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					Midwest Actuarial Forum
March 22, 2005

State of the Reinsurance Market



Bill Godfrey
Reinsurance Market Review




    Security   Assessment
    Renewals    in 2005




Guy Carpenter                2
A.M. Best Rating Distribution




                                Source: A.M. Best

Guy Carpenter                                       3
S&P Rating Migrations Among the
Top 150 Reinsurers*




                          Source: Standard & Poor’s   4
Guy Carpenter
S&P Outlook on Reinsurance Sector


   September 13, 2004 – Revised outlook to stable from
    negative
   Expect downgrades AND upgrades will be limited
   Potential for more reporting of prior-year reserve
    development continues to weigh on ratings of older
    reinsurers
   Concern over Asbestos reserving remains –
    Reinsurers not recognizing what primary insurers are
   Negative on Rating related triggers
   Diminishing Parental Support
   Outlook for 2004 and 2005 Strong Profitability

Guy Carpenter                                              5
Rating Changes Since September 11, 2001
for Top Ten Reinsurers




                        U – indicates under review

 Guy Carpenter          NR3 - indicates rating procedure inapplicable   6
Combined Ratio
U.S. P & C vs. Reinsurance Industry




Guy Carpenter                         7
Global Insured Catastrophe Losses




Guy Carpenter                       8
Reserve Strengthening: 5 Selected
Groups

       Group    Year-End 2003        Reserve            Reserve
                 Gross Loss     Deficiency During      Deficiency
                  Reserves             2002            During 2003
 AIG               56.1B              4.8B                  2.0B
 ACE               27.2B              2.9B                  0.7B
 Chubb             17.9B              1.4B                  0.6B
 CNA               21.3B              0.2B                  6.9B
 St. Paul          60.1B*             5.9B                  2.0B
 Travelers
 Total            $182.6B            $15.2B               $12.2B


 *Estimate

                                                    Source: U.S. SEC Filings
Guy Carpenter                                                                  9
Reinsurance Industry Reserve Additions

 The impact of U.S. casualty reinsurance business from 1997-2001


 2003 Examples include:

                             Additional Development    2003 Combined Ratio
     Employers Reinsurance Corp     $ 355 million            105.1%
     American Re-Insurance Co       $ 546 million            108.4%
     General Reinsurance Corp       $ 402 million            103.6%
     Swiss Re America               $ 903 million            138.5%
     Transatlantic Re               $ 298 million             96.4%
     XL Reinsurance America Inc     $ 289 million            151.3%
                                    $2,793 million




                                                      Source: U.S. Statutory Filings
Guy Carpenter                                                                          10
Reinsurance Industry Reserve
Additions
 The impact of U.S. casualty reinsurance business from 1997-2001


    2004 First 9-months updates:
                               Additional Development         Combined Ratio
      - American Re-Insurance Co      $ 201 million               114.3%
      - Employers Reinsurance Corp $ 473 million                  116.2%
      - General Reinsurance Corp      $ 474 million               112.6%
      - Swiss Re America              $ 134 million               108.0%
      - Transatlantic Re              $ 157 million               102.0%
      - XL Reinsurance America Inc $ 50 million                    94.4%
                                      $1,489 million


Despite these actions, have reinsurers fully accounted for reserve additions taken
by primary companies during the last 30 months?




                                                          Source: U.S. Statutory Filings
Guy Carpenter                                                                              11
S&P Global Reinsurance Industry
Combined Ratio Versus Return on Revenue




Guy Carpenter                             12
US Reinsurance Composite
Return on Equity (Surplus)




Guy Carpenter                13
U.S. Reinsurance Composite
RBC Composite Weighted Average




Guy Carpenter                    14
U.S. Reinsurance RBC
Composite Companies - 2003




Guy Carpenter                15
US Reinsurance Recoverables
 from Unaffiliated Reinsurers
    Reinsurance Recoverables on:
                            2003          2002
    Paid Losses            $17,931 M   $16,833 M
    Unpaid Losses           79,945 M    77,490 M
    IBNR Losses             79,090 M    78,146 M
    Sub-total              176,966 M   172,469 M
    Funds Withheld         -20,706 M    -18,920 M
    Total Recoverable     $156,260 M   $153,549 M




 Guy Carpenter                               Source: A.M. Best   16
2003 US Reinsurance Recoverables


     Reinsurance Recoverables                $156 B


     Admitted Assets               $1,174 B
     Reins. Recov. / Adm. Assets                13%


     Industry Surplus               $354 B
     Reins. Recov. / Surplus                    44%



Guy Carpenter                                 Source: A.M. Best   17
U.S. Reinsurance Recoverables


                Dependence of U.S. Insurers on Reinsurance
                      (recoverables as percentage of surplus)




Guy Carpenter                                                   Source: Standard & Poor’s   18
An Unprecedented Convergence

   Adverse loss development in commercial lines for the last 10 accident
    years
   Adverse loss development for asbestos and pollution
   Increased severity and frequency in short tail lines
   September 11, 2001 - correlated losses from one event
   Increase in reinsurance recoverables
   Reserve gap (primary & reinsurers)
   Low interest rates and lack of investment income
   Drop in asset values due to equity market volatility
   Regulatory and rating agency scrutiny following a climate of corporate
    scandals
   Prolonged soft market in insurance and reinsurance

                                                           A perfect storm?
Guy Carpenter                                                                 19
Reasons to be optimistic...


   In the end, the insurance and reinsurance mechanism has
    effectively done what it is supposed to do
     – The industry has absorbed the losses from
         WTC / 9-11
         asbestos


         pollution
         and many other systemic threatening situations
   Corrective measures are in place
    – An increased focus on underwriting disciplines
    – Adequate pricing
    – New risk management techniques

Guy Carpenter                                             20
New Capital
2001 - 2003 Start-Ups

                                    Initial Capital
             Name            Year
                                    (US$ billions)
Allied World Assurance Co.   2001         1.5
Arch Re                      2001         1.0
AXIS                         2001         1.7
Catlin Insurance Co.         2002         0.4
DaVinci Re                   2001         0.4
Endurance                    2001         1.2
Montpelier Re                2001         0.9
Olympus Re                   2001         0.5
Platinum Underwriters        2002         1.0
Quanta                       2003         0.6
Wellington Re (now Aspen)    2002         0.3
Total                                     9.5



Guy Carpenter                                         21
Agencies issue ratings to start up companies

                          Start Up Credit Ratings


Reinsurer                 Standard & Poor's         AM Best & Co.
 Allied World Assurance             NR                    A+

 Arch Re                            NR                    A-

 Aspen Re                           A                     A

 AXIS                               A                     A

 Catlin Insurance Co.               NR                    A

 DaVinci Re                         A                     A

 Endurance                          A-                    A

 Montpelier Re                      A-                    A

 Olympus Re                         NR                    A-
 Platinum Underwriters              NR                    A

 Guy Carpenter                                                      22
Exited 2001 - 2004




Guy Carpenter        23
Major Reinsurance Centers:
Financial State in 2004

   Bermuda
    – Profitable
    – Hurricanes impact reduced by FHCF
    – Exposed to new Florida “take-outs”
   US
    – Profitable
   UK
    – Profitable
    – Lloyd’s reducing capacity in 2005
Guy Carpenter                              24
Reinsurance Market Review




    Security   Assessment
    Renewals    in 2005




Guy Carpenter                25
2005 Renewals


   Property
   Casualty




Guy Carpenter   26
U.S. – Cat Property Rate On Line Index*




   * 1989=100. Index constructed by Guy Carpenter & Company, Inc.


Guy Carpenter                                                       27
       Insured Losses from 2004 Hurricanes
                     $ billions


                     Charley Frances                     Ivan        Jeanne

      U.S.              $6.8             $4.4            $6.0           $3.2

 Caribbean              $0.1             $0.5            $1.5           N/A

     Total              $6.9             $4.9            $7.5           $3.2

US data for Charley, Frances, Ivan and Jeanne from PCS. Other figures from model estimates.

Guy Carpenter                                                                       28
U.S. Property Catastrophe
2005 Renewals
    Price
      – Nationals pricing about flat.
      – Average ROL down marginally for about 3% for regionals
      – Florida exposure a concern (developing issue)
      – Market most competitive at upper layers
    Retentions and limits stable
    Horizontal exposures a concern (active 2004 hurricane and typhoon seasons)
      – Pricing high
    Terms and Conditions
      – Some extension from 72 hours to 96 hours
      – Terrorism - following TRIA.
           Personal lines get full cover
           Commercial lines get cover for “domestic” terror.
      – Brushfire defined by location, not ignition source
    Capacity
      – Generally available. Decrease in oversubscriptions from 2004
Guy Carpenter                                                               29
U.S. Property Renewals, 2005
(Excluding Catastrophe)

   US Property:
    – Per risk
       Pricing flat or down
       SPI growth implies significant drop in contract rates
       Reinsurers concerned over softness in primary
        property market
    – Margins in pro rata renewing at expiring
       Florida exposure a concern. Aggregate caps
        imposed.
    – Capacity adequate

Guy Carpenter                                                   30
2005 U.S. Casualty Renewals


   Workers Compensation
   Medical Malpractice
   Directors & Officers
   Errors & Omissions
   Employment Practices
   Umbrella and Excess



Guy Carpenter                 31
2005 U.S. Casualty Renewals
Workers Comp

   Primary pricing strong
    – Abundant capacity in catastrophe layers
    – Market improved , but still firm for single
      claimant exposures
   Terror issue:
    – In-depth evaluation of exposure
    – Non-certified free (ex NBC)
   Security concerns

Guy Carpenter                                       32
2005 U.S. Casualty Renewals
Medical Malpractice

   Primary market recovering, but 20 states in crisis
   Pricing main issue, not capacity (new Bermuda capacity)
   Reinsurance rate stable (unless unfavorable loss history)
   Problem areas:
     – Start-ups
     – Pro rata medical professional liability
     – Tort terrors
        Cook County IL, South Florida



Guy Carpenter                                                   33
2005 U.S. Casualty Renewals
Directors & Officers

   Imbalance between soft primary market and firm
    reinsurance market
   Rates declining on primary business
   Reinsurance firm because:
    – Exits from the line, notably Converium
    – Security issue reduces potential reinsurance panel
    – Heightened concerns on Financial Institutions
    – Rising settlement values
   Ceding commissions under fire as underlying premium
    viewed as inadequate
   Return of loss ratio caps and loss corridors
Guy Carpenter                                              34
2005 U.S. Casualty Renewals
Errors & Omissions

   – Primary market expected to soften in 2005
   – A diverse line, with varying market conditions
   – At January 1, 2005, ceding commissions and terms
     dependent on type of business, loss experience and
     portfolio size
   – Difficult lines include:
       Large Accountants
       Large Lawyers
       Project Architects & Engineers


       Large Technology E&O
       Start-ups pushed to Quota Share

Guy Carpenter                                             35
2005 U.S. Casualty Renewals
Employment Practices

   – Mild softening of of the primary market in 2004
      and continuing into 2005
   – Reinsurance renewals tend to be at expiring
   – Increasing concerns by reinsurers on third party
      EPLI claims




Guy Carpenter                                          36
2005 U.S. Casualty Renewals
Umbrella and Excess

   Primary market
     – Flat to single digit increases in rates in early 2004
     – Single digit decreases to flat later in 2004
     – Some classes saw 10-15% decreases
     – Decreases in single digit range anticipated in 2005

   Reinsurance market
     – Reinsurers do not view original rates as redundant
     – Reinsure pricing also reflecting fear of inadequacy, and possible
       recurrence of poor 1997-2001 years
     – Quota share:
         Increased pressure for ceding commissions on a cost plus basis.
         Pressure to minimize override in ceding commission
     – Pressure from reinsurers for mold, asbestos, silica, tobacco and terror
       exclusions
Guy Carpenter                                                                    37
Summary


   Finances of reinsurers improved
   New non-legacy capital expanding in capacity and
    scope
   Moderate softening at reinsurance renewals in
    January, 2005
   TRIA and market security over-riding concerns




Guy Carpenter                                       38
Midwest Actuarial Forum
March 22, 2005

State of the Reinsurance Market



Bill Godfrey

				
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