November 2015Issue 101

PRIME STORY 4-6

In depth: Uncertain prospects pose fundamental questions for reinsurers

NATIONAL 7-8

Banks to face action for mis-selling insurance policies 7

Event coverage becoming money-spinner for insurers 8

Ministry in tie-up for road accident insurance 8

INTERNATIONAL 9-10

Lloyd's aims to improve understanding of liability catastrophes 9

Reinsurers told to innovate to address capacity overload 9-10

J.B. BODA GROUP SERVICES 11

CONTENTS PAGE NOS.

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WE WISH OUR READERS

HAPPY DIWALI & A PROSPEROUS NEW YEARFrom

The Management & The Team at J. B. Boda Group

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PRIME STORY

In depth: Uncertain prospects pose fundamental questions for reinsurers

(PART – I /III)

Mixed messages emerge from the reinsurance market as acquisitions and growth plans clash with the

soft market and structural uncertainty

Reinsurers attending the annual get-together in Baden-Baden are feeling the strain as weakening

conditions for many lines of business combine with a seismic shift in the industry’s trading

landscape.

After preliminary discussions a month ago in Monte Carlo, reinsurers now have to settle down to

more precise and intense discussions about their risk appetite and overall strategy for 2016, all the

while unsure of exactly how much the underlying dynamics of the market have shifted.

Any rating change, whether positive or negative, takes time to filter through but reinsurers know the

exceptional results of 2014 and the still-strong performance in 2015 is unlikely to last for too much

longer. Companies relying on traditional reinsurance, with a weighting towards property lines, will

find earned premiums reducing steadily unless they work hard to attract new business or diversify

into markets facing less strain.

Reinsurers will be aware they will not be able to rely on two areas that have proved extremely

helpful for underwriting performance over the past couple of years: favourable reserve development

and catastrophic loss activity.

Analysts say the reserve surpluses the industry built up during the loss-heavy 2010 and 2011 years

are nearing the end and, with fewer catastrophic losses since then, reinsurers of necessity have less of

a cushion that can be released if actual losses prove less than originally estimated. The suspicion is

always that companies’ reserving practices are more cautious and prudent during hard markets than

soft.

Bumper results for most reinsurers last year depended to quite an extent on the exceptionally mild

major loss experience. Swiss Re estimated overall economic losses from disasters totalled $110bn,

compared with an inflation-adjusted average for the past 10 years of $200bn. For insured losses, the

2014 total was $35bn compared with an average of $64bn but it’s worth pointing out the higher the

insured loss total the higher the reinsurance share should be. Few reinsurers reported major bills

from any cat event last year.

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This year has continued the generally benign loss trend although major losses were running at a

higher level for the opening six months of 2015 compared with the same period of last year.

Insurance Day’s sample of leading Bermudian companies posted cat losses of $508m, up from

$385.7m.

The good news

The good news is the market escaped a major North Atlantic hurricane strike, yet again, during the

third-quarter of 2015 but the major loss activity did pick up and is likely to chip into profitability,

even if it will do no damage to solvency. The biggest event will be the Tianjin explosions in August,

producing an insurance loss that is proving hard to quantify. Overall market estimates vary widely,

with reinsurance broker Guy Carpenter estimating the range at $1.6bn to $3.3bn. Depending on any

possible chemical contamination and business interruption issues, the total could go higher.

At time of writing, three reinsurers had issued loss estimates for the explosions. PartnerRe put its pre-

tax loss at $50m to $70m, Validus expects to face claims of $43.9m and Aspen estimated losses at

$30m, with another $20m from other cat losses during the period. The Validus and Aspen estimates

were based on exposure analysis rather than loss notifications.

Validus said it also suffered a $20m loss from the earthquake that hit Chile on September 16. That

country’s devastating M8.8 quake of 2010 produced an insured loss of $8.5bn, according to Aon

Benfield, and 95% of that worked its way through to the reinsurance sector. Chile has one of the

highest insurance take-ups in Latin America and the local market is heavily protected by the

international reinsurance sector. As a comparison, a similar loss in the US would result in reinsurers

footing 50% of the bill, Aon Benfield said.

China also suffered another major cat earlier this month when typhoon Mujigae struck, causing heavy

damage in Guangdong province, although it is unlikely to produce much of a loss for the international

insurance market. On the positive side, events of this nature provide Chinese companies with a

demonstration of how insurance and reinsurance protection can help guard against the country’s

severe exposure to both natural and manmade catastrophic events.

Elsewhere, the south of France was hit by flooding, producing an insured loss of up to €650m,

according to the Association Française de l’Assurance, and the US has faced heavy damage from the

continuing wildfires burning in California, now estimated to cost the insurance market more than

$1.1bn.

In Brazil, the financial scandal that has engulfed Brazilian energy company Petrobras is set to

produce claims for international directors’ and officers’ liability underwriters, many of them in the

London market.

How much of the overall insurance loss from these events filters through to the reinsurance market

remains to be seen but 2015 is now certain to deliver a larger drag from major losses than 2014 did.

The bad news

The bad news does not end there. The low interest environment and continued volatility in the capital

markets mean investment returns have been patchy since the financial crisis and can no longer be

relied upon to prop up a sub-par underwriting performance.

Tables 1 and 2 show the investment income and realised investment gains (or losses) for a selection of

10 major reinsurance groups since 2007, the year before the crisis stuck. Only two of the 10

companies recorded more investment income in 2014 than in 2007. For the seven companies

reporting in dollars, the total fell to $6.8bn in 2014 from $13.7bn in 2007 while for the three

reinsurers reporting in euros the figure actually increased to €8.5bn ($9.6bn) from €8.1bn.

The realised gains table shows a more encouraging picture as the losses of 2007 to 2009 have given

way to gains but volatility remains the most striking feature of the table.

Rating agency Standard & Poor’s (S&P) draws the conclusion that underwriting performance has

become more important for reinsurers and profitability is increasingly sensitive to single catastrophe

claims. Looking at reinsurers’ results for 2014, it found a cat loss adding 19 percentage points to the

combined ratio would have pushed the sector to an underwriting loss. For most reinsurers, the return

period for incurring an underwriting loss is now between one-in-10 and one-in-20 years, down from

one-in-25 years since the end of 2012.

Most reinsurers have cut back on their cat exposure this year in reaction to softening rates but some

have taken the opposite strategy and increased their appetite. Submitting the sector to extreme cat loss

scenarios, S&P found London market players and some North American reinsurers were most

vulnerable. “Those that misjudge their exposure could be left isolated after the next large event,” S&P

said.

Contd…..

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NATIONAL

Banks to face action for mis-selling insurance policies

For the first time since selling insurance policies began in 2002, banks will now be held accountable

for mis-selling them. A bank and its specific employee, found guilty of mis-selling of insurance

products, will face action under the new Insurance Act.

The Insurance Regulatory and Development Authority of India (IRDAI) has directed banks to map

policies sold by their employees and maintain records that it can access in case of a complaint.

The new law defines corporate agents as intermediaries, representing the customer. "...they have to

act in the best interest of the customer," IRDAI chairman said.

Earlier, banks were reckoned as agents and representatives of the insurance companies.

One of the problems that was encountered on inspection was that the banks did not have much of an

idea about the policies which were procured through them or the employees responsible for the sale.

That is one loophole need to be plugged in this regulation.

Under the new law, the IRDAI chairman said "the policy and whoever is sourcing it will be mapped

in the records of the corporate agent". While the database will be maintained by the bank, the IRDAI

will be provided the credential so that it can remotely log in and inspect the records anytime.

The regulator will have its supervision team in Mumbai, said Vijayan, who was speaking on the

sidelines of a ceremony to inaugurate IRDAI's Mumbai regional office.

The insurance regulator will also come out with regulations on corporate governance. These norms

will define management control so that insurance companies can meet the statutory requirement that

the management is 'Indian'. "We should be able to bring out the guidelines in October", Vijayan said

while inaugurating an ASSOCHAM insurance summit earlier in the day.

The new Act also allows foreign reinsurance companies to set up branches in India. Vijayan said

around six international reinsurance companies have shown interest in setting up a branch, of which

three are seriously pursuing their plans.

Source: Economic Times

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Event coverage becoming money-spinner for insurers

Non-general insurance players may be seeing sluggish growth in the auto cover segment but new

areas are providing them with brisk business. Events are turning out to be a major draw, not only in

terms of footfalls for organisers but also for insurance companies. Sample this: GSB Samaj, which

holds one of the grandest Ganesh Utsavs in Mumbai, had insured the event for a whopping Rs 200

crore. Janmashtami sees huge demand for such covers for the dahihandi event. The cancellation of a

much-awaited musical concert by a renowned artiste in Pune due to unseasonal rains triggered a

claim. With Durga Puja, some organisers were in talks with insurance companies to explore the

possibilities of covering their respective events. As organisers spend more money in events, the risks

too rise. Such policy covers cancellation of an event due to fire and allied perils at the venue, ban

imposed by state/Central government and national mourning due to the death of specified dignitaries,

among others. It also covers material damage to property such as stage, sets, seats and wardrobe due

to fire and allied perils, burglary. Additionally, coverage for public liability as well as personal

accident can also be given.

There is a demand for sports events like cricket, football or kabaddi matches under event insurance.

Also, customers’ preference for insuring business seminars, conferences is on the rise The event

insurance business is expanding.

Source: Financial Chronicle

Ministry in tie-up for road accident insurance

It may be odd to wish for a road accident, but if at all it is on the Jaipur-Delhi, Ranchi-Jamshedpur or

Vadodra-Mumbai highways, insurance companies will pay for hospitalisation. The ministry of road

transport & highways has tied up with general insurance company to offer cashless insurance cover to

road accident victims. There will be ambulances to take the injured to hospitals, too. These three are

pilots and depending on the outcome of this project, the ministry may roll out the insurance cover

nationally, said two senior executives of insurance companies. The premium is paid by the ministry.

The policy covers around 150-200 km highway stretch. In the 15 months since the ministry launched

the policy, there were 4,000 accidents and 7,000 claims on the Jaipur-Delhi highway. The claim

amount is capped per policy.

Source: The Economic Times

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INTERNATIONAL

Lloyd's aims to improve understanding of liability catastrophes

Lloyd's teams up with liability catastrophe modeller to lay out methodology for assessing liability

risk accumulation. Lloyd’s is urging a greater use of big data to improve insurers’ understanding of

liability risk. Liability risks are one of the most complex exposure management challenges faced by

insurers today, Lloyd's said in a new report.

It warned accumulations of liability risks have the potential to generate significant losses for

insurers. In the present environment, liability risks are becoming even more complex as new risks

emerge.

Lloyd’s has teamed up with Praedicat, a liability catastrophe modelling company, to set out a new

methodology to improve the understanding of liability risk. Rapid advancements in big data has

opened up a wealth of new opportunities in the understanding of emerging risks. One area in

particular in which this is creating new possibilities is in relation to the management of liability

risk. The approach explored in this report, developed by Praedicat is one example of how new

technologies are being used to enhance our understanding in this area.

According to the report, liability catastrophes are similar to property catastrophes in that they are

low-probability and high-consequence events; however, unlike natural catastrophes, liability

catastrophes lack scientific data and are more complex, multi-year events. However, new

technologies allowing the industry to harness big data could provide a more robust liability risk

management for insurers.

Praedicat and Lloyd’s have set out a methodology using big data technology to search and mine data

from scientific research associated with potential liability risk to help identify potential liability

accumulations. According to the report, this involves identifying the risk, contextualising it in terms

of causation, mapping the exposure and developing quantitative estimates of mass litigation.

Reinsurers told to innovate to address capacity overload

New risk classes such as cyber liability are proving challenging to sector. The reinsurance industry

was urged to develop new products as a way to soak up the excess capital in the sector. Senior

figures in the reinsurance market said the sector needed to speed up its response to emerging risks

classes and find ways to respond to cedants’ requirements. The lack of innovative products is the

key problem facing the global reinsurance industry.

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The question is what this [excess] capacity is being used for? There is not too much capacity in the

market, but perhaps too few products. The available capacity in the reinsurance market is almost at

a record level. In the first half of 2015, the market capitalisation of the reinsurance industry

declined 2% relative to the end of 2014 to $565bn, mostly due to currency exchange rates. The

excess capacity in the market has been forcing down rates for some years, piling pressure on

reinsurers.

Cyber risk is one class which the reinsurance industry is seeking to develop. While cyber insurance

is already an established market in the US, premium income elsewhere remains very low. Its

growth has been held back to some extent by the lack of a comprehensive risk models for the line.

Risk modelling company Air Worldwide is working on a risk model for cyber at the moment.

However, it will take at least three years until the model can be completed.

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J. B. BODA GROUP

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