Phillippa Rowe, an independent reinsurance consultant, gives a personal review of events in the reinsurance world for the year since the last "Rendezvous", with the luxury of a peripheral observer's perspective.
The year since the last Monte Carlo Rendezvous, it seems, has been one of frenzied activity in the reinsurance market in every aspect except one - rate rises, a phrase which has not been needed for a long time.
Reinsurance results worldwide for 1997 were excellent, due largely to an exceptionally good loss experience. Lloyd's produced a £1.1 billion profit for the 1995 year of account, and the analysts reported company results as generally very good, although in many cases due as much to premium income growth, investment income and capital gains as to underwriting results. Rates everywhere seemed to be low, and declining, and predicted to continue to decline. The 1998 renewal season produced widespread dire warnings for future results.
According to the invaluable "SIGMA", the total value of catastrophe losses for 1997 was $28.8 billion, which was approximately half that for the previous year. The largest catastrophe loss arose from the floods in Central and Eastern Europe in July and August, estimated by SIGMA at $940 million. Loss figures for 1998 do not appear to be set to be so benign. Moreover, the range and causes of recent losses seem designed to tax the technical abilities of every reinsurance claims manager, and test the drafting of event definitions and hours clauses to the ultimate.
As well as the aforementioned floods which occurred over several weeks and many regions, we saw floods due to melting snow and accompanied by major fires in the US, and the Ohio River floods, also in the US. Another bout of UK storms between December and February produced losses of $500 million. In 1998 there were ice-storms, estimated at $1.5 billion, in Canada - not a peril yet specifically written into any wording I have seen - forest fires in Florida, and a freak tornado on England's south coast. There have been some large risk losses too: a satellite loss in December, and major fires - a factory in Taiwan estimated at over $300 million, and a whole street of historic and listed buildings in the UK. Who said reinsurance claims work isn't exciting?
Notwithstanding falling rates and probably rising losses, the last year has seen no let up in merger and acquisition activity. It sometimes seems as if a new deal has been reported every week, and certainly it would take too long to list them all. The trend is not confined to any one market - Bermuda, the states and Europe seem as active as each other - nor to any one sector. Insurers and reinsurers seem equally keen, and some of the new alliances include Commercial Union and General Accident (presumably not wishing to be outdone by Royal Sun Alliance), Allianz and AGF, St Paul and USF&G, Exel and Mid-Ocean, Terra Nova and Corifrance, Axa and UAP Provincial, Trenwick and Sorema (UK), Zurich and BAT, Groupama and GAN, . . . and - as this is being written - the surprise announcement that Berkshire Hathaway Group has bought General Re. Despite all this, Munich Re remains the world's largest reinsurer, and top of everyone's lists.
Brokers too have caught the merger fever, so that soon there may well be only one alphabet broker: "J&H,AON,M&M". Or so one could be forgiven for thinking. Certainly the trade press is eagerly speculating on the futures of Sedgwick and Willis Corroon, and the pattern seems to be of large brokers getting larger, rather than of small brokers consolidating to become medium-sized.
Even the market's trade associations are merging, and in London there has been much excitement at the forthcoming marriage of LIRMA and the ILU, to be called the International Underwriting Association of London. Surely no one will have been surprised at the appointment of Marie-Louise Rossi of LIRMA to run the new body, although last minute difficulties over "property liabilities" at the ILU, which surely must have been foreseeable, means that the arrangement is currently in a state of suspended animation. Perhaps by the time the Rendezvous comes round we will know the answer.
In Lloyd's, not to be left behind, corporate "capital providers" are merging with their managing agents, and reinsurance companies from Bermuda, the US and Europe are investing increasing amounts in the Lloyd's market. It is unlikely that by 1999 there will be any so-called corporate "spread vehicles", or any managing agencies not linked to their investors. The implications for underwriters and agents who thus become employees remain to manifest themselves. Within managing agencies themselves there are moves to build "mega-syndicates" by merging all of an agency's syndicates, such as at Kiln, at Murray Lawrence and at Wellington - although this last seems to be meeting some opposition.
Still at Lloyd's, the "traditional" Names seem to be feeling increasingly embattled. Their number has declined again from 9,957 in 1997 to 6,825 in 1998 (At the peak in 1988 there were 32,433). The proportion of capacity they represent has fallen from 56% in 1997 to 40% in 1998. Some agents have been producing a steady flow of press announcements on the desirability of limited liability, and the cost of servicing the (unsuitable) Name. Some have made it clear that Names are no longer welcome on their syndicates, and allegations of foul play fly in newsletters intended for Names. There was hope that the new chairman of Lloyd's, would prove "Name-friendly", but the statement by the chief executive that the days of the annual venture are numbered was taken as contradicting this and caused predictable uproar among Names. It cannot be long before Lloyd's is another market of companies. Lloyd's received its first rating from Standard & Poor's - an "A+" - and a renewal of its "A" from A M Best. Commentators suspect that these will not improve until this structural change is complete.
The UK has also seen regulatory upheaval for the market, with supervision of insurance companies moving from the Department of Trade & Industry (DTI) to the Treasury. It has also been announced that the proposed new Financial Services Authority will assume regulation of Lloyd's, which has the approval of the market self-regulators. Whether these moves mean that the previous emphasis on policyholder protection will switch to one of "investor" protection remains to be seen.
On the legal front, the volume of reported cases continues, and reinsurers and cedants seem to continue to be willing to line lawyers' pockets in order to determine apparently elementary points from any reinsurance primer. In Marchant v Denby and Yasuda v Lloyd's the Court of Appeal succeeded in correcting the definition of "policies on an aggregate basis" so that not all insurance policies with a limit of indemnity are aggregate policies. In Brown v GIO the court found that reinsurers who give their pens away - allowing the reinsured to define an event - must abide by the results; and in Roar Marine v Bimeh Iran Insurance Company that those who subscribe to slips with an agreement to follow the leading London underwriter must do so. In CU v NRG the market has gained the rather delphic decision that in the absence of a follow the settlements clause (What sort of wording was that?) it is not enough for the reinsured seeking cover to show that his settlement was sensible and businesslike. He must also show clearly that he was liable under the original policy. (I hesitate to say "actually liable", and create another semantic mess.) Finally in my selection, in Baker v Black Sea & Baltic, the House of Lords reversed in part earlier decisions and found that there may be a market practice under which proportional reinsurers normally pay their proportion of a cedant's loss adjustment expenses. They ducked a final decision, however, returning the matter to the lower courts. This case was also interesting because of the intervention in the proceedings of Equitas on behalf or reinsurers - the first public indication that Equitas is beginning to show its strength in the market.
As the 1998 Rendezvous approaches, one wonders which issuers currently manifesting themselves will be noteworthy in another year's time. It seems likely that results will have deteriorated, but not that rates will have risen. Earlier this year commentators on the reinsurance market described the 1998 renewal season as "dangerous", and the marine market rates as on a "slide" into unprofitability. The Lloyd's annual report suggests that results for the next two years will fall. There continues to be considerable discussion on alternative risk transfer as a threat to reinsurance, although it has yet to materialise as a dominant part of the market. Industry watchers continue to predict market expansion in China, and the opening up of the Indian market, though as the tiger economies falter such eastern pastures may start to seem less attractive. Information technology continues to limp towards an electronic market. LIMNET will now be a "facilitator of new technology" rather than an obligatory network. The London electronic placing system (EPS) is dead - but long live EPS. It will now be developed to an internationally compatible standard. In the London market one electronic claims handling system, "CLASS", has replaced another, "ELASS". None of this seems the stuff of technological revolution, but perhaps more progress will be seen next year.
The most predictable problem for our business is probably "Y2K": will it produce losses or not; should they be covered or not; have they been excluded or not; can all the computers be fixed in time or not? It is said that Lloyd's Claims Office has already received the first Y2K claims - at least two years before the event. More work for the claims men - and a new puzzle for wording draftsmen.
Finally, I cannot finish a review of the last twelve months without remembering the sudden and sad loss of R. J. Kiln last summer, and his packed memorial service. He was a true giant of the reinsurance world, and I was honoured to be able to have worked with him. I wonder what his review of the year just passed would have included?
Phillippa Rowe, is senior partner at Phillippa Ross & Co, independent reinsurance consultants, and is a mediator and vice-chairman of the Academy of Experts responsible for its Faculty of Mediation & ADR. From 1974 to 1989 she worked for R.J. Kiln & Others at Lloyd's as claims manager, dealing with claims, reserving and wordings matters.