Valerie Denney summarises the replies to this year's survey.

When conducting a survey of this nature, you do so with a certain amount of trepidation. The questions have to be phrased in such a way that they will, hopefully, elicit insightful replies; stock questions breed stock replies. Then there is always the looming prospect of cliche-punctuated, PR speak which says very little in very many words. Another concern is attracting a good cross-section of the industry. This is, after all, an international survey.As you will gather from the following pages, such concerns are not an issue. An impressive list of respondents has taken time and trouble to provide an educated perspective. Of particular interest are the differing views which emerge in regard to certain questions; reflecting an industry which is far from orthodox.

Our first question regarding the emphasis on shareholder value has been met with a general consensus. Many agree that this is bringing greater discipline to the business and obliging companies to keep their technical results in the black, although the market's huge capital infusion is neutralising the effect. As SCOR's Jacques Blondeau points out, today's companies could not be managed the way they were 15 years ago.

While admitting that the emphasis on shareholder value has been helpful in that it has brought into focus the long-term effect of the market downturn, and the impact on capital management, CNA Re's William J. Adamson remarks that “it is unhelpful from the standpoint of putting too much focus on returns to the point where investments in people, capabilities, infrastructure, IT are more difficult to justify.”

We then ask about the changing demand for reinsurance. Here again there is general agreement that retentions have increased as a result of primary insurance consolidation, and that the increased demand for catastrophe cover is probably as much a result of lower rates and readily available capacity as it is consolidation kicking in.

The majority concurs that the demand for traditional reinsurance has dropped, more a result of the growing popularity of ART products than consolidation.Stockton Re's Dan Malloy explains that there is an increasing demand for enterprise-wide risk management initiatives. “Aggregate stop loss contracts and other finite reinsurance schemes address overall risk management concerns, sometimes as a replacement for but usually as a complement to traditional catastrophe cover, required to manage the aggregate exposure of increasingly larger and sophisticated books of business.”

Talking of more sophisticated solutions, we query the impact this is having on the reinsurer's cost base, with particular regard to multi-line/multi-year policies. It is largely agreed that the kind of expertise required to devise sophisticated solutions demands a considerable dedication of resources, but this does not necessarily bludgeon the cost base. Remarks Jonathan S. Roberts of Enterprise Re: “The cost base is actually lower in the long run because it can be spread out across the many lines and years of the programme.”

Respondents such as Nigel Rogers of Terra Nova (Bermuda) are keen to set the record straight that the advent of the multi-line solution is not down to the fiercely soft market, as is often suggested. “While the timing from the point of view of price was unfortunate it is true to say that the (re)insurance markets were adapting to the needs of the client and not just attempting to secure the quality client's insurance for a number of years. Both reinsurer and reassured are looking for less volatility in premium income and cost.”

The question of the developing role of the broker obviously has to be brought into the fray. Many of our respondents agree that brokers play an important role and are able to take an independent position when exploring customer needs. However, as Rhine Re's Max Furrer remarks, brokers must “share the development work with the reinsurer to avoid duplication of efforts.”

Duplication is a major issue. While some feel this should not continue, there are others who think it is no bad thing. Take Mr Rogers, for instance. “While work in areas such as modelling, auditing and due diligence can indeed be duplicated we believe that this may often be beneficial by serving as a check on our own techniques and methods. We never want to be so blinkered that we cannot learn from others and we believe that a diversity of approaches and analytical skills can be seen as a strength not a weakness.”

When asked about the impact of low interest rates and low inflation, the responses are varied and informative. Some maintain that the issue is not specific to reinsurance, while most detail the various influences.

Remarks Mr Adamson: “Low interest rates and low inflation are presenting increasing challenges to reinsurers and insurers alike in that investment returns on cash flow and reserves are reduced. To the degree companies are still offering price competitive products in this environment, they will find that the drain on capital will intensify.”

“Lower inflation is generally beneficial to insurers and reinsurers, introducing more stability to claims costs,” says Tempest Re's John Engeström. “Lower interest rates are both good and bad for reinsurers. Falling interest rates lead to capital gains on the bond portfolio but also generate less future interest yield. Furthermore, lower interest rates should logically reduce the ROE requirement. This fact does not seem to have sunk in with analysts (and shareholders) who typically - at least in the US - still expect 15% ROE post tax. This would translate into 20%-23% pre-tax. Compared to risk free returns of around 6% it is clearly challenging to price for an additional risk premium of around 15%.”

Solvency of primary insurers is generally not a high worry factor. Most agree that it is part of the underwriting process to choose business partners prudently. In addition, as Arig's Farooq A. Khwaja points out: “The increasing emphasis on policyholders protection and the effectiveness of regulatory controls in most markets address the issue to a large extent.”

However, there are those who beg to differ. Comments Mr Rogers: “The solvency of primary insurers is a concern. In many classes we are seeing business being written at rates below the historical burning cost. Underwriting at these levels has been supported, to date, by high investment returns and by the excess supply of reinsurance capacity. This position is not sustainable. Investment returns are now very much reduced and, once the reinsurance market contracts in response to the losses that are now coming through, primary insurers will find themselves squeezed. On one side, they will face rising reinsurance costs and uneconomic rates for direct business and on the other declining investment returns.”

Mr Blondeau introduces another perspective when he comments that he is “more concerned to see some reinsurers through various forms of ART helping some ‘shaky' insurers to ‘eat their cake first' and putting themselves at risk for the future.”

Which leads us to the next question addressing potential losses. Climate and new technologies figure highly of course. Only time will tell whether either of these develops into a industry-threatening calamity.

“Our greatest worry in relation to potential losses is not so much the spectacular loss events as rather the low-average loss, high-frequency claims that on aggregate are more expensive,” contends Bayerische Rück's Erich Herrgen. His concern is that rising claims consciousness in combination with the re-definition of personal risk, accountability and fault in society could escalate such claims to epidemic proportions.

Moving on to a more cheery topic, we finish by asking where the future opportunities lie. Emerging markets such as Latin America, Asia and Eastern Europe are inevitably cited as are ART techniques. Odyssey Re's Andrew A. Barnard sums it up well: “Whatever creates concern, fear, or scarcity is an area of potential oppportunity for the alert reinsurer. The key is knowledge, and the ability to make an educated translation of the exposure into loss costs. Clearly one area of opportunity is the entire e-commerce phenomenon, both on the internal side and on the distribution/marketing side. Another is the so-called convergence of traditional risk assumption and capital markets. It gives us new tools to approach all our customers with a re-defined view of risk management, and creates more choice for the client.”

For the replies in full, read on.

Farooq A. Khwaja, general manager, Arig Reinsurance Company, Bahrain
To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

There is evidently a growing consciousness about and emphasis on creation of shareholders' value. This is bound to go a long way in bringing about greater discipline to our business in particular and strengthening the fundamentals of business in general. As a related development, it is a good sign that underwriting is already making use of more scientific and technical tools with the help of information technology. The increasing involvement of actuaries to support underwriters to assess catastrophe exposures, retention levels, pricing adequacies and capital allocations is a significant step in the right direction.Apparently, there is no direct conflict between shareholders' and other stakeholders' interests. However, over-emphasis on any of them may not be in the best interest of the business. The right balance must therefore be struck and maintained among all interests having regard to short term business plans and the longer term goals.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

In view of the ongoing consolidation in the primary market, we are certainly experiencing reduction in traditional reinsurance business caused by increased retentions of primary insurers and a shift from proportional to excess of loss reinsurance. The growing popularity of financial reinsurance or ART products is another significant factor contributing to the shrinking traditional reinsurance market. However, the demand for catastrophe capacity continues to grow as larger companies are exposed to larger catastrophe aggregates, not to mention current predictions pointing to higher frequency and greater severity of natural disasters.

These observations more accurately reflect the trends seen in the developed markets. In developing markets, however, the demand for traditional reinsurance, including proportional reinsurance, still remains strong.

What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

Currently, Arig Re is not actively involved in offering such sophisticated multi-line/multi-year policies although we are looking into possibilities.The popularity of such products obviously depends on their attractiveness to both reinsurers and reinsureds in terms of cost efficiency leading to stable long term relationships.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

The traditional role of the reinsurance broker, namely, negotiating and placing reinsurance programmes and subsequent servicing of the business, will continue to form a major part of their activity. Even electronic trading will not eliminate that role, instead it will complement it and lead to increased efficiency.We believe there will be increased demand from their clients for risk management, reinsurance consultancy and specific areas of expertise, like catastrophe exposure modelling. Irrespective of the growing demand for this secondary role, the issue remains how feasible it is for them to charge their clients for such services, like consultancy firms.

There will be a certain overlap between this expanded role of the reinsurance brokers and that of the reinsurers. However, it is expected to become complimentary over a period of time.

What effect do you believe low interest rates and low inflation are having on reinsurance?

Low interest rates mean low investment return for reinsurers causing negative impact on their overall net profitability as pricing is to a certain extent sensitive to interest rate fluctuations. The negative impact should therefore lead to higher pricing levels for reinsurers in order to sustain their profitability. But in today's reinsurance market, which is characterised by over capitalisation and resulting intense competition, the opportunity for such rate increases practically remains very slim and even non-existent. As a result, reinsurers are under tremendous pressure to cut their operational cost to safeguard profitability.Furthermore, low interest rates discourage and even prevent any outflow of capital from reinsurance business to capital markets, causing current over capitalisation in reinsurance markets to continue. A positive outcome is that low inflation rates, if sustained for a considerable period, usually bring some relief to reinsurers from the resulting lower than forecast claim payments. Also, this can lend stability to reinsurers' administrative cost.

To what extent generally are you worried about the solvency of primary insurers?

The increasing emphasis on policyholders' protection and the effectiveness of regulatory controls in most markets address the issue to a large extent. The supervisory authorities have played and continue to play a vital role in this direction. As far as reinsurers are concerned, we believe it is a part of the underwriting process to choose their business partners prudently. Better access to information and services provided by rating agencies is also extremely helpful.

We do not consider it to be a high worry factor in the reinsurer's mind today compared to other more burning issues like the increasing catastrophe loss scenario or uncertainties associated with possible Y2K exposures.

Looking further ahead, what are your greatest areas of concern in relation to potential losses? For example, the concentration of population in climatically or geologically unstable regions, the development of new technologies, such as genetically modified crops?

In our opinion, there are at least three main areas of concern which could be a major source of potential losses, namely, natural perils related, increasing catastrophe exposure of certain regions, socio/political instability of certain countries, even regions and the impending potential Y2K related claims including associated legal costs which some have ironically termed a “lawyers' picnic”. Moreover, the potential liability claims which could arise from the tobacco industry, EMF, EIL, stress at work, and genetically modified crops should be of great concern to the market, especially to the leading liability underwriters.

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

We have not entered into any new class of reinsurance business in the last couple of years, although we are actively examining opportunities.We share the belief that the emerging insurance markets offer enormous growth potential. For instance, the Middle East, Asia and Eastern Europe, and some Latin American countries have strong business potential for developing new reinsurance business as a result of the ongoing rapid market liberalisation process.As far as products are concerned, we feel there is a growing demand for credit, life and pensions, health, personal lines and liability business in markets we are currently focusing on. Worldwide, opportunities for reinsurers lie in the areas of financial reinsurance, ART products, balance sheet protections as well as securitised products.


Jean-Marie Nessi, chairman and ceo, AXA Reinsurance and member of AXA executive committee
To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

The current emphasis on shareholder value is helpful to the extent that it obliges companies to keep their technical results in the black. Unfortunately, the huge volume of capital that is being injected into reinsurance is neutralising the effect. This injection of capital is forcing reinsurers to compete fiercely bringing down their potentially profitable technical base. The cyclical aspect of our business is such that we find it more advantageous to have a single shareholder that appreciates long-term results rather than a group of stakeholders who expect stable annual profits.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

It is expected that the consolidation of the primary market will increase the self-reinsurance capabilities of the client. However, the process will take a good deal of time. This is mainly because of the over-abundance of capacity available on today's buyer's market. A second reason is that finance managers are more concerned with financial stability and control of share value than with maximising profit retention. Most insurance companies are over-protected or buy reinsurance simply for the purpose of arbitrating.

What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

We do not think that sophisticated solutions can reduce the reinsurer's cost base. What this does do is provide a means of securing long-term relationships that can protect the reinsurer, to a certain extent, against the cyclical effects of our business. Sophisticated solutions are very expensive to build even if the premium involved is of high volume.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

We believe that the development of sophisticated solutions provides adequate premium margins although these margins are the focus of sharp debate with the client. If the broker is at the negotiating table, this will help the reinsurer to retain a certain degree of liberty. However, we see the broker's role as more of a go-between who helps to transform opposing interests into positive solutions. We do not consider the broker as an individual who builds solutions on his own.

What effect do you believe low interest rates and low inflation are having on reinsurance?

Low interest rates and low inflation reduce the ability of reinsurers to offset technical losses by using financial products and should, as a consequence, force market competition downwards. However, this will also serve to weaken the balance sheets of insurers and create an increase in the demand for balance sheet protections. Lastly, these conditions move risk from the liability side of the balance sheet to the asset side while actually generating new needs for cover.To what extent generally are you worried about the solvency of primary insurers?

The lower the solvency level of primary insurers, the greater the demand for soft capital. As long as the deal provides for an up-front premium settlement, there is no reason for concern.

Looking further ahead, what are your greatest areas of concern in relation to potential losses? For example, the concentration of population in climatically or geologically unstable regions, the development of new technologies, such as genetically modified crops?

It is clear that the potential losses in the casualty lines are a great concern for us. This is because we see so much potential for growth in this area yet casualty claims are plagued by the problems of a “deep-pocket” mentality. So in reality the question should be: Can we accurately evaluate the cost of these potential losses and sell sufficient numbers of protections at the right price thus effectively spreading the risks so as to create the high margins we are looking for?

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

We see the greatest opportunities in the emerging countries that have a lack of capital and surplus. We also see a lot of opportunity in the casualty lines. However, we consider it more important to be a 100% service provider by offering our clients the full range of covers that they need and working on a package basis. This means that, as a reinsurer, we must provide every possible solution to all our clients' needs at any given time.


Erich Herrgen, member of the board of management, Bayerische Rück
To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

For us, the shareholder value concept is more than just a passing trend. We find it an incentive to think more technically, to act not on hunches but on the basis of an analysis of what we are doing and why, always with the aim of continuous improvement. Even if this means applying the red pencil now and again, it enables us to stay more efficient and gives us a competitive advantage that enables us not only to satisfy our shareholders but also to give our clients good value and our employees job security. Of course, you can always have too much of a good thing, and the shareholder value principle has sometimes been taken too far. We see shareholder value not as a short-term target but as a long-term orientation that helps us achieve a sustainable and yet dynamic balance. Long-term orientation leads to communality of interest between all shareholders.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

There are 5,000 primary insurers in Europe and more are emerging by the day. Consolidation is a natural and, we think, welcome process, though not a goal in itself. “Big is beautiful” is a bit out of fashion. There is plenty of room for smaller, nimbler specialists. The big risks are getting bigger all the time, so there is plenty of demand for all viable market players to satisfy. Mergers will reduce reinsurance needs only if diversification of risk is improved. Consolidation at the primary insurance level does not necessarily lead to reinsurance being placed only from consolidated group headquarters. Centralised reinsurance would relieve the operating units of their responsibility for producing business that is profitable in its own right. Even in a global organisation, delegation, motivation and accountability go hand in hand, so it would be counter-productive to over-centralise on the reinsurance side. If the giants do not know that yet, they will do soon.On the other hand, globalisation means that it is becoming more difficult to smooth out volatility by regional risk-spreading on the technical side, so there certainly is a growing demand for balance sheet protection.

What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

Sophisticated problems require sophisticated solutions, and nowadays everything is becoming more and more sophisticated - telephones, remote controls, family relationships, you name it. And, of course, reinsurance needs. Gone are the good old days when one could tie up a client's reinsurance package in twenty minutes and then get on with more important business such as violin playing or lunch. Standardised products and simple solutions are a thing of the past, nowadays there is much more detail involved, and it all has to be analysed, discussed and tailored. Of course, that takes time, and time is money. But if the job is done properly, if you can give the client the customised solution he needs, then the added value more than makes up for the extra cost. Happy the reinsurer whose clients are willing to pay that little bit extra for sophisticated service.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

We are pleased to see the pioneer work done in London and elsewhere finally bearing fruit on the continent, and we welcome reinsurance brokers as new kids on the block. There is, of course, some overlap with what reinsurers are doing, but competition makes life more interesting, and fresh eyes are always welcome in developing new product designs. There is plenty of scope for mutual fertilisation between reinsurance brokers and reinsurers. Good brokers know that they have to generate added value for their clients, and if they do we will certainly make selective use of their services.

What effect do you believe low interest rates and low inflation are having on reinsurance?

Low interest rates have put an end to cash-flow underwriting - or at least should have. With little to be gained from snowballing funds and less and less assistance coming from the cfo's department, many companies are having to re-invent technical underwriting. Life companies are having a particularly difficult time, some of them having to dip into reserves to be able to deliver profit shares they guaranteed - perhaps recklessly - when investment income was higher. And non-life companies are struggling to bridge the gap between low monetary inflation and high social inflation - the rising cost of claims due to escalating demands and expectations by policyholders and society as a whole. Reinsurers can help by offering their services, for instance in the form of rating assistance, portfolio analysis and balance sheet support.

To what extent generally are you worried about the solvency of primary insurers?

We have always favoured a holistic client approach based on long-term continuity in a sustainable relationship. Before we take up with a new client in a big way, we take a look at his solvency and, in the developed markets, at least, trust in his self-preservation instinct. And as caring reinsurers, of course, we consider it our job to provide our clients with the assistance they need to avoid solvency problems in the first place.

Looking further ahead, what are your greatest areas of concern in relation to potential losses? For example, the concentration of population in climatically or geologically unstable regions, the development of new technologies, such as genetically modified crops?

Our greatest worry in relation to potential losses is not so much the spectacular loss events as rather the low-average loss, high-frequency claims that on aggregate are more expensive. We are concerned that rising claims consciousness in combination with the redefinition of personal risk, accountability and fault in society could escalate such claims to epidemic proportions. The trend is already evident in the US, as the plight of the tobacco industry illustrates. The problem is that it is impossible to foresee, much less quantify and factor in such risks, even if we think we have identified a potential future source of avalanche claims, such as EMF or genetically modified foods. The only thing that is certain is that if these risks materialise it will be on such a scale that they will inevitably impact reinsurers too. All we can do is to make our clients aware of such risks and advise them to make some sort of allowance for them, even in the most global form.

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

We believe that the greatest opportunity for developing new reinsurance business is to transcend traditional business class boundaries. Anybody can be an expert in one class of business or another, but we find that too narrow a perspective which, if times get tough, leaves you treating isolated symptoms instead of generic causes. With our holistic client approach we address our client's overall risk exposure, including his financial risks in general and potential volatility on the investment side. Having made a thorough diagnosis, we can then put together a comprehensive reinsurance structure which accurately matches the individual client's insurance and non-insurance risk structure. To facilitate this diagnosis we have developed a number of aids, for instance our Capital at Risk calculation tool, RICASSO.


William J. Adamson, CEO, CNA Re
To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

The emphasis on shareholder value has been helpful from the standpoint of bringing into focus the long-term effects of the market downturn, and the impact on capital management. One would expect that the inferior returns would require companies to take more aggressive action towards underwriting and pricing discipline. It is unhelpful from the standpoint of putting too much focus on returns to the point where investments in people, capabilities, infrastructure, IT are more difficult to justify.

There is no measure of balance between interest of shareholders and other stakeholders. It must only be understood that matters related to a company's mission statement need to be understood in terms of necessary investment in areas noted above that may not always translate into the best quarter to quarter result. There has to be enough understanding and confidence in management to allow for uneven periods of profit with superior returns over the business cycle.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

Consolidation of the insurance industry has reduced the demand for reinsurance for some larger companies. However, the prolonged downturn in the market and the challenge of managing capital in this market has actually forced companies to purchase more reinsurance. How much of this market phase will continue as market conditions improve is debatable. There will continue to be a reinsurance dependence for smaller specialty writers that will maintain a position in the industry.

What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

Sophisticated solutions such as multi-line/multi-year insurance policies have not been taken up as much as anticipated. Some companies offer a single tailored solution for some clients, but thus far the impact on reinsurers has been minimal. The writing of multi-year reinsurance contracts that are non-negotiable do have an impact on reinsurers from the standpoint that terms were locked in at the bottom of the market and cycle, and the performance on those accident years will almost certainly be a drain on capital.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

The role of the broker should continue evolving to that of a consultant for the buyer. As the roles between intermediaries and reinsurers are redefined, we must optimise costs, yet recognise that both broker and cedant are our clients.

What effect do you believe low interest rates and low inflation are having on reinsurance?

Low interest rates and low inflation are presenting increasing challenges for reinsurers and insurers alike in that investment returns on cash flow and reserves are reduced. To the degree companies are still offering price competitive products in this environment, they will find that the drain on capital will intensify.

To what extent generally are you worried about the solvency of primary insurers?

Solvency of primary insurers is a concern given the unprecedented duration of the downturn in the market, and the coverage expansion that has been provided over the market cycle. The amount of reinsurance availability has helped to mitigate the liability side of the balance sheet for insurers; however, companies are exposed on the asset side of the balance sheet.

Looking further ahead, what are your greatest areas of concern in relation to potential losses? For example, the concentration of population in climatically or geologically unstable regions, the development of new technologies, such as genetically modified crops?

The greatest areas of concern for future industry losses are hard to quantify. Certainly, there are real questions relating to global warming, internet liability, GM, EMF, etc. The difficulty is knowing how changes in our social, economic and legal system will impact this industry.

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

The greatest opportunities for growth involve offering products in countries that are developing infrastructure to support a growing economy and/or regions that are privatising the insurance industry, for example, Brazil, India, Central and Eastern European countries. Another area for companies to grow and be successful will be the linking and integration of capital markets and insurance to treat risk on a holistic basis.


Jonathan S. Roberts, President, Enterprise Reinsurance Holdings Corporation


To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

Shareholder value is a very helpful first step because it helps management focus on what really matters, which is doing right by the shareholders. However, from a practical standpoint, the people who decide how to hedge or cover risks are also concerned with other things, for example, keeping their jobs.Herein lies a potential conflict of interest between shareholders and management. Management might choose to hedge to reduce volatility, while the shareholders might have a diversified stock portfolio and not be as interested in hedging, since hedging is generally expected to cost money in the long-run.All stakeholder interests, not just those of the shareholders, should be considered to create a more equal balance.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

I agree that the demand for catastrophe cover and balance sheet protection has increased but, not solely due to consolidation. The trend towards just buying cat cover and balance sheet protection has also been driven by buyers becoming more sophisticated and realising that this is a more efficient way to protect themselves.

The effect of consolidation is generally to reduce risk capacity and hence increase the demand for reinsurance in the absence of any reduction in the risk underwriting of the new company.

What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

The cost base is actually lower in the long run because it can be spread out across the many lines and years of the programme.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

The brokers should originate risks and intermediate reinsurance negotiations between the buyer and the seller. In my view, broker development of risk analysis expertise does not overlap. The broker is working to protect the interests of the ceding company, his client. It is not a threat to the underwriter who is modelling and underwriting on behalf of the reinsurers' stakeholders.

What effect do you believe low interest rates and low inflation are having on reinsurance?

As interest rates fall, bond values rise, and insurers feel richer. On the liability side, reserves are not explicitly discounted so lower interest rates do not increase reserves; lower inflation means lower expected future claims payments which lowers required reserves. This in turn increases surplus, again allowing insurers to feel richer. Therefore, low interest rates and low inflation result in higher assets, lower liabilities, hence greater surplus and greater risk capacity resulting in less demand for, and greater supply of reinsurance.

To what extent generally are you worried about the solvency of primary insurers?We are not concerned about insolvencies in the marketplace. On the contrary, we are well positioned to take advantage of any market disruptions.

Looking further ahead, what are your greatest areas of concern in relation to potential losses? For example, the concentration of population in climatically or geologically unstable regions, the development of new technologies, such as genetically modified crops?

Whenever there is a threat of potential losses, as companies' exposures increase, there should be an increase in the demand for reinsurance. The difficulty currently is that premium increases have not kept pace with exposure increases.

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

The current trend continues to move towards catastrophe cover and balance sheet protection. The distinctions that currently exist between lines of business will cease to be quite so important, and overall enterprise risk will be managed in the aggregate, as this is more efficient.

Risks will no longer be underwritten by class or type. Instead, liquidity is becoming controlling. Wall Street has historically intermediated liquid “financial” risks, by hedging and trading out of positions that are marked to market in real time. Historically, insurance companies have used actuarial diversification to underwrite illiquid “insurance” risks. But, the distinction between “insurance” and “financial” risks is irrelevant now. Broker-dealers are intermediating increasingly liquid “insurance” risks by securitising them into the capital markets. Illiquid “financial” risks such as unusual credit and residual value are being underwritten by insurance and reinsurance companies, and as such represent new business lines.


David Calhoun, President and CEO, ERC
To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

Shareholder and customer interests should coincide. Shareholders want a company to have successful customer relationships. If a company is run to serve its customers well, then shareholders will benefit. In many cases in the past, shareholders and customers have received too little focus. GE has been successful by focusing on customers' needs.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

Consolidation frequently leads to less reinsurance. Most primary insurers lay off their catastrophe coverage if the price is right.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

Brokers play an important role because of the services they offer to customers. Reinsurers and brokers need to get upfront their expectations of what each party will do to avoid duplication.

To what extent generally are you worried about the solvency of primary insurers?

Solvency of primary insurers is not a major issue, although a big catastrophe might create a solvency issue for some players.

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

This is an exciting time for reinsurers, and we see growth opportunities in selected niches.


Wilhelm Zeller, Chairman of the Executive Board, Hannover Re
To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

Like any other management system the shareholder value concept has pros and cons. The numerous advantages have convinced us to implement certain instruments and to pursue a determined shareholder value strategy. Shareholder value considerations force management to increase the company's value and to optimise use of shareholders' funds. This supports profit-orientated companies with sophisticated capital management instruments. The access to capital markets and the opportunity to raise shareholders' funds is essential for every global player. In addition, the need to create shareholder value can have a positive impact on competition if companies are forced to charge appropriate prices as shareholders are not willing to support unattractive industries or business segments. In the long run there should be no conflict between the interests of shareholders and stakeholders as both should be able to gain if a company is successful and grows profitably.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

The observation that the demand for reinsurance is reduced due to consolidation is correct. The merged entities are able and prepared to carry larger retentions. The soft market we are currently experiencing distorts the picture slightly in that reinsurance buyers now have access to reinsurance capacity at prices that are below their own capital costs. Many cedants take advantage of the offer although on a more opportunistic basis.

The larger the entity and the more control it has over its data the more interested it is in protecting the balance sheet rather than the traditional insurance risks. Demand for balance sheet protections is naturally also increased by the ongoing wave of consolidations; again the real picture is distorted by the price of available reinsurance.

The demand for catastrophe protections follows the same principle as for per-risk reinsurance. Merged entities generally require less cat protection. They buy, however, larger cat programmes due to their joint exposure, albeit with higher retentions. A larger number of reinsurers is often required to complete a placement, due to the structure of reinsurers' underwriting guidelines, which very often are determined by limits per layer or per programme.

What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

At first glance, multi-line/multi-year policies have the effect of limiting and even reducing reinsurers' costs, because underwriting could potentially be condensed and might not need to be done on a yearly basis.We feel, however, that nearly the contrary is the case, in that these more complex reinsurance structures need more and more attention. In particular, all lines of coverage need to be analysed on a separate and individual basis. In addition the experience and exposure has to be re-checked thoroughly at each renewal, even if it is a multi-year policy, allowing us to continue to discuss the recent developments with our clients.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

We see the primary function of the reinsurance broker as an intermediary in the true classical sense, i.e. to bring parties together. Nevertheless in many instances the broker has become a consultant to the cedant working on a fee basis. They assist in evaluating alternative offers for the cedant who delegates a lot of its data assessment work to the consulting broker in order to lower its own expenses. The broker also investigates and compares alternative products in the market and advises the cedant which product may be most suitable. New products are often developed jointly by reinsurers and brokers as they have to be acceptable to both cedant and reinsurer. For this reason the reinsurer and the broker often develop similar expertise. (Reinsurers should consider using the consultant services of a broker in order to reduce their expenses and tie in the expertise developed.)

As a professional reinsurer in every sense of this word we feel obliged to develop all aspects of the underwriting process and have done so in the past. In this respect, we have developed models for nearly 10 years and we feel very comfortable in using all aspects of modelling for our underwriting. In this respect, it is important that we obtain from the client - with the assistance of the broker - the data which allows us to do the modelling. We will always check on the modelling results submitted to us, so that there is indeed an overlap. The same also goes for all other underwriting aspects like trended burning costs as well as sophisticated exposure rating.

However, we feel that only brokers who have the capability of giving their clients highly technical advice (including results from modelling and rating) will do an adequate job and thereby avoid giving clients the wrong impression about what brokers are capable of generating in the market.

What effect do you believe low interest rates and low inflation are having on reinsurance?

Interest rates influence a number of aspects in reinsurance. With regard to bodily injuries, low interest rates lead to higher claims settlements as the interest used for discounting the settlement amounts tends to be lower. Claims size is, however, also influenced by factors independent of the interest or inflation rate, for example social perception and the increasing value attached to personal well-being. Reinsurers participating on a non-proportional basis can therefore expect an increased claims frequency and severity.

As far as investment strategy is concerned, insurance companies may be tempted to move their investments from bonds to shares. This would make their investment portfolio more volatile, resulting in the need for balance sheet protections.

Low inflation generally leads to a more stable economic environment which benefits economic development, therefore providing better business opportunities for insurers and reinsurers.

To what extent generally are you worried about the solvency of primary insurers?

A high solvency ratio generally reduces the need to buy reinsurance or leads to a more opportunistic approach to the purchase of reinsurance. A lower solvency ratio can be caused by various factors and therefore needs to be evaluated carefully, although under normal circumstances it is not of great concern to reinsurers. Additionally, a low solvency rate might create need for certain surplus-relief reinsurance products (which we are happy to provide through our Advanced Solutions division).

Looking further ahead, what are your greatest areas of concern in relation to potential losses? For example, the concentration of population in climatically or geologically unstable regions, the development of new technologies, such as genetically modified crops?

Our greatest concern in relation to potential losses is directed to those complexes which we were unable to calculate when we wrote the reinsurance, and even worse, to those issues where there is no basis for a quantifiable analysis. For instance, liabilities arising from new technologies and the consequences of modern society such as stress related illnesses, EMF, etc, coupled with an increasingly litigious society, both in the US and elsewhere, expose insurers and reinsurers to an extent which is currently undeterminable. Another typical example for such a claims complex is the Year 2000 issue.

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

There are still a number of insurance markets (such as Latin America, Asia or Eastern Europe) which have not yet reached the same level of insurance penetration as the more developed markets. The potential for reinsurers, however, is limited as these areas can generally be covered by the capital available to the insurance markets. Only in the initial stages will reinsurance capacity be required.

The greatest opportunities for new reinsurance concepts are, in our view, liability reinsurance and the synergy to be developed from traditional and non-traditional reinsurance aspects. This includes all financial coverages which clients may need to cover their balance sheets, for instance in the interest of shareholder value. While we have significantly developed business in this area we are constantly trying to refocus and address the needs of our clients which seem to constantly diversify and intensify.


Mike Gelband, President, Lehman Re Ltd
To what extent do you find the current emphasis on shareholder value helpful/unhelpful? In general and/or in relation to your own business, what do you believe the balance should be between the interests of shareholders and those of other stakeholders?

If you are acting in the best long term interests of your shareholders as well as aligning employees' interests with those of the shareholders, you will have the best possible chance to greatly increase the value of your organisation.

It is regularly said that consolidation among primary insurers will reduce demand for reinsurance but increase demand for catastrophe cover and balance sheet protection. Has this really happened and, if so, in what way?

Thus far, this has not happened. Reinsurers have been reducing prices due to competitive pressure and this provides primary insurers with the economic incentive to purchase coverage and will continue to do so until market conditions change.

What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

The general movement towards increased customisation of products is extremely healthy for the business in general. However, multi-line policies should decrease profitability to the industry by decreasing margins for traditional reinsurers. Multi-year policies, on the other hand, should add price stability and capacity to the market creating a more efficient operating environment.

What role do you believe reinsurance brokers can play? To what extent does their development of areas of expertise, such as modelling, overlap with what reinsurers are doing?

Brokers can provide additional value in the areas of analysis of clients' needs, structuring, and pricing of covers. The broker's departure from the traditional role of just facilitating the transaction is similar to the change in the role of reinsurance companies as simply being providers of capacity. Looking for a competitive edge, both are entering the area of providing services to the insurance companies in addition to their traditional functions.

What effect do you believe low interest rates and low inflation are having on reinsurance?

In the favourable investment environment we have been experiencing (low inflation, low interest rates), some reinsurers are taking on risks through burning costs in anticipation of high investment returns. If the expected returns fail to materialise, the impact on certain reinsurers could be severe.

To what extent generally are you worried about the solvency of primary insurers?

Larger, highly-capitalised insurance companies are fundamentally healthy. The real worry comes from smaller companies that are experiencing significant pressure from price competition. This pressure may cause problems if (or when) the investment side of the companies are not able to meet their earnings targets.

Looking further ahead, what are your greatest areas of concern in relation to potential losses? For example, the concentration of population in climatically or geologically unstable regions, the development of new technologies, such as genetically modified crops?

Looking past Y2K, some areas of potential losses include changes in the weather patterns, health impacts of new electronic technologies, and the introduction of new legal doctrines that will create new classes of liabilities.

Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?

The greatest opportunities lie in the area of blending traditional insurance risks with capital market innovations and technologies. The areas that are the most mature and present the greatest opportunities are property catastrophe, finite, financial, life & health, and political/credit risk.

continued in part 2…