Notes from Monte Carlo – What’s on the Minds of Reinsurers

Monte Carlo

I’m back from another whirlwind week of meetings and networking at the Monte Carlo Reinsurance Rendezvous (my 9th one in as many years!) and have had a chance to reflect on some of the main themes to emerge from this year’s event.

Of course the first topic of conversation at Monte Carlo was the unprecedented run of $100 billion of insured natural catastrophe losses in the last 18 months, over $50 billion of which will be picked up by the reinsurers. While to the outside world, these figures must surely have an impact on the reinsurance industry, the general consensus at the Rendezvous was that these losses are only a 2011 earnings issue for reinsurers, and their capital is ok.

New Money

There was a lot of chatter about the amount of new money flowing into the industry from specialist funds as capital market investors who can’t get enough cat bonds and are desperate for a non-cyclical, non-correlated home for their investments, move from providing retrocession capacity to supporting more mainstream primary business. While some traditional reinsurers may view this as a threat, it must be said that these investors are still only playing in Nat Cat business, which is just a small sliver of the overall reinsurance pie.

As usual, there was some friction between the big reinsurers who want prices to go up, but are nervous of an over reaction in the market spiking prices too high for primary insurers to handle, versus specialist players, who are having a more difficult time results-wise and are keen for a more aggressive market turn.

Interest Rates: How Low can They go?

Martin Sullivan Speaks at PwC Breakfast Briefing in Monte Carlo

Willis Deputy Chairman Martin Sullivan Speaks at PwC Breakfast Briefing in Monte Carlo

At last year’s Rendezvous, we all thought interest rates couldn’t get any lower, but were proved wrong: they are still incredibly low in 2011 and look like they’re going to stay that way for a few more years. Several reinsurers, and it must be said brokers, are bewildered as to why the low interest rate environment has not yet impacted the rating of longer tail classes and if/when it will. Another spectre looming in the back of reinsurers’ minds writing long tail business is rising inflation and what impact this will have on the their claims reserves and ability to continue to release reserves from earlier years.

Some were surprised that there wasn’t too much open concern expressed about the impact of the European sovereign debt issues, but I suppose that’s because the reinsurance market has always been very conservative in its investments with little or no exposure to government debt in the most stressed European countries.

CBI Debate

Munich Re started a very interesting debate about Contingent Business Interruption (CBI) for systemic risk, calling on primary insurers and original clients to come to the table to discuss how they could exert more control over and provide a clearer picture of their supply chain risks. This is because in the aftermath of the Tohoku EQ disaster, just-in-time supply chain management proved so highly complex that it was impossible to unravel. Consequently there’s a continuing question mark over exactly how big the CBI losses from Japan will be.

The recent RMS model changes in the US and Europe were naturally hot topics. I believe that this development will further the drive toward multi-modeling as insurers can’t change their whole corporate risk strategy because of a few individual model changes. At Willis Re, we believe that it’s important for insurers to develop their own view of risk and that this can be informed by a combination of commercial models, their own internal models and any other sources of risk information they are comfortable with.

My final observation is the large number of new faces at Monte Carlo this year, from Australia, but notably from China. As my colleague Martin Sullivan said in his PwC breakfast briefing at the start of Monte, a fragmentation in the market cycle is leading to increased competition from regional reinsurers such as China Re and Asia Capital Re who are well-capitalized and are getting ready to take on the big boys at least in their own regions.

It will be interesting to see how all these factors impact the upcoming renewals!

About James Vickers

James is the Chairman of Willis Re International & Specialty, where he is responsible for strategy and senior c…
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