Posted on 11 Jun 2009
Attendees at the Casualty Actuarial Society (CAS) seminar on reinsurance during a wide-ranging panel discussion on "The State of the Market" were told that property/casualty insurers and reinsurers rely more than ever on the expertise of actuaries at a point in the cycle when the market is neither softening nor hardening.
Session moderator Michael Angelina, chief actuary and chief risk officer, Endurance Specialty Holdings Ltd, observed that after two consecutive years of record earnings boosted by strong investment returns and favorable loss trends, 2008 turned into an incredible challenge for the property/casualty industry.
“In 2008 we saw decreasing rates, developing liabilities from the credit crisis, disappearing investment returns, destructive accounting rules, mixed in with a shot by Mother Nature in the form of Hurricanes Ike and Gustav. And we closed the year with further reserve development from offshore energy losses,” he said.
Against the backdrop of global recession, Angelina noted that significant industry players on both the primary and reinsurance side have changed.
“We have seen teams of people leaving institutions going to new start-ups or new ventures. Counterparty risk has become a huge concern within our industry and some companies have reduced capacity on peak zone accumulations,” he said.
Marc Grandisson, chairman and chief executive officer, Arch Worldwide Reinsurance Group, noted that 2008 was a good year through September. “Then the stock market crashed in October.”
Grandisson observed that property/casualty industry investments had been innocuous for the longest time. “Companies just invested in treasuries or very high grade corporate bonds and made a decent return. The bottom line is that companies could sometimes use those returns to make up underwriting losses. What happened in 2008 is a first,” he said.
Yet while the softening market did not materialize as expected in 2008, neither did a hardening market. In the absence of either, Grandisson told attendees that this is a point in the cycle when actuaries can shine.
“This is a time when we can make a difference. We are at a segment of the market and cycle in which actuaries have enough in their tool boxes to help companies make better decisions,” he said.
The events of 2008 affected different parts of the property/casualty industry in different ways, according to David Cash, chief executive officer, Endurance Specialty Insurance Ltd.
“For most Bermuda/U.S. reinsurance companies the damage was relatively contained. If you look at some of the large European reinsurers with larger balance sheets and more asset leverage, it was much more damaging.
“There were large, credible companies with 20 percent of their capital destroyed. Similarly, for large U.S. composite insurers with a life insurance presence, the damage was devastating,” he said.
Cash said his operating assumption coming into 2008 year-end was that capital was depleted and that ought to be reflected in prices everywhere. But that has not been the case.
“The interesting thing is that at year-end 2008 and beginning of 2009 it turned out you had both too much capital in some places and too little capital in other places.”
The catastrophe reinsurance market is the only place where prices have been increasing steadily in the last six months, he observed.
“As we get to June 1 and July 1 renewals, the price of U.S. catastrophe reinsurance, be it property catastrophe or offshore energy, is going up fast and will probably stay high for the next 18 months until companies’ balance sheets have recovered or reestablished themselves,” Cash noted.
Nolan Asch, principal of ISO’s reinsurance division, commenting on the property catastrophe reinsurance treaty segment of the industry, noted that catastrophe prices are adequate this year because Hurricane Ike happened. “If we have two or three years without a major catastrophe, you are going to see these rates go down. Only if we have another Hurricane Andrew will the market really change.
“No matter what your capital position, it’s a question of whether or not we have catastrophes. The future has to do with the severity and frequency of catastrophe losses,” he said.
The Casualty Actuarial Society fulfills its mission to advance actuarial science through a focus on research and education. Among its 5,000 members are experts in property/casualty insurance, reinsurance, finance, risk management, and enterprise risk management.