Reinsurance Focus

The International Association of Insurance Supervisors (IAIS) — a consortium of insurance and reinsurance regulators and supervisors from 190 jurisdictions around the world — had its tri-annual conference and general meeting in Dubai on October 29, 2010. The conference featured discussions about regulatory reforms in light of continuing global financial crises. The IAIS adopted a “Strategic Plan and Financial Outlook” for 2011 to 2015, to ensure resources are in place to strengthen overall supervision. It also approved a two-year roadmap to ensure timely progress toward high level goals. The IAIS will undertake research and analysis of systemic risk in the insurance sector, and the means by which to assess those risks from qualitative and quantitative standpoints. It adopted eight “supervisory papers,” which revised the insurance core principles with supporting standards and guidance materials. The IAIS also announced the signing of two more signatories to the IAIS Multilateral Memorandum of Understanding, the members of which voluntarily agree to be bound by certain minimum regulatory standards (no U.S. authority has yet signed). For more details, see the attached Press Release.

This post written by John Pitblado.

Recently, Guy Carpenter issued a World Catastrophe Reinsurance Market report for 2010. The report noted that 2010 has been an exceptionally difficult year for the reinsurance industry noting the Chilean Earthquake and the BP Deepwater Horizon oil spill as particularly costly events. However, even with such events (and an active hurricane season approaching), reinsurance costs declined in 2010 roughly 6%, and the reinsurance market was overcapitalized by 8%. Thus, while the market has been able to cope with the disasters of 2010, a difficult second half of the year could bring about a significant change in the market. The outlook for the catastrophe bond market is similarly dependent on the second half of 2010.

The Reinsurance Association of America also recently released a comprehensive summary of the 2009 data for underwriting and operating results of major property/casualty reinsurers and the US reinsurance market (available for purchase on the RAA’s web site). The RAA also published a survey of the first six months of 2010 underwriting results.

This post written by John Black.

Standard & Poors, in addition to providing ratings of reinsurance companies, also provides free articles on various aspects of the reinsurance market. These articles often include significant financial analysis and illustrative charts. To access these articles, go to S&P’s Home Page and search for “reinsurance.” You will be asked to register as a user for free access to the site’s content, and we are unable to provide direct access to the articles. There are two recent articles that may be of interest to our readers:

• Fall in Traditional Reinsurance Pricing Outpaces Decline in ILS Pricing – In an article that is somewhat inconsistent with the ILS reports of some involved in the insurance-linked securities markets, S&P opines that the decline in the price of traditional reinsurance for cat risks is likely to dampen the issuance of ILS as an alternative to traditional reinsurance over the next 12-24 months.
• The Sluggish Economic Recovery and Emerging Regulatory Changes Are Reshaping the Life Reinsurance Landscape – This article discusses the options of life reinsurers for capital raising and deployment in light of Solvency II, the decline in life reinsurance cessions and limited capital resources.

This post written by Rollie Goss.

The Global Reinsurance Market Mid-Year Report recently released by the International Association of Insurance Supervisors (“IAIS”) focuses on the extent to which regulators of insurance and reinsurance companies are gathering data and engaging in macroprudential analysis of the reinsurance sector. The report contains three parts: (1) a discussion of what a macroprudential surveillance approach means in this context; (2) examples of such activities in the United States (through the NAIC), India, Europe and globally through the World Bank and the International Monetary Fund; and (3) a “case study” of such surveillance efforts. It is interesting that the fragmentation of regulation in the United States among the states is viewed as beneficial to this analysis, because it illustrates a possible global model in which one entity (the NAIC in the U.S. model) would gather data and provide stress testing on a broad scale across multiple jurisdictional lines. To some, this may overstate the NAIC’s activities in the reinsurance sector. The unspoken assumption is that the IAIS would serve that global role, and the report touts its data gathering activities as a first step along this path.

Highlights from the report:

• While the meaning of macroprudential surveillance in insurance and reinsurance varies by jurisdiction, such activities are geared towards identifying, assessing and monitoring risks to the financial system. These activities include gathering and analysis of macroeconomic and financial market information, and of how these data interact with each other.
• The current global financial crisis has highlighted the complexities inherent in capturing and making sense of risks that evolve rapidly in time, and cut across geographical boundaries and financial sectors.
• Although most supervisory authorities do not have a formalized definition of macroprudential surveillance, nearly all of them carry out some such activities.
• The two most prevalent macroprudential surveillance activities are insurance market analysis and analysis of the impact of macroeconomic variables on the insurance market. In both instances, the focus tends to be on the analysis of domestic data, with international data analysis receiving comparatively less attention.
• Under 50% of regulators carry out insurance market-wide stress testing; however, approximately 20% of those who do not stress test their markets have plans in place do so within the next 12 months.
• Macroprudential surveillance activities appear to assist regulators in: (1) identifying and assessing relevant changes in insurance markets as well as macroeconomic factors affecting these markets; (2) providing early warning signals of emerging risks, and enabling prompt action; (3) providing value-adding information for forward-looking monitoring; and (4) identifying futures issues that may affect the insurance market.
• There is limited information available on insurance-specific macroprudential surveillance activities at the global level collected and compiled by insurance regulators.

This post written by Rollie Goss.

Aon Benfield Securities has issued its third-annual review of the insurance-linked securities (ILS) market. The review describes the growth that has occurred in the ILS market for the year ending June 30, 2010, including 20 new transactions representing a volume of $4.6 billion. The review also provides a positive outlook for the upcoming year.

Also included in the Aon Benfield review are Aon Benfield’s newly-created indices for its All Bond, BB-rated Bond, U.S. Earthquake Bond, and U.S. Hurricane Bond categories of the ILS market. The indices reflect strong investment returns for 2010, including returns of nearly 13% for both the All Bond and the BB-rated Bond indices, over 15% for the U.S. Hurricane Bond index, and over 7% return for the U.S. Earthquake Bond index. Aon Benfield also provides analyses of the catastrophe bond market and the non-U.S. ILS market, as well as a panel discussion of the ILS market with five active investors.

A report was also issued by Swiss Re that focuses on the ILS market for the first half of 2010. The report provides an overview of new issuance for the first half of the year – which had a volume of $2.5 billion and was comprised of 85% exposure to U.S. Wind risk. Swiss Re’s report also provides analysis of catastrophe bond maturities, trading in the secondary market, and a breakdown of the 3.3% return of its Swiss Re Global Cat Bond Index. Swiss Re’s report also spotlights its recent placement of notes covering U.S. hurricane and earthquake risk for Allianz, and a breakdown of various ILS sector data. Similar to the market review of Aon Benfield Securities, Swiss Re provides a positive outlook for the ILS market.

This post written by Michael Wolgin.

In response to the financial crisis, eleven chief executive officers have formed the Global Reinsurance Forum (the “Forum”), which seeks to, among other things, represent industry positions before regulatory and supervisory organizations and advocate for a global, reasonable framework for the growth of reinsurance markets. Membership to the Forum will be limited to the chief executive officers, and business issues, such as prices, terms, and conditions, will not be discussed. A press release describes this new organization.

This post written by Dan Crisp.

Observant readers will have noticed a new addition to the right sidebar of Reinsurance Focus titled Reinsurance Market. In discussions with our clients, many have mentioned the higher reinsurance rates this season, and the particular difficulty in obtaining acceptably priced reinsurance for cat risks. Although the cat bond market basically dried up during the second half of 2008, early 2009 has seen a number of cat bonds successfully issued and sold, using a somewhat different model and cost structure than before. Since our tracking of how many readers view each of our posts reveals that a large number of our readers are interested in such topics, we have added this new area to provide links to publicly available studies and analysis of the reinsurance market and cat risk bond market. It is not our intention to provide “newsy” items in this area, but rather to bring to the attention of our readers particularly thoughtful reports and studies which might provide a basis for creative thinking to help get your company or clients through difficult times. Let us know what additional types of information might be useful to you.

This post written by Rollie Goss.

If you are looking for news and research on the reinsurance market or the capital markets, you may wish to check out a web site maintained by broker/intermediary Guy Carpenter, called GC Capital Ideas. The site is presented in a blog-type format, and contains information with a financial bent, such as reinsurance rates, cat and other claims trends, and alternative risk transfer venues.

This post written by Rollie Goss.

The Benfield Group’s October 2008 research report entitled “Global Reinsurance: Capital Consequences – Billion Dollar Question” analyzes the impact of the 2008 hurricane season, the credit crisis, and the financial concerns over XL Capital and AIG on the global reinsurance market. The report states that reinsurers were well prepared for the hurricane season, and, while Hurricane Ike will likely end up as being one of the five most costly insured catastrophe losses, Ike will not be a market changing event by itself. The report then predicts that the 2008 investment returns for most reinsurers will be negative due to the effects of the credit crisis despite the majority of assets being invested in high-quality, fixed-income securities. Finally, the report lists concerns with XL Capital’s recent issues with capital adequacy and investment losses and with AIG’s issues, which include the possibilities of S&P downgrading Transatlantic Holdings (of which AIG owns 59%) and business formerly ceded to AIG being placed in the open market. The predicted result of the combination of these factors is that prices in the global reinsurance market will increase in 2009.

This post written by Dan Crisp.

On November 28, 2007, we reported on a dispute involving the sale by Conseco Insurance Company of two insurance subsidiaries to J. C. Penney. The post described a decision transferring a case pending in Conseco’s home venue of Indiana to California, where another action relating to the dispute was pending. Less than two months after the transfer order was entered, the parties filed a notice of settlement of their dispute. No details are available about the settlement. Conseco Ins. Co. v. J. C. Penney Life Ins. Co., Case No. 07-6901 (USDC C.D. Cal. 11/8/2007).

This post written by Rollie Goss.