“In general the reinsurers’ perception of the wider class of credit, political risk and surety insurance business is very positive, considering the seriousness of the downturn,” observes David Edwards, managing director, credit, bond and political risk team at Guy Carpenter, ahead of the reinsurance renewals season.
Between November 1 and January 1, 2011, insurers will be busy signing the bulk of their reinsurance treaties.
Since late 2008, the insurance market has been somewhat battered, initially from the huge influx of trade credit insurance claims stemming from the crash in western economies, and then a hit once more by a wave of political risk insurance payouts caused by problems in the emerging markets. The market is now watching to see to what extent reinsurers have adjusted their risk appetite following such market upheaval.
“Two years ago the scenario was threatening, both in terms of its frequency and the possibility of additional surprises on larger risks,” says Jan Mueller, managing director, credit, surety and political risk at one of the market leaders, Hannover Re, which increased its reinsurance volumes across those classes by nearly 80% from 2008 to 2010, mostly in credit insurance.
“We were hit quite significantly in late 2008 by the crisis, when the loss ratios and claims increased significantly, but only on the credit insurance side. Underwriters have very much tightened up since then, the loss ratios have normalised back to the pre-crisis level for the dominant insurers, and those surprises have not occurred, although you still cannot exclude the possibility,” he cautions.
“Initially there was distinct disappointment amongst the reinsurance community at the deterioration of the trade credit results.”
This theme is echoed by Phil Bonner, head of Aon Benfield’s Credit and Financial Risks team, who believes that “initially there was distinct disappointment amongst the reinsurance community at the deterioration of the trade credit results”.
He adds that part of this was because of the failure of a number of insurers to project their results accurately when the crisis was in its early stages. Subsequently “the dramatic reduction of projected loss ratios for business written in 2009 and 2010 has surprised the market”, he says.
“Credit insurance results have turned around very dramatically, swinging back to some excellent results and claims ratios in 2010,” agrees Thomas Lallinger, head of financial risk department at Munich Re, a reinsurance market stalwart over the past two decades, which earns a premium of around €500mn annually in the credit/surety/PRI classes.
However Lallinger underscores that some primary carriers “were more discriminate in their approach, whereas others carried out measures on a scorched earth basis, which left some of their customers feeling as if they had been led into the rain with no umbrella”.
He continues: “Credit risk underwriters have learned lessons, have enhanced their approach to internal risk management and underwriting, and will become more forward-looking in their credit limit decisions, bringing in early warning systems for clients, such as a six to 12 months outlook. They are all working on their pricing as well, moving away from the approach of standardised premium rates towards rating-based, risk-adequate, sometimes flexible premium rates.”
“2008 was one of the worst years ever, but we had retained a lot of our business, so most of the crisis losses stayed on our balance sheet.”
Reinsurers are very satisfied with the results performance of the world’s largest credit insurer, Euler Hermes, claims Benoît des Cressonnières, chief executive at subsidiary Euler Hermes Re. “2008 was one of the worst years ever, but we had retained a lot of our business, so most of the crisis losses stayed on our balance sheet. We increased the cession in 2009-10, and that will be a good year, helping reinsurers to maintain the very good level of profitability on the cycle from 2003,”
“The main players ultimately proved able to get their situation well under control,” echoes Thomas Rothenberger, head of credit and surety at Zurich-based Ariel Re, which began reinsurance operations in autumn 2009. He says Ariel Re has enjoyed “an excellent start to our credit and surety business in terms of number of clients and diversification across different markets, industry sectors and products”.
Ariel Re’s surety business has so far held up well during the crisis, according to Rothenberger. “While we have seen an increase in frequency losses in a variety of markets, we are not aware of major contractor defaults yet,” he observes. Bonner adds: “There is still caution in the market given the longer term nature of a business that pivots upon the construction sector.”
In the PRI market, where annual premia received by underwriters amount to around US$1bn, comprehensive PRI policies in emerging markets have been hit, especially by huge bank reschedulings in Kazakhstan and Ukraine. “Losses have come at an increased frequency, peaking in the second quarter of 2010, and now starting to recover,” Mueller points out. “Political violence claims have increased recently, especially in Thailand, causing some losses in the reinsurance market,” adds Alastair Mole, a member of the specialty reinsurance team at Miller.
Summing up, Kit Brownlees, managing director, political, project and credit risks at Arthur J Gallagher, stresses that “there was nervousness before last year’s renewals, but reinsurers have stayed with our market”. He comments: “This indicates that they understand that PRI and trade credit are mature markets, whereas 10 years ago they would probably have pulled back in similar circumstances.”
Based on these scenarios, optimism abounds that the reinsurance treaty renewals should proceed to the satisfaction of both sides. “Generally speaking – judging by the September talks in Monte Carlo and the discussions now – the market is not expecting a worsening in the terms and conditions of ceding companies,” suggests des Cressonnières at Euler Hermes Re. “The reinsurers are likely to be very much more accommodating in this renewal. There is no doubt in my mind that the market will be soft, after the good results generated by the big trade credit insurers,” says Guy Carpenter’s Edwards.
“Capacity is now available at surprising levels,” says Mueller at Hannover Re.
“Theoretically there is today much more reinsurance capacity available compared to a year ago.”
“Theoretically there is today much more reinsurance capacity available compared to a year ago. But we would hope to be remembered by the clients that we stuck with during the tougher times, when we were under all sorts of pressures.” In terms of cession, structures and conditions, “I believe early indications show that most cedants are not looking to make major changes to their reinsurance side,” he elaborates.
At Munich Re, “we expect the overall ceded volume to be more or less flat”, says Lallinger.
One of the major buyers, Zurich, has begun discussions with reinsurers, receiving very positive feedback, says Andrew Beechey, deputy regional manager for Zurich credit and political risk UK. “Recoveries have been strong, and all the claims issues from the crisis are now significantly behind us, so I think there will be competition from the reinsurance side this year.”
The seeds of a softer reinsurance market were sown during the 2010 renewals, when many participants were envisaging a capacity gap. “There were some significant surpluses of capacity in January 2010, quite simply because the outlook was improving,” says Edwards. “Reinsurers looked to maximise profits for 2011 and 2012, by committing capacity earlier that would bring a greater share of the profits when the best years return.”
Also in the cedants’ favour, says des Cressonnières, is the lack of any catastrophe-type disasters in the general property/casualty market. “Credit insurance accounts for no more than 4% of the overall premium in reinsurance, and so can be impacted by events in other lines of business. Except Chile, there has been nothing recently, although the hurricane season is not yet over.”
One clue to the market direction came with the April/May 2010 treaty renewal for one of the London market’s newest insurers for political risks, terrorism and trade credit, Marketform. The company was “very pleased” with the outcome, highlights Nicholas Robinson, political risks and trade credit underwriter, Syndicate 2468, Marketform Managing Agency. “We were successful in increasing our per risk line for contract frustration and political risks to US$20mn and increasing the tenor on all risks, including trade credit, to 60 months,” he says, describing an expanded reinsurance panel comprising “experienced global players from Europe, Bermuda and the US”.
More significantly, the leading trade and political risk insurer Chartis (formerly AIG) concluded an oversubscribed reinsurance treaty on June 1, says Ray Antes, senior vice- president, political risk. “It’s a very healthy reinsurance market,” he comments.
“At this stage it would seem unlikely that the reinsurance market will not be able to provide whatever capacity is needed.”
A market consensus would appear to be that the economic crisis initially triggered a general reduction in trade and investment-related capacity provided by primary insurers, and consequently in the needs passed onto the reinsurance market. “The improvement in portfolio results and general risk management means that an increase in exposure should be seen during 2011. At this stage it would seem unlikely that the reinsurance market will not be able to provide whatever capacity is needed,” contends Aon Benfield’s Bonner.
However, Marketform’s Robinson stresses that reinsurance negotiations require hard work. “While we were able to expand the programme this year, it wasn’t simple and, in general, any amendments to plain vanilla programmes from cedants requires considerable work before such requests can be considered,” he says.
Edwards describes a core market of 30 reinsurers that now cover the broad credit/surety/PRI class, led by Munich Re and Hannover Re, and then many of the large European-based reinsurers. “There has been a change in the way that panels are constituted,” he says, explaining that a broader span of reinsurers are now used by cedants who remember Swiss Re’s dramatic capacity reductions in 2009.
That event “triggered a need for further diversification of reinsurance panels”, says Rothenberger at Ariel Re. “Reinsurance is an effective and efficient way of capital management, and so diversification will continue to be a theme among primary insurers seeking to address risk management issues.”
Des Cressonnières notes that Euler Hermes had some 20 different reinsurers for its 2010 treaty and expects to replicate that in 2011. “Some new players have knocked at our door, but we are looking for long-term partnerships, as well as reliable expertise, and, from this perspective, are happy with our existing reinsurers.”
“Zurich has now become the primary venue for reinsurers of this business, with at least nine companies active in this class.”
The paradigm shift has nonetheless been underlined by the entrance of two new reinsurance names in 2010: Catlin Re & Novae Re, which are both based in Zurich and employ former Swiss Re professionals. “Zurich has now become the primary venue for reinsurers of this business, with at least nine companies active in this class,” notes Bonner.
Welcoming the incoming entrants is Richard Wulff, group general manager, credit and surety, at QBE Insurance Group, which annually renews its treaty on January 1 to seek mainly excess of loss cover using a “dozen or so first-class reinsurers”. Wulff contends that the new entrants allow the market to function more efficiently than the oligopoly state of some years back. He points out that “these are staffed by already renowned names in the market, who have the contacts and technical knowledge to make the capacity sustainable”.
A concern for Lallinger at Munich Re is that some of the new reinsurance capacity is “from non-sustainable, somewhat innocent sources that have seen the good results”. He outlines a scenario where terms and conditions could be pushed down again, “making the market awfully soft very fast, from which position another crisis would hit hard on those of us who still want to be there in 20 years time”.
Capacity issues notwithstanding, Ariel Re’s Rothenberger argues that a greater level of technical expertise and resource is needed among reinsurers to support a healthy pipeline of large infrastructure projects, especially in Brazil and other Latin American markets. “Some of these big projects need US$500mn to US$1bn in bonded insurance. There is probably just enough capacity on the treaty side, but I don’t see sufficient risk appetite and reinsurance know-how for more complex facultative reinsurance structures, in particular on peak names,” he says.
Lallinger believes a greater focus upon large single buyer risks in several countries is also necessary. “You only have to look at the intended takeover of Germany’s Hochtief by Spain’s ACS for an example,” he says. “Bond and surety markets are very exposed to these companies, for which the extremely high capacity and limits are a challenge for everyone. There are very few players in the reinsurance market that can analyse those risks clearly.”
Reinsurers appear united in the view that the tighter underwriting shown since 2009 must be maintained. Hannover Re’s Mueller states that “the underwriters have been doing a pretty good job, but the environment is still challenging, and they need to keep their underwriting discipline”. The next step he recommends, “is to regain business and develop new business at a sufficient rate level”.
Another challenge for the entire industry will be to act earlier when the next cycle of high frequency losses manifests. “I believe primary and reinsurance underwriters could become stronger on working with their data and market indicators so as to make the product line less susceptible to shock events and increase the profitability over the cycle,” Rothenberger says.
The Solvency 2 capital adequacy protocol for the insurance industry may also bring changes if implemented, as planned, in 2012. “Some insurers may need more capital behind them; one consequence could be that reinsurance requirements increase as a mitigant,” forecasts Mueller.