the
wider pressures upon life insurers and pensions providers, have enabled reinsurers
to open up some broader debates on a range of important casualty issues. These
have included the following:
With a view to counteracting the shortage in terrorism coverage, and protecting
their domestic economy, a number of countries launched a series of initiatives as
detailed here below:
–
United States
The House of Representatives and the Senate passed separate bills to provide a
federal backstop and limit exposure to non-life terrorism losses on risks located in
the US. On November 20, the US Congress approved the Terrorism Risk Insurance
Act of 2002 (TRIA). The Act, which is a compromise reached by a joint committee
from the House of Representatives and the Senate, has been submitted to the US
President for signature.
However, pending issuance of the specific regulations associated with the bill by
the Secretary of the Treasury, and the interpretation of these regulations by the
NAIC and State Insurance Departments, certain aspects of the Act remain unclear.
Nevertheless, a summary of the main provisions of the Act is outlined below on the
basis of information currently available.
–
The Federal government will act as a backstop to the insurance industry when
losses resulting from an act of terrorism exceed USD5 million in a single
event.
–
Once this threshold is reached, each insurer (a group of affiliated or
subsidiary companies is viewed as a single insurer) will retain in the
aggregate per programme year a certain percentage of risk before being
eligible for reimbursement viz. 7% for 2002, 10% for 2003, and 15% for
2004, of the direct earned premiums of that insurer for the calendar year
preceding the loss.
–
The government will cover 90% of the excess over the individual insurer
retention and the insurer will cover the other 10%. The backstop programme
is capped at USD100 billion.
Disbursements in excess of that amount have to be referred to the
Department of the Treasury and approved by Congress.
–
–
There will be reimbursement to the Federal government through a surcharge
on all policyholders for amounts it incurs as follows:
While insurers' initial reaction to the prospect of treaty restrictions for these
cases has not been positive, a more considered view from some parts of the
market is emerging that moves to promote transparency in this difficult area
is not a retrograde step. However, questions remain as to the common sense
of treating fairly normal financial institutions' Public and Products Liability
risks in the same way as the largest Pharmaceutical risks. Willis Re are also
taking care to ensure that small subsidiaries of the largest 500 corporations
are not inadvertently excluded.
for 2003, the difference between USD10 billion and both the individual
insurer retentions and the insurers’ 10% share of losses above those
retentions. This rises to USD12.5 billion and USD15 billion for the last two
years of the programme, should the programme be extended through the last
year. Such surcharge shall not exceed 3% annually of premiums charged to a
policyholder for terrorism coverage at the time of reimbursement.
–
–
An eligible insurer is a carrier who is:
–
licensed or admitted in any State;
–
is an eligible surplus lines carrier listed on the Quarterly Listing of Alien
Insurers of the NAIC;
–
is approved for the purpose of offering commercial property or casualty
insurance by a Federal agency that regulates maritime, energy or
aviation activity; and
–
State residual market pools and State workers compensation funds.
Other entities such as municipalities participating in self-insurance
arrangements, self-insurance pools or risk-retention groups may
participate in the programme if the Secretary of the Treasury makes the
determination to allow such participation. It is understood that captive
insurers are included for purposes of the Act.
All limitations on, or exclusions of, terrorism coverage previously imposed by
commercial insurers are null and void from the moment the Act is signed by
the US President.
Fortune 500 Companies.
Reinsurers have rightly concluded that the critical mass of capacity supplied
to the more hazardous of the world's largest corporate customers has come
to rest with a minority of leading reinsurers. Their concern is that they have
limited understanding of their exposures, that the risks are often viewed as
"prestige" creating depressed profitability over long cycles, and that there is
very restricted scope to build a balanced portfolio of the heavier risks.
–
–
Pharmaceutical Risks.
Here there are a number of similar considerations. Again, generally there is a
growing sympathy for what the reinsurers have been trying to address, with a
now-notorious list of 75 major corporations considered to be the most serious
gaining some currency. However, other units in Willis Re placing larger direct
insurance and facultative reinsurance, have come across some cases of fairly
"innocent" risks which have been swept into the more general debate
without obvious signs of more detailed consideration.
Toxic Mold.
Here the debate has been badly focused when considering reinsurance issues
with the result that no clear objectives have emerged. Willis Re does not
expect an impact here on Motor or Employers' Liability classes. The
occupations of Architects, Estate Agents and Surveyors may be of concern in
the Professional Indemnity field. Some construction enterprises may merit
attention in the GTP/Products classes. Fortunately the issue remains at the
debate level thus far, with no signs as yet of any concrete proposals to impact
2003 treaties.
Asbestos.
A number of reinsurers are proposing an over-comprehensive exclusion for
Asbestos perils, to attach to casualty treaties. Whilst Willis Re and their client
insurers have sympathy with the perception that asbestos fibres have
wrought far too much damage across the wider community, and that insurers
should not be expected to carry an unquantifiable (and often apparently
purposeless) exposure in this field, we are disappointed to see overcomprehensive exclusions being proposed.
–
Motor should be exempt as a class
–
Employers' Liability (where this is a statutory class) should be treated
with respect for the lead-in times needed by insurers, to bring about an
appropriate amendment to the statutory position.
–
The actual text of the GTP/Products exclusion should only apply to the
part of a multi-cause claim that is caused by asbestos. At present, one
leading reinsurer is circulating a wording that allows reinsurers to deny
liability entirely in a situation where only a tiny fraction of the original
claim had anything to do with asbestos.
–
More science should be brought to the debate to determine whether
"White Asbestos" merits different treatment from "Brown" and "Blue"
asbestos.
–
Genetically Modified Organisms and Electro-Magnetic Fields.
Here, as with Toxic Mold, the debate on reinsurance issues remains in its
infancy with little or no in-depth research into the key areas. Therefore, there
is no sensible strategy being engaged to set any broader objectives for the
insurance sector to pursue. Leading reinsurers have been encouraged to
promote debate through seminars with appropriate academic input.
–
Internet Liabilities ("Cyber-liabilities").
The explosive expansion of Internet activities has brought a number of
"Jeremiahs" who have been prophesying explosive expansion of both size
and numbers of claims. Over the past two or three years, it has been
increasingly clear that the feared "Armageddon" has not come to pass.
Indeed, the Internet appears almost to be generating far fewer claims than
might generally have been expected.
However, there are some disturbing signs which may be pointing to a more
complex future. The example of the distribution of Pharmaceuticals through
the Internet is a case in point. Historically the "Learned Intermediary"
doctrine has both provided a strong legal defence and a massive quality
control process - the "family doctor" has usually known enough to prescribe
appropriately or to refer to specialists, and this has avoided huge pitfalls for
the inappropriate use of drugs. Some advertising language on the Internet accompanied sometimes by astonishing naiveté as to the need for
sophisticated guidance in the prescription process - may bring about a new
pattern of product misuse in the future.
Austria
Australia
Insurance companies have set up their own insurance pool to provide terrorism
coverage, operative from September 1, 2002. The pool will cover terrorism losses
up to Eur5 million on normal property and casualty risks without any
additional premiums.
In October 2002, the Australian government issued details of a plan for terrorism
insurance cover. The plan provides for a pool of funds initially planned to
accumulate to about A$300 million, funded by premiums. These funds will be
supplemented by a back-up bank line of credit of A$1 billion, underwritten by the
government, as well as a government indemnity of A$9 billion - giving aggregate
cover of up to A$10.3 billion when the pool is fully funded.
However, cover may be increased to Eur25 million subject to the payment of an
additional premium. The primary insurers contribute Eur50 million of the
Eur200 million capacity of the pool - the remaining Eur150 million being reinsured
into the commercial market.
There is, thus far, no involvement from the Austrian government but negotiations
are continuing for a participation from the state.
Spain
The Consorcio de Compensacion de Seguros (CCS), a state insurance facility,
formed in 1954 as an extension of Consorcio de Compensacion de Motin (1941),
has long been providing primary cover in respect of acts of terrorism. The
‘Consorcio’ was originally formed to cover additionally exceptional risks, such as
riots, civil commotion, earthquake, volcanic eruption, flood and storm.
However, following an agreement between the CCS and the insurance companies,
the CCS provides with effect from January 1, 2002, primary cover for Business
Interruption as a result of acts of terrorism, provided such cover is written in
conjunction with, and for the same limits as, the original policy.
The plan will cover commercial property and infrastructure facilities, and include
associated business interruption and public liability. The legislation will compel
insurance companies to provide cover for terrorism risk on all policies in all classes
of insurance included under the plan. Insurance companies will be able, but not
obliged, to reinsure their terrorism risk exposure with the proposed scheme.
Premiums will depend on the risk of insured properties and facilities, and will cost
from around 2% to a maximum of 12% of the related property insurance
premium.
State and federal governments will not be covered by the plan as they will selfinsure, but property or infrastructure owned by government business enterprises
will be covered by the plan.
The plan will cover damage caused by terrorist activity including causes such as
fire, flood, explosion, impact of aircraft, biological and chemical, but not nuclear
causes, and will operate from July 1, 2003. However, should there be a terrorist
event before this date, the government will consider providing appropriate
assistance.
–
The rate charged for coverage in respect of Business Interruption as a result of acts
of terrorism ranges from 0.009% to 0.025% of the sum insured.
Insurers must notify all policyholders in writing of the effects of the Act,
including the protection being provided by the Federal government, and must
provide each policyholder with a written quotation for terrorism coverage,
with the premium charge being clearly identified. Each policyholder has thirty
days from notification of the premium being charged to accept the offer and
pay the premium or to decline and have the limitation on, or exclusion of,
terrorism insurance reinstated.
–
Insurers must provide property and casualty insurance coverage that does not
differ materially from the terms, amounts and other coverage limitations
applicable to losses arising from events other than acts of terrorism.
–
An act of terrorism is defined as:
(iv) to have been committed by an individual or individuals acting on behalf
of a foreign person or foreign interest, as part of an effort to coerce the
civilian population of the United States or to influence the policy or
affect the conduct of the United States Government by coercion.
There are no provisions in the Act for "domestic" terrorism, such as the
Oklahoma City event, or acts of terrorism committed on US domiciled
companies' facilities located overseas.
–
“File and use” rules (for rates and forms) within individual states will be
suspended at the outset, however, the states may declare an insurer’s rates or
form to be unacceptable once reviewed. No forms can be in violation of state
laws.
any act that is certified by the Secretary (of the Treasury), in concurrence with
the Secretary of State and the Attorney General of the United States
–
Acts of terrorism will be declared, without recourse, by the Secretaries of the
Treasury and of State and the Attorney General.
(i)
–
Lines of business subject to the Act at inception are: “Commercial lines of
property and casualty insurance, including workers’ compensation insurance
and surety insurance and does not include:
to be an act of terrorism;
(ii) to be a violent act or an act dangerous to:
(a) human life;
–
Federal crop insurance issued or reinsured under the Federal Crop
Insurance Act, or any other type of crop or livestock insurance that is
privately issued or reinsured;
–
private mortgage insurance, as defined in section 2 of the Homeowners
Protection Act of 1998;
(b) property; or
(c) infrastructure
(iii) to have resulted in damage within the United States (to include all
territories and possessions of the United States) or outside the United
States in the case of:
–
(a) an air carrier [as defined in section 40102 of title 49, United States
Code] or vessel [a United States flag vessel or a vessel based
principally in the US, on which US income tax is paid and whose
insurance coverage is subject to regulation in the US]; or
financial guarantee insurance issued by monoline financial guarantee
insurance corporations;
–
insurance for medical malpractice;
–
health or life insurance, including group life insurance; or
(b) the premises of a United States mission;
–
flood insurance, including such insurance provided under the National
Flood Insurance Act of 1968
United Kingdom
Pool Re was set up in 1993 in the UK to ensure that terrorism insurance would
continue to be available, following the withdrawal of insurers from provision of
terrorism insurance for commercial property. HM Treasury is the "reinsurer of last
resort" for Pool Re, protecting it in the event that it exhausts all its financial
resources following claim payments. HM Treasury announced that the remit of
Pool Re will be extended to enable insurers to offer terrorism insurance against a
wider range of risks. A package of measures has been drawn up by a government
and industry working group set up to examine changes needed to Pool Re after
September 11. The working group reached agreement on the main changes viz.
–
the extension of Pool Re cover from "fire and explosion" only, to an "all risks
basis" e.g. enabling the scheme to cover contamination, impact by aircraft, or
flood damage.
Germany
–
Insurers will be free to set the premiums for underlying policies according to
normal commercial arrangements.
–
Pool Re and HM Treasury have agreed that as part of the overall package of
changes to Pool Re, they will re-examine the detailed involvement of HM
Treasury in day-to-day decisions.
France
In October 2002, the regulatory authority formally approved the formation of
Extremus Versicherung AG. thus allowing it to start selling insurance policies. Fire
and consequential loss damage resulting from acts of terrorism exceeding
Eur25 million is now excluded from all insurance policies.
Extremus will provide cover for terrorism damage up to Eur13 billion on an annual
aggregate basis. The maximum limit of Eur13 billion applies in respect of buildings
and other property damage, including business interruption.
–
losses to Eur1.5 billion to be reinsured by insurance and reinsurance
companies operating in Germany at 54% of original premium.
changes to the financing of Pool Re to encourage competition, and to make
governance arrangements more transparent.
–
losses between Eur1.5 billion and Eur3 billion reinsured predominantly by the
international reinsurance market at 27% of original premium.
–
cover provided by Pool Re to be extended to cover terrorist attacks, which
cause commercial property damage and consequent business interruption, by
"all risks". There will be no change to the existing exclusion for war risks, nor
to the type of property covered by Pool Re. There will, however, be an
exclusion in respect of hacking and virus damage to electronic components
due to the likely inability to prove a virus was a terrorist attack.
–
losses above Eur3 billion and up to a further Eur10 billion reinsured by the
Federal Government of Germany at 9% of original premium.
–
–
–
The new basis for the retention will mean that each insurer will have its losses
capped, both per event and per annum. Insurers will know in advance the
maximum amount they could be called to pay out in any one year.
Over the next four years, it is intended that the retention will increase
steadily, bringing commercial reinsurance in to cover insurers' retentions or
permitting insurers to retain this element of risk themselves. This increase will
be phased in order to allow the market to get used to the new arrangements
gradually, and to allow substantial time for the reinsurance market to reestablish terrorism capacity following September 11.
risks with insured values up to Eur6 million combined physical damage and
business interruption are to be insured without change. Insurers continue to
provide cover with limits similar to fire, explosion or allied perils while
reinsurers continue to provide cover without major restrictions.
–
risks with insured values above Eur6 million are to be covered by a pool,
called Gestion de l’Assurance et de la Reassurance des Risques Attentats
(GAREAT), comprising three tiers:
(i)
Expenses are expected to reach 10% of the original premium i.e. 2.5%
administration expenses and 7.5% commissions.
Eur250 million annual aggregate by way of "co-insurance" with each
participating insurance company committing itself proportionately
according to its contribution of premium/business.
(ii) Eur750 million in excess of Eur250 million annual aggregate by way of a
first layer of reinsurance provided by the market.
(iii) Above Eur1,000 million annual aggregate the Caisse Centrale de
Reassurance (CCR), and ultimately the State, assume the loss(es).
it is intended that the present exclusion which exist under the scheme for
damage caused by nuclear devices will be deleted as soon as practicable.
Pool Re currently operates a "retention" under which insurers bear the first
amount of any claims for an event covered by Pool Re. The current
arrangements mean that the total cost borne by an individual insurer depends
on the number of sections of their insurance policies affected by a terrorist
event. From January 1, 2003, the maximum industry retention will be set at
£30 million per event, with individual insurers' retentions being based on
market share.
–
In the first year of operation, Extremus expects an annual premium of
Eur300 - Eur500 million, which the Company will retrocede in full as follows:
–
–
The law requiring French insurance policies to provide terrorism coverage for the
same limits and deductibles as for fire, explosion or other allied perils remains
unchanged. However, in reaction to the reinsurers' refusal to provide terrorism
coverage for commercial and industrial risks, the following initiatives were taken
on December 10, 2001 by the French government and the insurance federation of
insurance companies:
Shareholders of Extremus Versicherung AG
Company
AIG Europe Direktion für Deutschland
Allianz
Share %
2.5
16.0
AMB Generali Holding
2.5
DEVK Rück und Beteiligungs
2.0
Deutsche Rück
11.0
Gerling-Konzern Allgemeine
2.3
Gerling-Konzern Globale Rück
2.7
Gothaer Allgemeine
5.0
HDI
8.0
HUK-Coburg
2.0
LVM
2.0
Münchener Rück
16.0
Nova Allgemeine
2.0
R+V Allgemeine
Swiss Re (Deutschland)
5.0
15.0
VHV
1.0
Zürich Agrippina
5.0
Total
In practice, CCR will receive an annual premium of Eur40 million from the pool,
and in the event of a claim up to Eur500 million to the CCR, a surcharge of
Eur50 million per annum will be charged to the pool until CCR is reimbursed. In
this way, the State will only ultimately assume losses in excess of Eur1,500 million
per annum.
100.0
Source : Extremus
United Kingdom
Pool Re was set up in 1993 in the UK to ensure that terrorism insurance would
continue to be available, following the withdrawal of insurers from provision of
terrorism insurance for commercial property. HM Treasury is the "reinsurer of last
resort" for Pool Re, protecting it in the event that it exhausts all its financial
resources following claim payments. HM Treasury announced that the remit of
Pool Re will be extended to enable insurers to offer terrorism insurance against a
wider range of risks. A package of measures has been drawn up by a government
and industry working group set up to examine changes needed to Pool Re after
September 11. The working group reached agreement on the main changes viz.
–
the extension of Pool Re cover from "fire and explosion" only, to an "all risks
basis" e.g. enabling the scheme to cover contamination, impact by aircraft, or
flood damage.
Germany
–
Insurers will be free to set the premiums for underlying policies according to
normal commercial arrangements.
–
Pool Re and HM Treasury have agreed that as part of the overall package of
changes to Pool Re, they will re-examine the detailed involvement of HM
Treasury in day-to-day decisions.
France
In October 2002, the regulatory authority formally approved the formation of
Extremus Versicherung AG. thus allowing it to start selling insurance policies. Fire
and consequential loss damage resulting from acts of terrorism exceeding
Eur25 million is now excluded from all insurance policies.
Extremus will provide cover for terrorism damage up to Eur13 billion on an annual
aggregate basis. The maximum limit of Eur13 billion applies in respect of buildings
and other property damage, including business interruption.
–
losses to Eur1.5 billion to be reinsured by insurance and reinsurance
companies operating in Germany at 54% of original premium.
changes to the financing of Pool Re to encourage competition, and to make
governance arrangements more transparent.
–
losses between Eur1.5 billion and Eur3 billion reinsured predominantly by the
international reinsurance market at 27% of original premium.
–
cover provided by Pool Re to be extended to cover terrorist attacks, which
cause commercial property damage and consequent business interruption, by
"all risks". There will be no change to the existing exclusion for war risks, nor
to the type of property covered by Pool Re. There will, however, be an
exclusion in respect of hacking and virus damage to electronic components
due to the likely inability to prove a virus was a terrorist attack.
–
losses above Eur3 billion and up to a further Eur10 billion reinsured by the
Federal Government of Germany at 9% of original premium.
–
–
–
The new basis for the retention will mean that each insurer will have its losses
capped, both per event and per annum. Insurers will know in advance the
maximum amount they could be called to pay out in any one year.
Over the next four years, it is intended that the retention will increase
steadily, bringing commercial reinsurance in to cover insurers' retentions or
permitting insurers to retain this element of risk themselves. This increase will
be phased in order to allow the market to get used to the new arrangements
gradually, and to allow substantial time for the reinsurance market to reestablish terrorism capacity following September 11.
risks with insured values up to Eur6 million combined physical damage and
business interruption are to be insured without change. Insurers continue to
provide cover with limits similar to fire, explosion or allied perils while
reinsurers continue to provide cover without major restrictions.
–
risks with insured values above Eur6 million are to be covered by a pool,
called Gestion de l’Assurance et de la Reassurance des Risques Attentats
(GAREAT), comprising three tiers:
(i)
Expenses are expected to reach 10% of the original premium i.e. 2.5%
administration expenses and 7.5% commissions.
Eur250 million annual aggregate by way of "co-insurance" with each
participating insurance company committing itself proportionately
according to its contribution of premium/business.
(ii) Eur750 million in excess of Eur250 million annual aggregate by way of a
first layer of reinsurance provided by the market.
(iii) Above Eur1,000 million annual aggregate the Caisse Centrale de
Reassurance (CCR), and ultimately the State, assume the loss(es).
it is intended that the present exclusion which exist under the scheme for
damage caused by nuclear devices will be deleted as soon as practicable.
Pool Re currently operates a "retention" under which insurers bear the first
amount of any claims for an event covered by Pool Re. The current
arrangements mean that the total cost borne by an individual insurer depends
on the number of sections of their insurance policies affected by a terrorist
event. From January 1, 2003, the maximum industry retention will be set at
£30 million per event, with individual insurers' retentions being based on
market share.
–
In the first year of operation, Extremus expects an annual premium of
Eur300 - Eur500 million, which the Company will retrocede in full as follows:
–
–
The law requiring French insurance policies to provide terrorism coverage for the
same limits and deductibles as for fire, explosion or other allied perils remains
unchanged. However, in reaction to the reinsurers' refusal to provide terrorism
coverage for commercial and industrial risks, the following initiatives were taken
on December 10, 2001 by the French government and the insurance federation of
insurance companies:
Shareholders of Extremus Versicherung AG
Company
AIG Europe Direktion für Deutschland
Allianz
Share %
2.5
16.0
AMB Generali Holding
2.5
DEVK Rück und Beteiligungs
2.0
Deutsche Rück
11.0
Gerling-Konzern Allgemeine
2.3
Gerling-Konzern Globale Rück
2.7
Gothaer Allgemeine
5.0
HDI
8.0
HUK-Coburg
2.0
LVM
2.0
Münchener Rück
16.0
Nova Allgemeine
2.0
R+V Allgemeine
Swiss Re (Deutschland)
5.0
15.0
VHV
1.0
Zürich Agrippina
5.0
Total
In practice, CCR will receive an annual premium of Eur40 million from the pool,
and in the event of a claim up to Eur500 million to the CCR, a surcharge of
Eur50 million per annum will be charged to the pool until CCR is reimbursed. In
this way, the State will only ultimately assume losses in excess of Eur1,500 million
per annum.
100.0
Source : Extremus
Austria
Australia
Insurance companies have set up their own insurance pool to provide terrorism
coverage, operative from September 1, 2002. The pool will cover terrorism losses
up to Eur5 million on normal property and casualty risks without any
additional premiums.
In October 2002, the Australian government issued details of a plan for terrorism
insurance cover. The plan provides for a pool of funds initially planned to
accumulate to about A$300 million, funded by premiums. These funds will be
supplemented by a back-up bank line of credit of A$1 billion, underwritten by the
government, as well as a government indemnity of A$9 billion - giving aggregate
cover of up to A$10.3 billion when the pool is fully funded.
However, cover may be increased to Eur25 million subject to the payment of an
additional premium. The primary insurers contribute Eur50 million of the
Eur200 million capacity of the pool - the remaining Eur150 million being reinsured
into the commercial market.
There is, thus far, no involvement from the Austrian government but negotiations
are continuing for a participation from the state.
Spain
The Consorcio de Compensacion de Seguros (CCS), a state insurance facility,
formed in 1954 as an extension of Consorcio de Compensacion de Motin (1941),
has long been providing primary cover in respect of acts of terrorism. The
‘Consorcio’ was originally formed to cover additionally exceptional risks, such as
riots, civil commotion, earthquake, volcanic eruption, flood and storm.
However, following an agreement between the CCS and the insurance companies,
the CCS provides with effect from January 1, 2002, primary cover for Business
Interruption as a result of acts of terrorism, provided such cover is written in
conjunction with, and for the same limits as, the original policy.
The plan will cover commercial property and infrastructure facilities, and include
associated business interruption and public liability. The legislation will compel
insurance companies to provide cover for terrorism risk on all policies in all classes
of insurance included under the plan. Insurance companies will be able, but not
obliged, to reinsure their terrorism risk exposure with the proposed scheme.
Premiums will depend on the risk of insured properties and facilities, and will cost
from around 2% to a maximum of 12% of the related property insurance
premium.
State and federal governments will not be covered by the plan as they will selfinsure, but property or infrastructure owned by government business enterprises
will be covered by the plan.
The plan will cover damage caused by terrorist activity including causes such as
fire, flood, explosion, impact of aircraft, biological and chemical, but not nuclear
causes, and will operate from July 1, 2003. However, should there be a terrorist
event before this date, the government will consider providing appropriate
assistance.
–
The rate charged for coverage in respect of Business Interruption as a result of acts
of terrorism ranges from 0.009% to 0.025% of the sum insured.
Insurers must notify all policyholders in writing of the effects of the Act,
including the protection being provided by the Federal government, and must
provide each policyholder with a written quotation for terrorism coverage,
with the premium charge being clearly identified. Each policyholder has thirty
days from notification of the premium being charged to accept the offer and
pay the premium or to decline and have the limitation on, or exclusion of,
terrorism insurance reinstated.
–
Insurers must provide property and casualty insurance coverage that does not
differ materially from the terms, amounts and other coverage limitations
applicable to losses arising from events other than acts of terrorism.
–
An act of terrorism is defined as:
(iv) to have been committed by an individual or individuals acting on behalf
of a foreign person or foreign interest, as part of an effort to coerce the
civilian population of the United States or to influence the policy or
affect the conduct of the United States Government by coercion.
There are no provisions in the Act for "domestic" terrorism, such as the
Oklahoma City event, or acts of terrorism committed on US domiciled
companies' facilities located overseas.
–
“File and use” rules (for rates and forms) within individual states will be
suspended at the outset, however, the states may declare an insurer’s rates or
form to be unacceptable once reviewed. No forms can be in violation of state
laws.
any act that is certified by the Secretary (of the Treasury), in concurrence with
the Secretary of State and the Attorney General of the United States
–
Acts of terrorism will be declared, without recourse, by the Secretaries of the
Treasury and of State and the Attorney General.
(i)
–
Lines of business subject to the Act at inception are: “Commercial lines of
property and casualty insurance, including workers’ compensation insurance
and surety insurance and does not include:
to be an act of terrorism;
(ii) to be a violent act or an act dangerous to:
(a) human life;
–
Federal crop insurance issued or reinsured under the Federal Crop
Insurance Act, or any other type of crop or livestock insurance that is
privately issued or reinsured;
–
private mortgage insurance, as defined in section 2 of the Homeowners
Protection Act of 1998;
(b) property; or
(c) infrastructure
(iii) to have resulted in damage within the United States (to include all
territories and possessions of the United States) or outside the United
States in the case of:
–
(a) an air carrier [as defined in section 40102 of title 49, United States
Code] or vessel [a United States flag vessel or a vessel based
principally in the US, on which US income tax is paid and whose
insurance coverage is subject to regulation in the US]; or
financial guarantee insurance issued by monoline financial guarantee
insurance corporations;
–
insurance for medical malpractice;
–
health or life insurance, including group life insurance; or
(b) the premises of a United States mission;
–
flood insurance, including such insurance provided under the National
Flood Insurance Act of 1968
Casualty
WTC - terrorism coverage
The terrorist attacks of September 11, 2001 in the US are expected to produce
losses of between USD36 billion and USD54 billion, with property damage and
business interruption claims deemed to represent 60% to 70% of this amount.
One of the immediate consequences of these tragic events was the withdrawal of
terrorism coverage for risks located in the major markets of North America and
Europe. Subsequently, some reinsurers softened their initial reaction to the events
so that terrorism coverage became available, albeit selectively.
Inevitably the reverberations of the impact of the World Trade Center atrocity have
continued to claim the centre of the reinsurance "stage". This has applied as much
to Casualty Treaty reinsurance as it has to Property. However, the intensity of the
demands from reinsurers for comprehensive Terrorism exclusions on all conceivable
lines of business has started to evolve into a phase of more balanced debate as
regards appropriateness.
The more general malaise of both the insurance and reinsurance sectors'
capitalisation, together with the depressed state of global stock markets and the
wider pressures upon life insurers and pensions providers, have enabled reinsurers
to open up some broader debates on a range of important casualty issues. These
have included the following:
With a view to counteracting the shortage in terrorism coverage, and protecting
their domestic economy, a number of countries launched a series of initiatives as
detailed here below:
–
United States
The House of Representatives and the Senate passed separate bills to provide a
federal backstop and limit exposure to non-life terrorism losses on risks located in
the US. On November 20, the US Congress approved the Terrorism Risk Insurance
Act of 2002 (TRIA). The Act, which is a compromise reached by a joint committee
from the House of Representatives and the Senate, has been submitted to the US
President for signature.
However, pending issuance of the specific regulations associated with the bill by
the Secretary of the Treasury, and the interpretation of these regulations by the
NAIC and State Insurance Departments, certain aspects of the Act remain unclear.
Nevertheless, a summary of the main provisions of the Act is outlined below on the
basis of information currently available.
–
The Federal government will act as a backstop to the insurance industry when
losses resulting from an act of terrorism exceed USD5 million in a single
event.
–
Once this threshold is reached, each insurer (a group of affiliated or
subsidiary companies is viewed as a single insurer) will retain in the
aggregate per programme year a certain percentage of risk before being
eligible for reimbursement viz. 7% for 2002, 10% for 2003, and 15% for
2004, of the direct earned premiums of that insurer for the calendar year
preceding the loss.
–
The government will cover 90% of the excess over the individual insurer
retention and the insurer will cover the other 10%. The backstop programme
is capped at USD100 billion.
Disbursements in excess of that amount have to be referred to the
Department of the Treasury and approved by Congress.
–
–
There will be reimbursement to the Federal government through a surcharge
on all policyholders for amounts it incurs as follows:
While insurers' initial reaction to the prospect of treaty restrictions for these
cases has not been positive, a more considered view from some parts of the
market is emerging that moves to promote transparency in this difficult area
is not a retrograde step. However, questions remain as to the common sense
of treating fairly normal financial institutions' Public and Products Liability
risks in the same way as the largest Pharmaceutical risks. Willis Re are also
taking care to ensure that small subsidiaries of the largest 500 corporations
are not inadvertently excluded.
for 2003, the difference between USD10 billion and both the individual
insurer retentions and the insurers’ 10% share of losses above those
retentions. This rises to USD12.5 billion and USD15 billion for the last two
years of the programme, should the programme be extended through the last
year. Such surcharge shall not exceed 3% annually of premiums charged to a
policyholder for terrorism coverage at the time of reimbursement.
–
–
An eligible insurer is a carrier who is:
–
licensed or admitted in any State;
–
is an eligible surplus lines carrier listed on the Quarterly Listing of Alien
Insurers of the NAIC;
–
is approved for the purpose of offering commercial property or casualty
insurance by a Federal agency that regulates maritime, energy or
aviation activity; and
–
State residual market pools and State workers compensation funds.
Other entities such as municipalities participating in self-insurance
arrangements, self-insurance pools or risk-retention groups may
participate in the programme if the Secretary of the Treasury makes the
determination to allow such participation. It is understood that captive
insurers are included for purposes of the Act.
All limitations on, or exclusions of, terrorism coverage previously imposed by
commercial insurers are null and void from the moment the Act is signed by
the US President.
Fortune 500 Companies.
Reinsurers have rightly concluded that the critical mass of capacity supplied
to the more hazardous of the world's largest corporate customers has come
to rest with a minority of leading reinsurers. Their concern is that they have
limited understanding of their exposures, that the risks are often viewed as
"prestige" creating depressed profitability over long cycles, and that there is
very restricted scope to build a balanced portfolio of the heavier risks.
–
–
Pharmaceutical Risks.
Here there are a number of similar considerations. Again, generally there is a
growing sympathy for what the reinsurers have been trying to address, with a
now-notorious list of 75 major corporations considered to be the most serious
gaining some currency. However, other units in Willis Re placing larger direct
insurance and facultative reinsurance, have come across some cases of fairly
"innocent" risks which have been swept into the more general debate
without obvious signs of more detailed consideration.
Toxic Mold.
Here the debate has been badly focused when considering reinsurance issues
with the result that no clear objectives have emerged. Willis Re does not
expect an impact here on Motor or Employers' Liability classes. The
occupations of Architects, Estate Agents and Surveyors may be of concern in
the Professional Indemnity field. Some construction enterprises may merit
attention in the GTP/Products classes. Fortunately the issue remains at the
debate level thus far, with no signs as yet of any concrete proposals to impact
2003 treaties.
Asbestos.
A number of reinsurers are proposing an over-comprehensive exclusion for
Asbestos perils, to attach to casualty treaties. Whilst Willis Re and their client
insurers have sympathy with the perception that asbestos fibres have
wrought far too much damage across the wider community, and that insurers
should not be expected to carry an unquantifiable (and often apparently
purposeless) exposure in this field, we are disappointed to see overcomprehensive exclusions being proposed.
–
Motor should be exempt as a class
–
Employers' Liability (where this is a statutory class) should be treated
with respect for the lead-in times needed by insurers, to bring about an
appropriate amendment to the statutory position.
–
The actual text of the GTP/Products exclusion should only apply to the
part of a multi-cause claim that is caused by asbestos. At present, one
leading reinsurer is circulating a wording that allows reinsurers to deny
liability entirely in a situation where only a tiny fraction of the original
claim had anything to do with asbestos.
–
More science should be brought to the debate to determine whether
"White Asbestos" merits different treatment from "Brown" and "Blue"
asbestos.
–
Genetically Modified Organisms and Electro-Magnetic Fields.
Here, as with Toxic Mold, the debate on reinsurance issues remains in its
infancy with little or no in-depth research into the key areas. Therefore, there
is no sensible strategy being engaged to set any broader objectives for the
insurance sector to pursue. Leading reinsurers have been encouraged to
promote debate through seminars with appropriate academic input.
–
Internet Liabilities ("Cyber-liabilities").
The explosive expansion of Internet activities has brought a number of
"Jeremiahs" who have been prophesying explosive expansion of both size
and numbers of claims. Over the past two or three years, it has been
increasingly clear that the feared "Armageddon" has not come to pass.
Indeed, the Internet appears almost to be generating far fewer claims than
might generally have been expected.
However, there are some disturbing signs which may be pointing to a more
complex future. The example of the distribution of Pharmaceuticals through
the Internet is a case in point. Historically the "Learned Intermediary"
doctrine has both provided a strong legal defence and a massive quality
control process - the "family doctor" has usually known enough to prescribe
appropriately or to refer to specialists, and this has avoided huge pitfalls for
the inappropriate use of drugs. Some advertising language on the Internet accompanied sometimes by astonishing naiveté as to the need for
sophisticated guidance in the prescription process - may bring about a new
pattern of product misuse in the future.
Property
The way that issues such as the above have come to dominate market debate over
recent months is a firm indicator of the almost complete evaporation during 2002
of the "market share" ethos that underpins such a large part of most reinsurance
cycles. But this is belied by other developments, both within the Casualty field and
in other markets.
The latest news from the Gerling Global Re has prompted a rash of telephone calls
as reinsurers have scrambled to position themselves to attract additional shares of
key market programmes that were previously written by the Gerling Global Re.
Whilst this is encouraging (as an indicator that the Gerling Global Re portfolio
generally carried wider respect), it also suggests that softer times are just around
the corner.
More broadly, news of demands to "double our gross capacity" from some
property per-risk insurers, and the news of a standard "ten percent off" on
renewals of the American property facultative portfolio coming to London, both
imply that the wider appetite for commercial and industrial insurance is returning.
This in turn is bound to feed competitive instincts.
In addition, the incipient hints from some of the more traditional reinsurers of
interest in more substantial positions for some casualty treaty business, are
beginning to be matched by statements of openness to casualty business from
newer markets. The "New Bermudans" have generally started out with a sharp
focus upon mainstream property classes, but a number of them have certainly
indicated interest in non-property fields. Naturally it takes time before insurers are
ready to entrust longer tail reinsurance risks with reinsurers of less fully
established presences, and the true depth of appetite from these reinsurers has yet
to be tested, but the peak of the cycle is clearly coming into view.
Undoubtedly there is still considerable soul-searching in progress, as the range of
the issues set out above indicates. Renewals into 2003 have to expect some fairly
firm - even confrontational - discussions. But older habits are discreetly reemerging: the edge of fear has gone from the main European reinsurers.
The meetings in Monte Carlo, Baden Baden and Los Angeles (NAII), addressed the
wider issues pertaining to the forthcoming renewal season. Now the focus is on
the job in hand, or more specifically: on what buyers expect from this year’s
renewal ?
In short, the answer to this question is dependent upon whether the buyer is
looking to purchase a product which has an over-supply or under-supply of interest
from the reinsurance community.
Single territory excess of loss catastrophe products are currently attracting the
most interest and, therefore, the simple laws of economics will play their part
when final prices are determined. Multi-territory products or inclusion of USA
coverage in international protections, will offer a greater challenge, but capacity
still exists subject as always to rating adequacy.
Single Risk capacity on an excess basis, although not in abundance, is still
sufficient to meet demand, and, if prices were to continue to increase, a great deal
more capacity would become available. Similar comments also apply regarding
single or multi-territorial issues.
It seems therefore, with no great surprise, that the buyers biggest challenge for
2003 in the property arena will be to obtain proportional reinsurance capacity.
Notwithstanding the fact that original business may have achieved 100% rate
adequacy (100% plus in certain areas), the capital available in the reinsurance
world seems fixed on the view that non-proportional products are the only
vehicles that fit the business plans, which attracted the investor communities in
the first place. In effect, the majority of the reinsurance world old or new, are
presenting a sign of no confidence in following the fortunes of their cedants,
preferring to keep direct control of pricing the original risk through the excess
layering route. It seems that reinsurers are no longer willing to cover catastrophe
perils in proportional contracts, not at least until their cedants can show they are
adequately charging for the catastrophe hazard within their original pricing.
History has shown what happens when there is over-supply of capacity and a
divergence of views on strike prices. The 2003 renewal season shows little signs of
creating new precedents and therefore the writer’s expectations are for the market
to compete in specific areas where the products on offer fit business plans
perfectly, and prices are adequate in each carrier’s view. At the same time, one
should also expect a reinsurer to exit historical products which have failed to
produce an adequate return on capital, namely, proportional covers, which in turn
could further fuel the over-supply of non-proportional capacity. This said, overanxious buyers will need to be careful if they are looking to drive prices too far
away from technical levels. The apparent over-supply of capacity could dry
up rapidly!
In addition to rating adequacy one should be prepared for significant debate over
coverage definitions. Single risk definitions and the interplay of contingent
business interruption exposures will continue to be a major theme. In addition,
second or third generation Asbestos Risk and Toxic Mold will be standard exclusion
for many reinsurers notwithstanding their relevance. Finally, a renewal season in
respect of catastrophe business would not be complete without some discussion
regarding preferred hours clause/occurrence definitions. The European wind and
flood losses of 2002 will ensure a re-think in event definitions, with perhaps the
reinsurance market trying even harder to widen the gap between the covers they
offer, and the actual catastrophe to which clients are exposed.
The key theme for this year’s renewals would seem to be pricing adequacy. Much
has already been written suggesting that technical prices have not yet reached the
desired level, depending on the product and the quoting market. This raises an
interesting issue for the 2003 season. The 2002 renewal season may have been
challenging in some respects, but at the same time it was in many ways
straightforward. Reinsurers were unanimous in insisting that depleted surpluses
needed to be replenished by means of rate increases across the board. The 2003
renewal season however seem to be rather fragmented with some already
suggesting price adequacy, whilst others are hoping for further improvement.
Engineering
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Trenwick announced it had placed LaSalle Re's operations into run-off, and
effected the sale of LaSalle Re's property catastrophe business through a
100% quota share reinsurance arrangement with Endurance. The deal, which
took effect from April 1, 2002, gave Endurance the renewal rights to LaSalle
Re's property catastrophe reinsurance contracts.
As part of the move to restructure Trenwick’s business, the company
announced that its subsidiary, Trenwick America Reinsurance, has entered into
an underwriting agreement with Chubb Re, the reinsurance arm of Chubb
Corporation. The underwriting facility will allow Trenwick to underwrite up to
USD400 million of US reinsurance business on behalf of Chubb Re for the
remaining period in 2002 and for 2003, with Chubb Re retaining final
underwriting and claims authority on any business generated.
Trenwick also announce that, with immediate effect, it will cease to
underwrite US Specialty Programme Business, which was previously
underwritten under the name of Canterbury Financial Group and through its
subsidiaries, Insurance Corporation of New York, Chartwell Insurance and
Dakota Specialty Company.
–
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Wellington Underwriting plc announced the raising of £448 million to fund
the proposed formation of Wellington Re, a London-based, FSA authorised
insurance company which will support the future growth of Wellington’s
underwriting capabilities. Wellington Underwriting also announced its
intention, subject to market conditions, to raise equity finance to increase
Wellington’s economic interest in the holding company of Wellington Re,
strengthen Wellington’s balance sheet, support its share of the future
development of Syndicate 2020’s underwriting, and provide permanent
capital to support the expansion of Wellington’s US business through
Wellington Underwriting Inc. Subsequently, Wellington Underwriting said it
would raise £120 million through a placing and open offer to finance a
further investment of up to £76 million in Wellington Re. The remainder
would be used to strengthen Wellington's financial base to support its
increased participation in Syndicate 2020 at Lloyd's for the 2003 year of
account and beyond (see also "Wellington" under "Lloyd's Market").
–
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Overview
Large losses
XL Capital Ltd. announced that it plans to integrate its reinsurance operations
following the ratification in January this year of XL's previously announced
acquisition of a 67% majority shareholding in Le Mans Re. The plans will see
the merger of their branches in Singapore; XL Re plans to reduce the scope of
its operations in Australia and, while business will continue to be
underwritten in Sydney, management of the Australian branch will be directed
from Singapore. The Le Mans Re underwriting operations in Miami are to
cease, and the Le Mans Re office in France will become responsible for the
management and run-off of its existing portfolio, while the Le Mans Re's
continuing Miami based business are to be merged with XL Re
Latin America Ltd's operations.
Subsequent to the events of September 11, 2001, and in conjunction with an
already contracting market, engineering reinsurers imposed a number of
substantial remedial underwriting measures during the 2001/2002 renewal
season. These included increased rating and deductibles, tighter terrorism
exclusions and the introduction of loss participation clauses, sliding scale
commissions, and cyber exclusions.
Whilst there has been the normal level of attritional losses expected on this line of
business, we are not aware of any major market losses over the past 12 months.
Zurich Financial Services (ZFS) gained the backing of its shareholders for a
USD2.5 billion stock issue to help finance a restructuring intended to return
the company to profitability, and take advantage of the upturn in the world
insurance market.
The past 12 months have seen a number of withdrawals from the engineering
market and the companies which remain, therefore, have more power to influence
terms and maintain market standards. A “back to basics” approach now prevails
and tighter underwriting discipline is being re-established to ensure a return to
technical underwriting profit. Wordings, particularly brokers’ manuscript wordings,
are being restricted.
ZFS is restructuring various operations, including its Nordic operations where
it is selling part of its general insurance lines in Denmark and Norway to Tryg,
Denmark’s largest non-life insurer. ZFS will stop writing new consumer and
commercial insurance business in Sweden. ZFS also said that the corporate
business in Finland and the Baltic countries would be repositioned by the end
of 2002.
Following such activity, it is thought that the 2002/2003 renewal season, which is
now under way, should see relatively few changes. However, reinsurers continue to
remain under pressure for an adequate return on capital and this, in turn, places
cedants under pressure to convince the market that the engineering class has
realistic expectations of profitable future performance.
Markets
As mentioned, there has been a reduction of engineering capacity with RSA Re,
Copenhagen Re, Wuerttembergische, Gerling Global Re, Cox and QBE withdrawing
from the market. This has impacted on both treaty and facultative business.
However, many important markets remain dedicated to engineering as a class, and
the trend for machinery breakdown being extracted from All Risks
programmes continues.
On the other hand, following a restructuring process within Munich Re, there has
been a change of emphasis with regard to engineering underwriting as a result of
which a more property-influenced approach is discernible, which is being filtered
down to cedants.
In addition, reinsurers are expected to remain keen that insurers should monitor
and control exposures in known catastrophe areas; Event Limits are now a
common feature of excess of loss treaties. Indeed, the level of account information
required by reinsurers has never been greater, and strong emphasis is placed on
producing the quantity and quality of information required to ensure true
transparency in the relationship between cedant and reinsurer. In some cases, prerenewal underwriting reviews are conducted.
A number of market initiatives are gradually being introduced, including the use of
rating models specifically designed for engineering business, premium payment
warranties, and the advent of maximum lines sizes on co-reinsurance, typically
25%. These initiatives can be expected to feature during the 2002/2003 renewal
season, along with continued hardening of excess of loss rating.
Winterthur Swiss has seen its equity base severely eroded by the fall in stock
markets and its parent, Credit Suisse, announced that it was injecting
SwFcs1.7 billion of capital into Winterthur Swiss to ensure that it retained an
adequate capital base.
Alternative Risk Transfer (ART)
The last 12 months have seen significant changes in the ART arena. It is probably
easier to identify these by examining different parts of the market separately.
Jan 2002
Finite transactions have been severely constrained in terms of use and
acceptability. Increasing scrutiny from regulators and the accounting industry
together with a much more conservative view on the key accounting issues, has
meant the demise of many multi-year or smoothing structures.
The continuing fall-out from Enron, HIH, Independent and other high-profile
failures is likely to mean a continuation of this stance.
Capital Market deals have been mostly concentrated in the equity markets. Most
investors looking for some insurance-linked assets in their portfolio seem to prefer
the root of equity investment in a start-up (and increasingly subscribing to rights
issues). This has meant a relatively low level of activity in the cat bond arena, but a
few issues have been done as listed below.
Mar 2002
Prospects generally for a resurgence of cat bonds or other insurance risk linked
securities are mixed. While the secured credit-worthiness of instruments has
obvious and lasting appeal, it is less certain that improved liquidity or the growth
of an active secondary market will reduce spreads on these instruments.
Apr 2002
Structured deals are the logical next step from a curtailed finite structure. Utilising
some of the characteristics of finite structures, in terms of well understood upside
and downside, the analysis of exposures is what gives comfort to the transacting
parties' confidence in the deals. This is increasingly the way in which "difficult" or
idiosyncratic exposures may be reinsured.
Apr 2002
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QBE operations in the US have received an additional capital injection of
US50 million from the Australian parent. The transaction increased the
policyholders' surplus of QBE Reinsurance Corporation to more than
USD250 million, and the policyholders' surplus of its primary subsidiary,
QBE Insurance Corporation, to more than USD75 million.
–
Quincy Mutual Fire Insurance Company have decided to withdraw from
writing an inwards account of reinsurance treaty business,and will no longer
write new or renewal business from its Branch Office in London. The decision
is based on the inherent difficulties of balancing world-wide mono-line
exposures against a conservative premium base and the expense of
retrocessional cover.
Generali France Assurances bought Eur17 million of reinsurance
cover by means of an index-linked reinsurance treaty that will
protect its local account against windstorm risks.
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Renaissance Re announced it would sell up to USD500 million in debt
securities, and an extra USD64.3 million in previously registered but
unsold securities. The proceeds would be used as working capital, capital
expenditures and acquisitions.
–
Royal & Sun Alliance Insurance Group (RSA) announced that it was not
launching a rights issue but was instead proceeding with a restructuring plan,
including :
Under the arrangement, the reinsurance is triggered when wind
speeds in high-risk areas exceed a certain threshold. The overall
programme is a mixture of alternative and conventional techniques.
The trigger is based on a daily calculation of the cumulative
maximum wind speeds taken at a network of Meteo France weather
stations. Each weather station is weighed in line with Generali
France's exposure in that area. The wind speed in kilometres per
hour is then converted into a financial amount. From this point on,
cover could be provided either by reinsurers, or in capital markets, in
the form of an option using the standard International Swaps &
Derivatives Association (ISDA) documentation.
There has been a marked decline in the explicit trading of credit as well as the
assumption of credit exposure in support of Collateralised Debt Obligations (CDOs)
and the like. The announced losses from many market participants have hastened
the reduction in such activities.
Parametric or indexed structures have continued to grow. The health of the
Industry Loss Warranty (ILW) market has been an indicator of this, as well as the
continued development of the weather markets using Cooling Degree Day (CDD),
Heating Degree Day (HDD), precipitation or windspeed indices. We see the growth
of parametric covers (with or without a buy-back of basis risk) as the low-cost
parallel of the cat bond market.
Scor Group announced that it had placed a second multi-year
reinsurance protection of USD150 million intended to cover claims
linked to natural catastrophe events from January 1, 2002. The
cover was placed through Atlas Re II, a special purpose vehicle
incorporated in Ireland, to protect Scor for a period of three years
against the occurrence of earthquakes in California and Japan and
windstorms in Northern Europe. Atlas Re II complements the
USD100 million per event cover of Atlas Re, which already protects
Scor against the occurrence of a first event of the same nature. Atlas
Re II provides coverage for a second or third event during a given
year, with a USD100 million per event limit and a USD150 million
limit over three years.
Hannover Re completed the "K3" deal which provides the reinsurer
with an equity substitute in the amount of USD230 million. The deal
is a structured financing involving a portfolio-linked securitisation,
comprising a variety of non-proportional reinsurance covers for
natural perils (hurricanes and earthquakes in the US, windstorms in
Europe and earthquakes in Japan), and worldwide aviation business.
The term of the transaction is three years with an option for the
investors to renew for two more years.
Hiscox announced the private placement of USD33 million of
catastrophe risk linked notes. The placement provides Syndicate 33
at Lloyd's, which is managed by Hiscox, with a new source of
catastrophe insurance protection for earthquake events in the
California and New Madrid seismic regions of the USA. Earthquakes
occurring in either of these two seismic regions with a magnitude of
not less than 5.0 are qualifying events and trigger a loss
calculation. St Agatha Re Ltd., a Bermuda-based company
established for the transaction, issued the notes.
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disposal of its Asia Pacific business through an initial public offering
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the sale of RSIU, its surplus lines business in the US
–
the reduction by a third of its underwriting British Personal Lines
business, such as motor and household, by a combination of closure
and disposal
–
Sompo has now taken up all the new shares issued by Taisei F&M for
Yen1 billion. Therefore Taisei F&M becomes a wholly owned subsidiary of
Sompo, and the main elements of Taisei F&M, excluding the reinsurance
department, will now be folded into Sompo.
–
The St Paul Cos allocated earlier this year an extra USD100 million in share
capital of its reinsurance arm, St Paul Re, by way of a cash investment, after a
year of catastrophic losses, and acted to exit certain lines and re-focus its
operations going forward. Subsequently, The St Paul Cos. announced its
intention to transfer its reinsurance operations to a newly-formed reinsurer,
Platinum Underwriters Holdings, Bermuda, and to participate in Platinum's
raising approximately USD1 billion of capital through an initial public offering
on the New York Stock Exchange. Continued turbulence in the US equity
markets caused the postponement of Platinum's initial public offering
scheduled for June this year. However, Platinum Underwriting Holdings and
The St Paul Cos. finally announced the initial public offering of 30,040,000 of
Platinum's common shares at a price of USD22.50 per share at the end of
October, and the shares made a strong debut on the New York Stock
Exchange (see also "St Paul" under "Lloyd's Market").
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Special Risk Insurance & Reinsurance (SRIR), Luxembourg, set up with a
Eur500 million of committed capital began operations. SRIR insures property
against acts of terrorism and offer policies to cover property damage,
business interruption and extra expenses incurred after a terrorist act. SRIR,
which focuses mainly on European business, writes a maximum of
Eur275million in a given 600-metre geographic area. The company was set up
by Allianz AG Holding, Hannover Re, Scor, Swiss Re, Zurich Financial Services
Group, and XL Capital Ltd.
–
Travelers Property Casualty Corporation, spun-off by Citigroup, filed a
statement to sell up to USD1 billion in Class A common stock in an initial
public offering. Concurrent with the offering, the company is offering an
undisclosed amount of Upper Debt Exchangeable for Common Stock and
purchase contracts to buy shares of the company's Class A common stock.
The company said it would use net proceeds from the IPO to pre-pay
intercompany debt to Citigroup.
After the implementation of these disposals, RSA predicts the Group’s
available capital would exceed its capital requirements by £750 million
–
Scandinavian Re, the Bermuda-based reinsurance subsidiary of ABB, stopped
writing new and renewal business after making losses of USD90 million
last year.
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Scor sold its 35.3% stake in the French export credit insurer, Coface, for
Eur290 million to French bank, Natexis Banque Populaire, who thus increases
its shareholding from 19% to 54.4%. Scor said the move would yield a profit
of Eur96 million and would free another Eur180 million in risk capital, which
it will reinvest in its core business.
Scor said it had reached a definitive agreement to sell its Arizona-based
Fulcrum business unit, to the Argonaut Group - the unit was acquired when
Scor took over Sorema.
Sompo Japan, formed through the merger of Yasuda Fire & Marine Insurance
Co., and Nissan Fire & Marine Insurance Co., commenced operations on July
1, 2002. The originally planned April launch had been postponed due to the
demise of Taisei Fire & Marine Insurance Co., which had been due to form
part of the new company.
On November 18, 2002 Scor announced a revision of its projected estimated
net loss to Eur400 million for the full year to 2002. As part of the recovery
plan ‘Back on Track’, the Board announced on November 21, the launch of a
rights issue to raise up to Eur381 million. This capital increase, 75%
guaranteed by a group of investors and by the banking syndicate, will enable
Scor to put into action its recovery plan. Scor had earlier confirmed that
around ten existing shareholders, holding approximately 50% of its existing
shares, had already indicated their intent to exercise their subscription rights
and even to increase their stake.
–
HCC Insurance Holdings, Houston, announced that it was discontinuing its
London-based Accident & Health underwriting agency LDG Reinsurance. HCC
plans to transfer the unit's responsibilities and outstanding business to the
Wakefield, Massachusetts office of its Houston Casualty unit.
Tokio Marine & Fire Insurance Co., Ltd. scrapped plans to merge its life
insurance operations with Asahi Life. The two companies said they were
unable to agree on details of a merger plan proposed in November 2001 and,
following the announcement, Dai-ichi Kangyo Bank (DKB), Asahi's main
creditor with an estimated Yen135 billion in subordinated loans and capital,
stated it would continue to support Asahi. DKB is considering injecting up to
Yen100 billion into Asahi Mutual Life's capital base by way of converting
subordinated loans DKB has already extended to the insurer into its capital
base. Asahi said it would still proceed with plans to demutualise and come
under the holding company of the Millea Insurance Group by 2004.
Meanwhile, the US regulators declared effective the USD750 million shelf
registration of securities being offered by HCC Insurance Holdings, which
intends to use the proceeds primarily to fund acquisitions and boost
operating capital.
HCC Insurance Holdings, Inc. announced recently that subject to regulatory
approval, it had reached agreement to acquire St. Paul Espana, Cia. de
Seguros s.a., Madrid, a property and casualty insurance company and, on
completion of the deal, the company’s name will change to HCC Europe.
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International General Insurance Company, Amman, Jordan, began operations
on March 1, 2002, with a paid-up capital of USD25 million, targeting Arab
and foreign markets rather than the Jordanian market and offering marine,
energy and property insurance, while focusing on servicing major foreign
clients especially oil companies and contractors.
–
Liberty Mutual Insurance decided to withdraw from the Japanese property
and casualty insurance market, citing its inability to develop the scale needed
to run a profitable operation there.
–
Merrill Lynch & Co. Inc. said that it formed a (Class 3) reinsurer in Bermuda
but did not release further details. Following Goldman Sachs and Lehman
Brothers, which have set up Bermuda units, it is thought that the recentlyformed operation will focus on acting as a vehicle for the securitization of
insurance for risks such as earthquakes and hurricanes, hoping alternative
reinsurance involving capital markets will become more attractive now that
traditional reinsurance rates have soared.
–
–
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Montpelier Re, set up in November 2001 with an initial capitalisation of
USD1 billion, completed recently an initial public offering which now gives
the company a total market capitalisation of some USD1.7 billion.
–
MS Frontier Reinsurance Ltd., (MSFR), Bermuda, has repositioned itself as a
catastrophe risk reinsurer to take advantage of the hardening of premium
rates in the reinsurance market, and, as part of the Mitsui Sumitomo
Insurance group's strategy of expanding its overseas inward reinsurance
business, MSFR's capital has been increased from USD10 million to
USD100 million. MSFR will focus on high-layer catastrophe risks in Asia,
Europe and the Americas. MSFR will also assume the role of the MSI group's
catastrophe risk retention vehicle to more efficiently manage the global MSI
group's exposure.
–
Olympus Reinsurance Ltd. announced it would write property catastrophe and
other short-tail lines of business, backed by a capital of USD500 million.
Olympus Re is said to have a quota-share agreement with member companies
of White Mountains Insurance Group Ltd.
–
Overseas Partners Ltd. (OPL) announced its decision to restructure OPL and
cause most of its operations to begin an orderly run-off. Specifically, OPL
discontinued writing new business in Bermuda with immediate effect and put
its Bermuda operations (OP Re, OPAL and OPFinite business) into run-off.
While the company entered into discussions with parties potentially
interested in hiring the Bermuda finite and accident & health underwriting
teams, the Company entered into an agreement with Renaissance
Reinsurance Ltd. whereby RenaissanceRe would assume the policies of OPCat,
thereby assuring continuity of coverage for the clients.
Meiji Life Insurance Co., and Yasuda Mutual Life Insurance Co., ranking fourth
and sixth in the life industry sector, are set to integrate their operations in
April 2004. The companies combined assets total Yen27 trillion, making the
merged entity the third largest life assurer in Japan following Nippon Life
Insurance Co., and Dai-ichi Mutual Life Insurance Co.
Millea Group's three non-life insurance companies, Tokio Marine and Fire
Insurance Co., Ltd., Nichido Fire and Marine Insurance Co., Ltd. and Kyoei
Mutual Fire and Marine Insurance Co., were planning to merge their life
insurance subsidiaries by April 2003. Meanwhile, Tokio Marine & Fire
Insurance Co., Ltd and Nichido Fire & Marine Insurance Co., Ltd have
integrated their non-life operations under one holding company in
April this year.
Kyoei Mutual Fire and Marine has withdrawn from the planned merger with
the Millea Group. Instead, Kyoei confirmed it was joining forces with
Zenkyoren, the National Mutual Insurance Federation of Agricultural
Co-operatives.
Overseas Partners US Reinsurance Company (Opus Re) would nevertheless
continue its reinsurance operations until a buyer was found.
–
The PRI Group, the new UK insurer specialising in underwriting professional
indemnity insurance, as well as providing other areas of cover such as
Directors & Officers' liability insurance, has raised £125 million of new money
in a placing on the Alternative Investment Market (AIM), and the company
will have a market capitalisation of some £140 million. To obtain UK and
European regulatory licences, PRI has bought the former UK arm of Sirius
International, whose UK subsidiary closed to new business in 1994 and has
no historical underwriting liabilities.
Apr 2002
Scor Group announced the placing on the capital markets of
Horizon, a Eur130 million index-linked securitisation of liabilities
designed to lower its risk profile in credit reinsurance over the next
five years. This structurally innovative cover is linked to Moody's A
and Baa ratings indices which comprise weighted credit risk
populations rated between A1 and Baa3. The indices were picked
for their match with Scor's credit exposures in terms of quality,
geographic diversity and range of sectors.
May 2002
Swiss Re Capital Markets Corporation (SRCMC) completed an
innovative USD40 million transaction applying collateralised debt
obligation technology to efficiently pool, tranche and transfer a
diversified pool of insurance risks. The deal also divided the pool
into four tranches of various levels of catastrophe risk. SRCMC
structured the deal and was able to create and place synthetic
equity and mezzanine risk tranches in a portfolio of insurance risks.
Investors in the two junior tranches accepted a higher risk profile to
obtain a more attractive yield than is generally available to
investors in the insurance-linked securities sector.
May 2002
Nissay Dowa General Insurance Co., announced a 3-year
USD70 million transaction, arranged through a special purpose
vehicle, Fujiyama Ltd., to cover potential losses from earthquakes in
Japan. Swiss Re Capital Markets Corporation (SRCMC) acted as sole
manager for the transaction and, in conjunction with RMS, created a
parametric structure in which losses to the bond are directly linked
to earthquake event parameters published by the Japan
Meteorological Agency (JMA). The parametric "box" structure fits
Nissay Dowa's exposure and covers seismic sources giving rise to
earthquake events affecting exposure in Cresta Zone 5 (Tokyo,
Chiba and Kawasaki), as well as the neighbouring prefectures to the
southwest, Shizuoka and Yamanashi.
Jul 2002
Swiss Re raised USD255 million from a 4-year bond for protection
against natural catastrophes. The company signed a financial
contract with Pioneer 2002 Ltd., a special purpose vehicle in the
Cayman Islands and the issuer of the USD255 million of securities.
The proceeds from the offering fully collateralise Pioneer's financial
contract with Swiss Re, and will serve to replenish Swiss Re's capital
should any of the specified natural catastrophes occur. The
protection is based on parametric indices tied to natural perils.
Under these indices, Swiss Re's recovery after an event is tied to
physical parameters such as earthquake strength or wind speed.
Five of the indices address individual risks viz. North Atlantic
hurricanes, European windstorms, California earthquakes, Central
US earthquakes, and Japanese earthquakes, while the sixth is a
combination of the other indices.
Sep 2002
Horace Mann Educators Corporation, Illinois, committed themselves
to a USD75 million capital agreement with Swiss Re. The facility is a
3-year option agreement that allows Horace Mann to maintain
financial flexibility and capital strength in the event of a major
property and casualty loss from catastrophes in the US. Subject to
the terms of the agreement, if at any time over the 3-year period
Horace Mann incurs catastrophe losses exceeding a pre-determined
level, the company has the option to issue up to USD75 million of
cumulative convertible preferred securities to Swiss Re Financial
Products Corporation, or to enter into a one-year quota share
reinsurance agreement with Swiss Re America.
Retrocession
Company Market
As in other sectors, the retrocession market is being affected by poor results
caused by the World Trade Center (WTC) disaster, poor investment returns and
under reserving of back years. As a result, we believe the market will remain firm
with some further rate increases, especially for business written on a worldwide
basis where demand will far outweigh supply, possibly resulting in the need to
break down into territorial sections at certain levels.
To date, 2002 has been a very good underwriting year with no significant US wind
activity and hopefully some much needed profits will be generated. The only
meaningful loss was the European Floods, which we understand could be in the
region of USD3 billion, and may affect some European retrocession programmes.
In addition, whilst WTC in 2001 is a major loss, most people seem to be
adequately, if not, over-reserved.
Whilst the industry has seen a significant amount of new capital being raised,
most predominantly in Bermuda, the majority of the new markets are targeting
direct catastrophe business and have a limited appetite for retrocession, if any.
Retrocession continues to be viewed as a difficult specialist class which is not as
transparent as direct reinsurance and therefore more difficult to rate and to model,
which historically has limited the number of serious players. In addition, due to its
heavy risk weighting against capital, many markets find it difficult to allocate
capacity to retrocession in the current market environment.
We anticipate therefore, another difficult renewal season in terms of finding
capacity, but hopefully this year things will start earlier. Last year we were
embroiled in basic coverage issues, such as changing to named peril slips, and
excluding terrorism and cyber risks. This caused protracted renewal negotiations
which hopefully have now been resolved and will not need revisiting.
Furthermore, we anticipate a significant reduction in capacity from some of our
existing European renewal markets as they revise their underwriting strategy in
light of the poor results.
The expected new entrants to the market, which we believe would have seen
retrocession as a core business, have yet to materialise and are unlikely to be in
place by January 1, 2003. It seems the appetite of the investment community for
new reinsurance ventures is not as positive as it was after September 11.
–
ACE Ltd. announced plans to sell up to USD500 million of 5-year senior
notes and use the proceeds to repay outstanding debt, and for general
corporate purposes.
–
American Re's reserves were increased when its parent, Munich Re, injected
USD1 billion last year as a result of heavy third quarter losses. Munich Re said
it would add a further USD2 billion to bolster American Re's reserves.
–
Arch Capital Group filed a shelf registration statement to offer
USD500 million of common stock, preference shares and unsecured debt
securities, as it expands its underwriting operations.
–
Axa s.a. announced that it would move forward later in the year with a
shake-up of Axa Corporate Solutions, after the holding company had injected
some Eur260 million into its reinsurance unit since the beginning of the year.
Accordingly, the reinsurance operation will now revert to its old name, Axa
Re; the unit that was once the Global Risks Group will become Axa Corporate
Solutions Insurance; and the run-off business will become Axa Liabilities
Managers - all three units are under the chairmanship of a member of the
executive board, who is also chief executive officer of Axa Re.
We continue to have a significant involvement in the loss warranty market, where
we think rates will be largely unchanged. This is a product that certain markets
who would not write traditional retrocession entertain, because the exposure is
easy to quantify due to the warranty trigger.
The risk excess market continues to present opportunities. Rates remain high both
for Worldwide Direct and Facultative, and Retrocession Risk Excess of Loss, and
catastrophe exposures have been significantly reduced.
–
–
Gerling then proceeded to restructure its operations and announced the
strategies of its four Group divisions viz. industrial insurance, commercial and
private insurance, credit Insurance, and reinsurance, adding that the Group
was looking for a strategic partner for its reinsurance unit. Subsequently, the
Group decided to put Gerling Global Re Corporation of America (GGRCA), its
US property and casualty reinsurance business, into run-off, to enable the
reinsurance division to employ its capital in other reinsurance markets and
target segments.
Gerling continued to search for an investor, or to sell part of its reinsurance
business, but, in view of its lack of success thus far, it said that the Group
would consider withdrawing from property and casualty business, through
Gerling Global Re, but that life reasurance was not affected by the situation.
Brit Insurance Holdings has increased the capital of Brit Insurance by
£80 million to £150 million thus enabling Brit to write in excess of
£300 million of gross premium income in 2003. (see also "Brit" under
"Lloyd's Market").
–
CNA Financial confirmed a £43.2 million cash boost for its direct insurance
operations in Europe. This takes the funds of these operations, which include
CNA Insurance, formerly Maritime Insurance, and CNA Insurance (Europe)
to £105 million.
–
Fuji Fire & Marine Insurance Co., reached agreement for a capital and
business alliance with AIG and Orix Corp. whereby AIG and Orix will each
take a stake of about 20% in Fuji making them top shareholders. The
companies will also co-operate with the insurer in product development and
sales.
–
GE (General Electric) has already said that it is examining ‘strategic options’
for its insurance subsidiary, Employers Reinsurance Corporation (ERC).
According to market sources, GE was planning to spin off ERC with a partial
initial public offering, but has delayed the move due to losses at ERC, and the
slump in the stock market. Meanwhile, it has been reported that Berkshire
Hathaway, the insurance and investment group led by Warren Buffett, has
emerged as a leading candidate to buy ERC, but is said to have offered less
than the USD8 billion that GE reportedly wants for the unit. However, people
close to the situation said that contacts between the two companies where at
an extremely early stage. GE issued a profit warning for 2002 mostly due to
ERC’s poor performance and injected USD1.8 billion into ERC - thus bringing
its reserves to a level where it will be easier to sell.
Gerling Group sustained a particularly difficult year in 2001 due to the
adverse developments of capital markets and a very high deficit posted by its
reinsurance division, Gerling Global Re. Consequently, the capital base of the
Gerling Group was reinforced by two capital increases in December 2001 and
March 2002 amounting to a total of Eur708 million, and a further
contribution of Eur102 million to strengthen underwriting funds and
provisions of the reinsurance unit.
Finally, Gerling announced that it would shut down its non-life reinsurance
activities but that, while all existing contractual commitments will be duly
fulfilled, any new business will not be written. It said at the same time that it
would reorganise its life reinsurance business, Gerling-Konzern Globale
Rueckversicherungs AG, under a new company name, Gerling Life
Reinsurance GmbH.
–
GoshawK Re, Bermuda, opened for business in the last week of January this
year with a capital of £100 million to write five main classes of business viz.
non-marine catastrophe risks, marine excess of loss, marine retrocession,
aviation excess of loss, and finite reinsurance (see also "GoshawK" under
"Lloyd's Market").
–
Groupama announced that it had abandoned plans to sell its UK property
and casualty operations and was making a "long-term commitment of at
least five years" to its UK subsidiary, Groupama Insurance.
–
Hannover Re raised over Eur800 million in capital last year, including
Eur94 million equity last December, with the aim of increasing its premium
volume for aviation, marine and London market reinsurance business.
Hannover Re intends to effect a Eur300 million capital increase at its E+S
Ruck unit in the fourth quarter of this year to take advantage of the strong
rise in premiums.
Healthcare
–
–
–
Hiscox raised £110.5 million in a rights issue, which was fully underwritten it was supported by 62.7% of its shareholders. However, Chubb, the US
insurer that held 28.3% share of Hiscox, did not support the capital raising
and, consequently, will see its stake reduced to 18.9%. Hiscox said that
capacity for syndicate 33 will be raised from £504 million to £655 million,
through a qualifying quota share reinsurance arrangement for £151 million.
With favourable trading conditions expected to continue into 2003, Hiscox
said that it planned another increase in capacity next year, taking the figure
to at least £706 million.
–
The St Paul Cos. restructured its business at Lloyd's by focusing upon four
main Business Units viz. Aviation (Syndicate 340), Property, Marine (Syndicate
1211) and Personal Lines (Cassidy Davis). St Paul decided to exit non-marine
reinsurance, marine excess of loss and financial and professional services (see
also "St Paul" under Company Market").
–
SVB Underwriting Limited (SVBU) received confirmation from Lloyd's that it
will not be required to reduce its capacity for 2002, subject to an undertaking
from SVBU that the premium income attributable to SVBU will not exceed
£371 million. This further clarifies the situation in the context of the drawing
down of funds at Lloyd's announced earlier in the year. In addition, SVB has
arranged a qualifying quota share reinsurance for £15 million with Berkshire
Hathaway for its wholly owned Syndicate 2147.
Jago Managing Agency Ltd. placed Syndicate 205 into run-off on
March 28, 2002, having determined that market conditions in the syndicate's
core areas did not provide a continuous business plan. The syndicate was
largely backed by Gulf Insurance Co. for 2002.
The merger of Syndicate 1241 and Syndicate 2147 has been approved by
capital providers and is subject to Lloyd's consent. The operation of the
merged syndicate should allow some realignment of business and together
with Syndicate 1007, provide the platform for SVBU to take advantage of the
current market conditions for the benefit of all capital providers.
Kiln increased the underwriting capacity of Lloyd's Syndicate 807, which it
manages, through a qualifying quota share reinsurance arrangement with
Montpelier Re, Bermuda, giving it a £75 million capacity for the 2002
underwriting year of account.
In February, Kiln announced that it had entered into two further qualifying
quota share arrangements with third parties. Subsidiaries of W R Berkley
Corporation would add approximately £86 million to Kiln’s underwriting
capacity for 2002, whilst a further quota share agreement with Arch
Reinsurance Limited will equate to a further 10% of Syndicate 510’s capacity
of £388.6 million.
–
–
In April, Kiln announced that W R Berkley, the US property and casualty
insurer, is to raise its shareholding from 5% to 20.1% as part of a
£47.6 million rights issue - thus becoming the largest shareholder of Kiln plc.
The capital raised will mainly support increased underwriting on
Syndicate 510.
With underwriting capacity up 76% on the previous year, Kiln said that
Syndicate 510 was now strongly placed to take full advantage of market
conditions as they continue rapidly to improve.
–
–
Markel Syndicate Management Ltd. provides a capacity of £200 million
through Syndicate 3000, which is the new combined syndicate formed
through the merger of Markel Syndicates 702, 1009, 1228 and 1239.
Syndicate 3000 has recently been given an extra £60 million of capacity for
the 2002 year of account following approval by market authorities.
Soc group, a members’ agent at Lloyd’s that acts on behalf of investors or
names, will set up a vehicle aimed at providing capital to a number of
syndicates. The vehicle, known as Socif, hopes to provide up to £1.2 billion of
underwriting capacity.
–
–
Market update
Claim severity
The medical malpractice insurance industry has been in a state of turmoil over the
last two years. A significant number of malpractice insurance companies have
either failed, withdrawn from this line of coverage, or received ratings downgrades
due to the significant deterioration of their financial results. The industry's
combined ratio was a poor 139% in 2001 and is projected to go higher in 2002.
A.M. Best are of the opinion that soaring verdicts, settlements, and rising legal and
related expenses to defend cases, have caused medical malpractice insurance to be
the worst performing line of all property and casualty coverages. Premiums have
rocketed for institutional and individual providers, thereby directly impacting the
affordability and availability of health care, resulting in malpractice coverage
becoming an issue for many buyers whether they are institutional or individual
providers.
Many commentators have noted that the current problem in medical malpractice
insurance has been the "frequency of severity": the unprecedented numbers of
large verdicts and settlements experienced nationally. While frequency is thought
to be flat, Jury Verdict Research reported a 43% rise in the median medical
malpractice awards between 1999 and 2000, hitting the highest median ever of
USD1 million. This in turn has increased loss pick trend factors of between 10% to
15% for excess Hospital Professional Liability (HPL) loss picks1, which has resulted
in a dramatic effect on corresponding reinsurance/excess insurance
HPL premiums.
Rate adequacy
We will comment briefly on current and future trends within malpractice insurance
and reinsurance, together with certain segments within medical malpractice
insurance and reinsurance, such as Primary Hospital Professional Liability,
Reinsurance, Physicians & Surgeons Insurance and Long Term Care.
Despite the huge rate increases being taken by malpractice carriers, there is no
certainty that this will restore profitability in the long term. The concern is that the
pricing increases are being offset by the continuing dramatic rise in the number of
large awards and settlements. Actuarial predictability has been lost in the current
environment.
Current and future trends
Talbot Underwriting Ltd., the managing agency formed by the former
Alleghany Underwriting management team, said it had some £85 million in
capital support for its underwriting at Lloyd's through Syndicate 1183 and,
allowing for quota share arrangements, the syndicate has an underwriting
capacity of £180 million for the 2002 year of account.
Tort reform
Malpractice carriers have responded in a number of ways in an attempt to restore
profitability, including:
Wellington Underwriting plc announced a major initiative whereby certain of
Berkshire Hathaway's wholly owned subsidiaries have agreed to provide a
30% qualifying quota share reinsurance to Syndicate 2020 for the 2002 year
of account, and also to provide the funds at Lloyd's necessary for Wellington
to form a new £150 million syndicate which will underwrite on a consortium
basis with Syndicate 2020 for the 2002 year of account. These arrangements
will increase Wellington's managed capacity from £625 million to
£963 million for the 2002 year of account, thereby enabling Wellington to
meet its original planned premium income of £950 million for the current
underwriting year (see also "Wellington" under "Company Market").
Very few US states have a favorable malpractice climate due to the absence of tort
reform. There are some states such as Pennsylvania, Nevada, and others that are
attempting to remedy their poor environment through legislation. The prospects
for federal tort reform are not promising, unless a convincing case can be made to
establish that malpractice reform is linked to affordability and availability of health
care. Without much hope for near-term tort reform relief, malpractice carriers must
rely on accurate pricing to restore profitability.
Wren Syndicate Management Ltd. set up personal lines Syndicate 2400 with
a capacity of £30 million, with backing from GE Frankona (95%) and BRIT
(5%) - its sole source of business is Bluesure, which sells personal lines
package policies. However, Bluesure has ceased to accept new business
because its management was unable to secure future underwriting support,
but it will continue to provide full services to all policyholders on risk and pay
valid claims in full.
XL London Market, the London subsidiary of XL Capital, is seeking to merge
Syndicate 990 into Syndicate 1209 - both 100% backed by XL, with current
capacities of £80 million and £360 million, respectively.
–
Withdrawing from this line of coverage
–
Double to triple digit rate increases
–
Restrictive underwriting of certain classes of business and in
certain territories
–
Raising attachment points/mandating deductibles
–
Offering lower limits of liability
Low interest rates have reduced investment income resulting in underwriters
focusing on underwriting profits. Low interest rates also reduce discount loss picks
which, in turn, increase premiums.
There has clearly been a renewed emphasis on pricing terms and conditions not
seen since the mid-1980s. Willis Re believes that the healthcare industry can
expect these efforts by malpractice underwriters to restore profitability, with this
trend likely to continue for at least the next two years.
There are a number of significant factors that will influence healthcare industry
insureds and malpractice carriers over the next two years, including :
–
Claim severity
–
Rate adequacy
–
Tort reform
–
–
Influx of new capital
The influx of new capital
The number of new companies entering this line of insurance is encouraging. Most
are providing additional reinsurance and excess lines capacity. However, these new
markets are being selective as they underwrite new business, although they have
the added bonus of entering the market without the burden of poor results from
prior years.
1
Loss picks are levels chosen by underwriters’ actuaries at which they would be comfortable attaching their capacity, both from an individual and aggregate claims level.
This level of ‘loss pick’ has been moving up during the last 6 months.
Capacity news
Medical Malpractice Market Segments
Lloyd’s Market
Primary Hospital Professional Liability
Physicians & Surgeons
This market segment's capacity has been greatly affected by the withdrawal of St.
Paul, the liquidation of PHICO, and exacerbated by the downgrading of certain
carriers such as the Reciprocal Group of America. The regulatory barriers for entry
to this segment are significant unless new entrants elect to use excess and surplus
lines paper. This segment needs new capacity over the next few years, but it will be
difficult to attract new entrants with such poor recent industry results. There is
more careful scrutiny of submissions and a major push to have insureds retain risk
through various self-insurance vehicles. Primary HPL buyers can expect to see
double to triple digit increases for the next two years. The good news is that the
London / European reinsurers have created a market for this business.
While there have been downgrades of certain companies in the last two years, this
market segment remains financially strong if the focus is the provider-sponsored
companies (PIAA). There are less than a handful of physician carriers able and
willing to write (or front) on a national basis. Of much greater concern is the
affordability and availability of insurance in certain US states, and territories within
a state. Certain specialties have been dramatically affected such as obstetrics,
emergency medicine, neurosurgery, and radiology, resulting in some physicians
having to leave their practices or discontinuing services. Hospitals and health
systems will be challenged to create innovative malpractice insurance solutions for
their medical staff, so that the quantity and quality of services is not affected.
These solutions must also be able to withstand legal scrutiny under the Medicare
and tax laws. Nationally, physicians and groups will see double digit increases, and
for groups with adverse experience, or those located in US states with poor tort
environments, these increases could be higher.
Excess Hospital Professional Liability
With the significant increase in Excess HPL premiums, the increase in retention,
and the pairing back of limits, this segment has seen at least five new entrants to
the market. These new underwriters bring additional capacity but are committed to
strict underwriting, and holding the line on pricing.
Reinsurance
With the insurance industry hardening as a backdrop, healthcare liability
reinsurance has witnessed an even more extreme hardening in 2002. Reinsurers
have acutely felt the impact of the severity trend in recent years. Reinsurance
pricing is now subject to stringent actuarial analysis, not just from the lead
underwriters but from the majority of reinsurers on the placement. There is more
capacity in this segment due to new entrants, but their pricing has been
conservative in an attempt to avoid the underwriting mistakes of the 1990s.
Reinsurance buyers can expect to see at least double digit increases in the next
two years, with the focus on increased profit margins, and containing the actuarial
loss picture within the parameters of the programme.
–
In May, as trading conditions remained strong, Amlin arranged a new
£50 million qualifying quota share facility with Montpelier Re - now giving
Amlin the ability to underwrite up to £900 million of income for the 2002
year of account.
–
In June, Amlin announced that it was raising £80 million through a share
placing so it can put together an offer to buy out the Names that control the
remaining 27.7% of the syndicate.
–
The Lloyd's market was one of the main markets to respond to the opportunities
that this 'crisis' created, resulting in a large number of facilities (approximately 15)
being created, which over the last two years has shrunk to around six, with the
premier programme, Sapphire, being the Willis facility.
Ascot, whose syndicate 1414 is backed by AIG, increased underwriting
capacity for 2002 by 66% from £117.5 million to £196 million. The syndicate
writes a diverse spread of specialist lines led by property, energy and
reinsurance, but also including marine cargo, fine art and political risks.
However, the syndicate decided to pull out of the marine hull market as a
result of the continuing poor state of the sector.
–
Beazley successfully completed its floation on the stock market raising
£150 million - thus valuing the company at £167.5 million. The Group will
use the cash to increase its underwriting capacity to £660 million this year.
–
Berkshire Hathaway extended its involvement in Lloyd's through a deal with
Trenwick, Bermuda, that will boost capacity on its Syndicate 839 by
£141 million. The deal will increase the total premium capacity of the
syndicate for the 2002 year of account by 70% to £341 million, comprising a
£62 million rise in stamp capacity and £79 million via a qualifying quota
share reinsurance facility.
Catlin Westgen Group Limited (CWGL) have raised USD482 million of new
equity capital as well as a USD50 million term loan facility. The transaction
will allow CWGL to increase its underwriting capacity at Lloyd's through
Syndicate 2003, its dedicated corporate syndicate. Additionally, CWGL will
begin underwriting through its Bermudan insurance company, Catlin
Insurance Company Limited.
Meanwhile, Ecosse, a new insurance company, officially opened in Glasgow.
The insurer, a 100% owned subsidiary of Catlin Underwriting Agency's
Syndicates 1003 and 2003, will write commercial combined, business liability
and excess of loss business solely for the Scottish market.
In March, Amlin announced that it had agreed a quota share facility with XL
Re that increased capacity for the 2002 year of account by £50 million. This
arrangement will also cover the 2003 year of account.
–
–
In February this year, Amlin confirmed that shareholders took up 39.7% of the
rights it issued to raise £43.2 million, net of expenses - sub-underwriters
subscribed for remaining shares.
The Long Term Care marketplace
The Long Term Care or Nursing Home marketplace was approximately two years in
advance of the hardening of the physician and hospital market, where Nursing
Homes, hit by a surge of litigation, gave rise to multi-million dollar verdicts based
on the quality of care.
Amlin Underwriting Limited, agreed last November that State Farm
Automobile Insurance, an existing shareholder, would provide a credit facility
of up to £100 million to support its underwriting through Syndicate 2001 for
the 2002 year of account. This facility will continue in 2003 and 2004.
Chaucer announced plans to raise £39 million in additional capital through a
placing and open offer to increase capacity and take advantage of improved
market rates. Chaucer's marine syndicate 1084 has seen premium increases
of 41% and its non-marine Syndicate 1096 has seen increases of 31%,
compared to 21% and 18% respectively in 2001.
Subject to regulatory approval, Chaucer said it would use £16 million of the
new funds in 2002, thus increasing the capacity of Syndicate 1096 by
£40 million. Part of the new funds will also be used to increase the group's
fund at Lloyd's to support the group's expected £210 million economic
interest on the Chaucer syndicates for 2003. Chaucer expects in-house
managed capacity of £358 million for the 2003 year of account.
–
Cox Insurance Holdings plc signed an agreement with Lloyd's that will isolate
the existing corporate members and contain any further exposure to liabilities.
Restructuring will include a £70 million placing and open offer of new shares
which will consolidate backing for a new corporate member funding Cox
retail business in Syndicate 218. In acknowledging the attractive rating
environment, Cox's managing agency announced its intention to increase
underwriting capacity from £361 million to £443 million, and said it will
proceed with its qualifying quota share arrangements that provide access to a
further 20% of capacity. The extra capacity will bring about an increase in
gross premiums written from £600 million anticipated for this year to more
than £700 million by the end of next year.
–
Euclidian's Syndicate 1243 achieved a total capacity of £213 million for the
2002 year of account, after Berkshire Hathaway provided the Lloyd's
managing agency additional capacity of £50 million by way of a whole
account qualified quota share arrangement. Euclidian is looking to see
whether establishing a company in Bermuda or London is a viable option and,
if so, will proceed with a specific capital raising exercise next year.
–
GoshawK increased the underwriting capacity of its Syndicate 102 at Lloyd's
as its capital increased from £150 million to £185 million (see also
“GoshawK" under "Company Market").
–
Hardy Underwriting Group confirmed it intends to raise £25 million through a
placing and open offer, which has been underwritten by Numis Securities
Limited. The group, which owns around £43 million of the £54 million total
capacity for its managed Syndicate 382 for the 2002 year of account, intends
to use the extra capital to further increase the underwriting capacity of the
syndicate to £100 million for the 2003 year of account.
Brit Syndicate 2987 is the new combined syndicate formed through the
merger of Brit Syndicates 0250, 0735, 0800 and 1202 - Syndicate 0250 was
renamed 2987 from January 1, 2002. The £450 million capacity represents a
46% increase on the merged syndicates' capacity (see also "Brit" under
"Company Market").
Accident & Health
2002
Target
Buyer
Details
July
CNA Re
(UK)
Tawa
(UK)
CNA Financial Corp. confirmed that it is to sell its London reinsurance
unit to Tawa (UK), a subsidiary of French investment group Artemis,
subject to regulatory approval. The share purchase agreement includes
all business underwritten by CNA Re UK, since its inception, which will
be run-off according to a 10-year strategy
July
Sheffield Insurance
(US)
Combined Specialty Group
(US)
Combined Specialty Group, which is formed by Aon's underwriting units,
has acquired Sheffield Insurance Corp. from Vesta Insurance Group, and
the company will be re-named Combined Excess & Surplus
July
Newmarket
Allied World Assurance Holdings
Underwriters Ins Co
- A.W.A.H. (Ireland)
(US)
Commercial Underwriters
Insurance Co (US)
A.W.A.H. acquired from the US subsidiary of Swiss Re, the two US
companies, which are authorised to write excess and surplus lines
insurance in 48 states
July
Duomo Assicurazioni
(Italy)
Cattolica Assicurazioni
(Italy)
Cattolica completed its acquisition of 100% of Duomo, with Cattolica
buying from Banca Popolare di Verona e Novara (BPVN) the remaining
20% stake it did not already own for Eur55.7 million. In return, BPVN
has agreed to the purchase of a 50% stake in the brokerage and asset
management group Creberg SIM from Cattolica for Eur11.4 million.
BPVN will also acquire about a 4% stake in Credito Bergamasco from
Cattolica for Eur45.7 million
Aug
National Insurance
Corporation
(Sri Lanka)
Janashakthi Insurance
(Sri Lanka)
The Sri Lankan government has awarded the remaining 39% stake in
the state insurer to private firm, Janashakthi, after the National Savings
Bank dropped out. Janashakthi purchased a 51% share of N.I.C. last
year- with the remaining 10% of the State holding being offered to
employees
Sept
PZU s.a.-Powszechny
Zaklad Ubezpieczen
(Poland)
IFC - International Finance
Corporation (US)
EBRD - European Bank for
Reconstruction & Development (UK)
IFC and EBRD have both expressed an interest in buying a stake in PZU,
according to the country's finance ministry
Oct
Europ Assistance
Holding
(France)
Assicurazioni Generali s.p.a.
(Italy)
Generali will acquire the 40% shareholding it does not already own in
Europ Assistance Holding from Fiat for Eur124 million. Europ Assistance
sells healthcare, motor, travel and household insurance, and provides
travel and medical assistance services to both individuals and companies
in some 200 countries and territories throughout the world
Oct
Ping An Insurance
HSBC
(China)
(UK)
(in respect of a 10% share)
To date, 2002 has provided the Accident and Health (A&H) arena with a far more
stable trading environment compared to recent years. With the unsettling activities
of previous years seemingly behind us, and with the significant market correction
on pricing and coverage which took place last year-end, 2002 has in general
witnessed a more consistent response from the Reinsurance market.
Terms and conditions on Personal Accident reinsurance business have however
continued to tighten throughout the course of 2002, and retrocessional coverage
still remains extremely scarce. The more recent terrorist activities in Bali have
ensured that Terrorism coverage is still commanding an additional premium of a
varying magnitude dependant upon location. Exposures to potential nuclear,
chemical and biological terrorist activities remain extremely difficult for reinsurers
to quantify, and thus to rate appropriately, which means that rarely can they gain
enough comfort in order to cover this liability. Pricing on Catastrophe protections
continued to rise steadily throughout the course of the past year.
The US Medical reinsurance market has been enjoying equally favourable trading
conditions this year, and actuarial predictions reflect that this sector will return
profits for both this and last year. The more significant volumes of cash flow in this
class, coupled with the less catastrophic nature of the business counterbalances
the Accident class when written in conjunction. Whilst the expected profit margins
will obviously not be as potentially significant, the ultimate outcome is somewhat
more predictable.
In looking forward to 2003 Willis Re envisage a continuing difficult trading
environment whilst remaining optimistic on our clients behalf, that the market may
see a slight improvement in conditions in Accident and Health reinsurances in the
years to come.
Despite the obvious attractions of this sector from a reinsurer’s perspective, there
have been very few new entrants to affect the state of the market. Opportunistic
markets have continued to write Personal Accident exposures, but only when given
a Rate on Line more reflective of Property pricing than A&H rates. Many direct A&H
reinsurers are carrying significant accumulation of risks net of reinsurance due to
the adverse fluctuation in pricing last year.
Given the absence of any significant market-wide Accident losses in 2002,
reinsurers should be in a position to be returning a significant margin of profit on
their portfolios this year. This, it is thought, will perhaps prompt a number of
interested 'observing' parties to enter the market during 2003.
HSBC agreed to pay USD600 million for a 10% stake in Ping An, subject
to regulatory approval. Ping An is China's second-largest life assurer and
operates the third-largest property and casualty business
Facultative
Property
Casualty
A year after the terrorist attacks of September 11, the market may no longer be in
turmoil, but all the features of a hard market are still prevalent. The renewals of
facultative underwriters' treaty protections during 2002 have been difficult, and
there are no signs of relief for the forthcoming January 1, 2003 renewal season.
Capacity remains a major issue while increases in rates and restrictions in
conditions continue to apply. The key difference between the casualty facultative
and the property facultative market is that many of the new reinsurers have not
committed their capacity to the casualty facultative market as enthusiastically as
they have to the property facultative market. It has become increasingly apparent
that the commercial liability reinsurers have been losing money over the last ten
years. The low interest environment and, in addition, a worsening development of
earlier underwriting years, are blatantly exposing this fact. In these circumstances,
the new capacity that has entered the market is yet to be convinced that a
sustainable return can be earned from underwriting commercial casualty
facultative business.
The substantial rate increases and the tightening of terms and conditions seen
during 2002 look set to continue, though the pace of rate increases is showing
signs of slowing, primarily due to the influx of new capacity to the market.
Although this new capacity is most timely, it is proving to be highly selective and
subject to strict underwriting control. Proportional capacity remains limited, thus
making it difficult to obtain capacity for sums in excess of USD500 million.
However, sufficient capacity for major risks can be obtained on an excess of loss
basis, provided the rate is adequate and assuming such risks are not located in
areas of known catastrophe exposure. In addition to capacity, the following issues
will remain to the forefront in 2003 taking into consideration market trends which
have evolved in the course of 2002:
–
insurers and reinsurers can set their own prices and conditions on risks
requiring large limits
–
in order to attract capacity, large buyers and their brokers have to make
considerable efforts to differentiate themselves
–
if some room for negotiation has appeared, this does not mean that
premiums are reducing, but rather that underwriters may be prepared to
show some flexibility in considering the limit and scope of the cover in respect
of certain risks
–
notwithstanding the fact that the cost of insurance continues to rise, those
buyers who paid large increases in the immediate aftermath of September 11
will be seeking a sympathetic review
–
as insurers and reinsures revert to technical underwriting standards, they are
relying more heavily on their own in-house engineers to assess the quality of
individual risks. This is leading to a substantial increase in the data required
for the study of the risk, and to prolonged delays in obtaining support
It is anticipated that the demand for facultative cover will increase as a result of
the restrictions being applied, not only to facultative reinsurers' own treaties, but
also to the acceptance of facultative reinsurance and co-insurance under the
primary insurers' property treaties. In the case of medium-sized insurance buyers,
whose property insurance requirements have previously been covered under
primary insurance companies' treaties, the need to approach the international
facultative markets to obtain capacity will prove difficult. Such first time facultative
insurance buyers are likely to find the terms and conditions required by the
international property facultative markets difficult to manage. Nevertheless,
despite these difficulties, the return to basic underwriting principles and real
capacity - not inflated by treaty capacity - ultimately bodes well for the property
facultative market which will eventually provide a more stable product to original
insurance buyers.
The new capacity that is entering the casualty market is aimed towards higher
excess layers - with no signs yet that the capacity problems of primary layers are
likely to be solved in the near future. The restriction of capacity on primary layers
has continued during 2002 as some well-established underwriters were no longer
prepared to write 100% of primary layers, and some of the Lloyd's leaders in this
segment reached their premium limits. The number of "mainstream" primary
insurers has reduced from 16 in 2000 to 6 at the time of writing. The situation is
less severe for excess layers as the Bermudan companies who are writing casualty
facultative business are prepared to provide support at this level. Overall, global
liability capacity has reduced from approximately USD2 billion any one risk in
2001 to USD1.6 billion in 2002. It must be noted that this figure is only available
for a "perfect" risk and, in practice, overall capacity is much lower. This is
particularly true for difficult risks such as pharmaceuticals and railways, which are
becoming standard exclusions under many facultative reinsurers' treaties, thus
reducing their capacity to a net line.
Pressure on the scope of coverage continues unabated, though the reinsurers'
main focus remains on achieving adequate pricing. Although substantial rate
increases have been achieved during 2002, reinsurers are still continuing to put
out a strong message that they require further increases to reach acceptable levels
so as to provide an adequate return on capital. With no anticipated softening in
the terms of treaty protections for the January 1, 2003 renewal and the low
interest rates environment persisting, there are no signs of a reduction in the pace
of hardening rates and coverage restrictions.
2002
Target
Buyer
Details
April
CGU Courtage
(France)
Groupama
(France)
Groupama plans to combine CGU Courtage with its existing broker
market operation, GAN Eurocourtage, and the acquisition gives
Groupama third spot in that sector in France. The takeover will also see
Groupama assume CGU Courtage's participation in the French
aerospace pools, La Reunion Aerienne and La Reunion Spatiale
May
(in respect of its
Benelux-based portfolio)
Achmea
(The Netherlands)
In a series of disposals to raise an estimated £800 million, RSA is selling
its Benelux-based life and general insurance business for £77 million
May
La Fondiaria
(Italy)
SAI-Societa Assicuratrice
Industriale
(Italy)
SAI and Fondiaria, Italy's 3rd and 4th largest insurers, agreed to a
merger that would give control to SAI. The deal creates the second
largest Italian insurer by domestic premium. However, the country's
anti-trust authority is investigating Mediobanca's ties with Generali and
SAI - Fondiaria but stated that it will not refer the case to the European
Commission
May
Huatai Insurance Co.
(China)
ACE Ltd.
(Bermuda)
ACE has agreed to acquire 22% of China's fourth largest property &
casualty insurer, Huatai Insurance Co., for around USD150 million. ACE
will have three seats on Huatai's board, which will be taken by Brian
Duperreault, Dominic Frederico and Peter O'Connor
June
(in respect of its Isle
of Man insurance &
investment portfolio)
Friends Provident Life &
Pensions Ltd (UK)
Continuing the series of disposals to raise £800 million, RSA is to sell its
Isle-of-Man based offshore life assurance and investment subsidiary,
Royal & Sun Alliance International Financial Services Ltd. for £133 million
- included in the sale is Royal & Sun Alliance Investment Management
Luxembourg s.a.
July
Karlsruher Group
(Germany)
Munich Reinsurance Company
(Germany)
As part of the reorganisation of their shareholdings, Munich Re will take
over Allianz's 36.1% stake in Karlsruher with effect from July 1, 2002,
thus increasing Munich Re's share to 90.1%. As a result, Karlsruher will
be integrated into Ergo, Munich Re's main primary insurance group
July
Plus Ultra C.A. de
Seguros y Reaseguros
(Spain)
Groupama
(France)
Groupama announced plans to acquire Plus Ultra for Eur246 million
from Aviva (UK), which said that it would continue to build its Spanish
life assurance business through Plus Ultra Vida and its bancassurance
links with Spanish banks
July
Storebrand
(Norway)
(in respect of its
non-life operations)
Den norske Bank
(Norway)
DnB and Storebrand revealed they would divest their non-life operations
as part of a bancassurance merger deal. In the event, the merger talks
collapsed. But analysts say that a breakdown could open new opportunities
for both companies: DnB would be free to pursue a merger with Union
Bank of Norway and Storebrand could become a takeover candidate by a
foreign bank
July
Naviga
(Belgium)
SMAP - Societe des Administrations
Publiques (Belgium)
CMB, the Belgian shipping company has decided to sell its insurance
subsidiary, Naviga, subject to regulatory approval
Marine
The prolonged soft market up to the end of 2000, the record losses in 2001,
including the events of September 11, and the poor investment returns as equity
markets began to decline in 2000, have caused the insurance and reinsurance
companies to reassess their exposure to risks, to withdraw capacity from certain
types of business, and to strengthen their reserve provisions and their
balance sheets.
These factors are reflected to a large extent by the mergers & acquisitions and
other corporate movements during the period under review, and this section also
captures new capital entering the market, or existing participants increasing their
capital base, to take advantage of the now prevailing hard market environment.
2002
Target
Buyer
Details
Feb
ABA Seguros
(Mexico)
GMAC Insurance Holdings
(US)
GMAC Insurance Holdings, a subsidiary of General Motors, completed
the acquisition of motor insurer ABA Seguros, giving the company access
to the Mexican market. ABA Seguros underwrote more than USD200
million in premiums in 2001 and has 35 offices throughout Mexico
MBf Insurans Bhd.
(Malaysia)
QBE Insurance
(Australia)
MBF Capital Bhd. Malaysia, announced that the proposed merger
between its wholly-owned subsidiary MBf Insurans Bhd. and QBE
Insurance (Malaysia) Bhd. had been approved by the regulatory
authorities. The merger would involve the transfer of MBf Insurance's
general insurance business to QBE (M) and subscription of new shares
as a result of which MBf Insurance would have an equity interest of
49% in QBE (M)
Feb
Feb
Amanah General
Insurance
(Malaysia)
Tokio Marine and Fire Insurance
Co., Ltd
(Japan)
Tokio Marine and Fire Insurance Co., Ltd. acquired this Malaysian
non-life insurer for Yen3.5 billion as part of its expansion in Asia
Feb
CGNU (UK)
(in respect of its
Portuguese general
insurance operation)
Ergo Group
(Germany)
CGNU agreed to sell its Portuguese general insurance operation,
(which had gross premiums of Eur21 million as at December 31, 2000
and a net asset value of Eur4.6 million), to Victoria Seguros, a subsidiary of the
Ergo Group, itself a subsidiary of Munich Re
Feb
Hermes
(Germany)
Euler
(France)
Allianz agreed terms for the proposed merger of its two credit
insurance operations, Euler and Hermes. Euler, owned by AGF, in which
Allianz is the majority shareholder, will buy 97.3% of Hermes for
Eur535 million, valuing the company at Eur550 million. More than half
of the operation is to be financed through debt; a capital increase is to
be carried out, and "self-controlled shares" will also be sold. The
remainder will be covered by cash deriving from a distribution of Hermes
dividends. On completion, AGF will control 56% of the new group,
"Euler & Hermes", with Allianz having a 10% stake. “Self-controlled
shares" are to be reduced to about 2%, and 32% of the capital is to
be floated
Royal Sun Alliance
Personal Insurance
Co (US)
Connecticut Specialty
Reinsurance Co (US)
Axis Specialty Limited
(Bermuda)
This sale forms part of a series of disposals by RSA to raise an estimated
£800 million. The two companies will be renamed Axis Specialty
Insurance Co and Axis Specialty Reinsurance Co. Axis Specialty Insurance
will write business on a surplus lines basis in 38 states and Axis Specialty
Re will be licensed to write insurance and reinsurance in all 50 states,
the District of Colombia, and Puerto Rico
March
Reinsurance terms were sharply increased for 2002: retentions increased by
substantial amounts, premiums rose and exclusion clauses were created and/or
reintroduced. The increased retentions were not tested until late September and
early October, when, in a two-week period, the following losses occurred:
–
The Mitsubishi's Shipyard in Japan had a massive fire on the "Diamond
Princess", causing a loss suspected to be up to USD300 million.
–
The "Hual Europe" (owned by Leif Hoegh) grounded and was declared a Total
Loss (USD55 million Hull & Machinery and Increased Value combined) and a
potential Cargo loss of up to USD40 million.
–
The "Limburg" tanker was attacked outside Yemen and has incurred damage
(classified as War in the Marine market) of up to USD30 million.
–
Hurricanes Isidore and Lili have also wrought damage to jack-up rigs
(towards USD100 million) and to Casino Boat "Treasure Bay", valued at
USD18.5 million, resulting in a Total Loss.
In the context of the worldwide catastrophe reinsurance market these amounts
may appear unsubstantial, but in the context of a world-wide bluewater (including
building risks), premium income of, say, USD3 billion, the Mitsubishi loss alone
represents up to 10% of this premium. A very significant amount indeed!
The impact of these losses has been felt broadly. The Japanese, London and
Norwegian Hull markets have been hit hard, but not as hard as Marine Reinsurers,
whose involvement on the Japanese Pool and other prominent reinsurance
placements has concentrated the losses into the hands of a few carriers.
The underwriting results of marine reinsurers were supposed to revert to profit in
2002 following on from the miserable 2001, with the combination of better
original insurance terms improving the smaller proportional treaty portfolio, and
the more stringent terms producing a choice return on the non-proportional
Excess of Loss business. Excess of Loss, however, operates to its own timetable:
results may be mitigated by higher retentions and enhanced premiums (along with
reinstatements), but is always vulnerable to the extra ordinary loss. The Mitsubishi
shipyard loss is certainly extra ordinary in the context of Marine Hull values:
approximately 95% of all bluewater vessels (by insured value) are valued at less
than USD50 million. Any Marine Hull Loss over USD50 million, let alone two such
losses, will inevitably have a disproportionate effect on reinsurers.
Reinsurers are also incurring higher costs to buy their own retrocessional
coverage. The remedial action imposed by retrocession underwriters for 2002
meant increased premiums on the one hand, but also higher retentions, which
have ensured that this market should not be greatly affected by recent losses.
Reinsurers are likely to be charged more in 2003, but will have received little
benefit from their protections in 2002.
Therefore, reinsurers are likely to offer yet more restrictive proportional treaty
coverage, although current underwriting guidelines from insurers should make
proportional coverage more practicable for 2003. In respect of Excess of Loss,
reinsurers will probably acknowledge that a lot of the remedial work was applied
for 2002, with the premium and retention increases, but will still be seeking
higher premiums. Renewals will be based on a reasonable increase for all, but
with a specific increase to apply to reinsurers with losses.
The list of clauses is likely to extend to an amended radioactive exclusion clause
and a bio-chemical / electromagnetic weapons exclusion, which should plug any
loopholes between Marine and Non-Marine reinsurance wordings. Long-term
Cargo storage is also under scrutiny, and exclusion clauses are being proposed to
try to reposition the storage into the Property market, which will constitute a
substantial change in practice and in mindset for the Marine Cargo market.
Marine Reinsurance is closely linked to the fortunes of the Marine insurance
market. In recent years, the reinsurance market has reacted severely to the adverse
results, whereas the Marine insurance market has adopted a more pragmatic
approach to remedial action.
Introduction
Marine Liability
These different speeds are creating some real business difficulties for insurers, and
below is a brief summary of how each class of Marine business is reacting:
Marine Hull
In September 2002, Hull underwriters were applying a 20% - 25% cash increase
for loss-free accounts; following the losses these base rises are up to 35%. Adverse
results are being treated harshly and rises of 100% or more are not uncommon.
Deductibles are generally not changing unless they are clearly below average.
Marine War
The immediate response to the events of September 11 was to increase prices
across the board for both Marine Hull War and Cargo War. All shipowners were
charged large increases, and Passenger Vessel owners, being potentially high
profile targets, incurred still higher rates. These Hull War rates have generally
remained steady since then with any inclination by insurers to reduce the rates
being stemmed by the highly publicised "Limburg" terrorist loss.
The global insurance and reinsurance industry is facing the January 1, 2003
renewal season having lost USD175 billion of capital over the last two years. This
unprecedented erosion of capital has arisen from a combination of underwriting
losses, under-reserving on earlier years, and investment losses. Partially offsetting
this loss of capital, the global insurance and reinsurance industry has attracted
over USD40 billion of new capital, most of it raised following the World Trade
Center disaster.
Protection and Indemnity (P&I)
Despite an improvement in underwriting conditions, investment losses and the
need to boost reserves on past years have overwhelmed reinsurers' results for the
first two quarters of 2002. Allied with many reinsurers' need to raise additional
capital, these poor operating results are having a severe impact on many quoted
reinsurers' share price. Whilst there are numerous specific reasons behind any
individual company's share price performance, it is notable that US and Bermudan
companies with access to the broader US capital markets, and a longer history of
active capital and shareholder management, are performing better than European
reinsurers. Of greater concern to those companies still seeking to raise additional
funds, are the growing signs that capital markets' appetite to invest in the
reinsurance industry is reducing. This trend is only likely to be reversed once
reinsurance companies can demonstrate an ability to earn the returns capital
market investors require, and share price performance improves.
As the P&I Clubs suffer losses to their equity portfolios, coinciding with a time of
poor results, the pressure is on the underwriting to stabilise reserves. The P&I Clubs
have recourse to both advance and supplementary calls to balance their accounts,
but the size of these calls has a bearing on the competitiveness of the Club and,
hence, on its long-term viability. During this year’s renewal, increases are likely to
be substantial and will incorporate an additional provision to allow for a big
increase in their reinsurance costs. For reinsurance, The International Group of P&I
Clubs has enjoyed preferential terms from the market (the three-year deal
concludes in February 2003), as the collective reinsurance placement has been
broadly arranged with the insurance market allowing this substantial
"reinsurance" contract to sidestep the demands of the retrocessional market.
Unlike previous hard market cycles, the global reinsurance industry is facing an
unprecedented range of pressures which require immediate action to rectify. For
example, there is a definite need to overhaul investment policies and stem any
further losses. European-based companies, who invested more heavily in equities
during the last few years, are comparatively more exposed than their Bermudan
and US counterparts in this regard. However, in spite of the fact that some
companies are less exposed to equities, all insurance companies are exposed to
increased defaults in their corporate bond portfolios. On the underwriting side, the
view is that reinsurers need to ensure that they will achieve acceptable margins
going forward, and, in many cases, such margins will have to be wider than
previously targeted to offset poor investment results.
During 2002, rises of 20% were broadly applied, and whereas insurers will be
looking for a similar percentage increase for 2003, the availability of capacity will
probably mean that the rises will be closer to 10% than 20%. Closely related to
P&I, the Marine Liability market is always keeping a wary eye on the fluctuations
of the reinsurance market to balance its portfolio.
In such difficult times, rating agencies have not been slow to react with
downgrades far outweighing any stable, let alone improved, ratings. Again this
situation is unlikely to be reversed until such time individual reinsurers can rebuild
their balance sheets and show the same degree of capital flexibility they enjoyed
in the late 1990's.
Marine Cargo
Local, indigenous Cargo business is generally profitable and continues to be
underwritten according to local requirements. The London Cargo account, with its
higher limits, specialist treatments and bespoke needs, saw a general increase of
20% in 2002 and anticipates a further 15% increase in 2003. The larger limits are
proving more challenging as capacity for big volume placements has significantly
shrunk. Standalone storage can be problematic in view of the uncertainty of
Reinsurers' approach for 2003.
With respect to Cargo War, the immediate reaction was to increase rates for the
War & Strikes coverage and to focus closely on the extent of the onland (Storage)
coverage. This gave rise to the Termination of Transit (Terrorism) Clause, which
defines the length of coverage after arrival at port or warehouse etc., and, again,
the almost universal application of this clause in reinsurance contracts has meant
that this guideline is holding strong and will continue to do so for 2003.
As the forthcoming January 1, 2003 renewal approaches, it is clear that
reinsurance buyers must continue to budget for increased reinsurance costs and
restrictions in cover. There is no sign of an end to the hard market, but the degree
of hardening will vary according to the class. With this background, the key issue
for primary insurance companies is how quickly they can achieve improvements in
their own direct underwriting, and how effectively they can manage the gap
between reinsurers' requirements and their own clients’ ability to pay. Primary
insurance companies who are able to manage this difficult transition will prosper,
but those who are not will face a difficult 2003 with continued pressure on their
own margins and capital base.
November 2002
Willis Limited
Ten Trinity Square
London EC3P 3AX
Telephone: +44 (0)20 7488 8111
Website: www.willis.com
REI/0924/12/02
A member of the General Insurance Standards Council

Reinsurance Market Review

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