...continued from part 1.

Hans-Jürgen Schinzler, chairman of the board of management, Munich 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?

Consistent strategic orientation is essential in well managed companies. This, of course, requires vision but it also requires a range of management instruments to steer and position the company in the markets. There is no doubt that the shareholder value concept is a helpful performance measuring instrument, especially over the longer term.

Every manager knows that there are legitimate expectations from all stakeholders in a business and successful managers are generally those who are able to not only balance these interests, but achieve optimal performance over the long term. Looking after all of the stakeholders is vital; no company that wants to be successful in the long term can afford to neglect its clients, its staff or the environment in which it finds itself - this would surely be contrary to shareholders' interests.

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?

To begin with, one must recognise the fact that reinsurance volume worldwide is still growing - indeed, in the last few years it has grown more strongly than primary insurers' original business. This is certainly a favourable perspective and is not surprising in view of larger and larger risks.

On the other hand, it is clear that company mergers are enhancing primary insurers' self-financing capacity; at least this is true outside the area of accumulation risks. While insurers in emerging markets had and have a substantial reinsurance need, in “mature” markets there have indeed been reductions in cessions to a certain extent. One of the main areas is capacity for risks with a very low occurrence probability, but there have also been increases in retentions. In both cases financial reinsurance is often arranged. However, the overall weight of the cession-reducing process is frequently overestimated. For primary insurers, the decisive factor is really not whether they “have” the capital to be able to cut back their reinsurance. It is whether they invest their capital more favourably by doing this than by employing it in another way. In making forecasts about the development of reinsurance demand, one must always keep the price situation, i.e. how costs compare, in mind.

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

Sophisticated solutions are products that can be adjusted with optimum flexibility to the needs of the individual client. I am not sure whether multi-line and multi-year policies are the best examples of this, though. What is certain is that more and more clients expect intensive consulting prior to a placement. Such individual covers cannot be produced in advance, ready for sale; in many cases they can only be developed in collaboration with clients in accordance with their specifications. This gives rise to considerable additional costs, which initially have consequences for the reinsurer's cost ratio. But ultimately the decisive factor for the reinsurer is not cutting costs but investing productively, especially in know-how and competent staff. Companies that create the prerequisites for intelligent products and service capacity second to none will certainly have the future on their side.

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?

I see the role of brokers in the insurance and reinsurance markets as being different. The removal of borders - in connection with the European single market for example - has undoubtedly made the broker's intermediary function more important for a large number of policyholders. In the reinsurance market, which has always been mainly international, the situation is different. The less than encouraging experience with splitting treaties into small and very small participations has been a significant factor in rekindling many insurers' interest in long-term relations with a relatively small number of first class reinsurers. The names of the companies on this list are well known in the market and it is not difficult to get in contact with them. Large reinsurance brokers are therefore looking to expand their services more and more beyond actual placement into the area of so-called additional services. The efforts involved are considerable. To this extent, there is a certain degree of overlap between the brokers and the large service providing reinsurers.

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

First and in general, bottom line results currently depend on the reinsurance more than on the investment side. In other words, one has to look very carefully at the underwriting rates and conditions. Secondly the reinsurance industry is confronted with increasing demand from our clients for protection that covers not only traditional underwriting risks but also other items on the balance sheet, like investment income. The interest rate risk is a subject for scrutiny, not only for insurers but also among financial analysts. As a result, many insurers are being forced to examine their asset-liability position and to identify possible mismatches. For those who are prepared to react - even at a cost - this might be the time to do so while it is not yet too late. The reinsurers' task is to work with their clients in limiting or transferring their mismatching risks. The right solution may range from pure reinsurance or finite risk reinsurance all the way down to purely financial contracts, in which case it may be beneficial to co-operate with an investment bank.

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

I am not worried, but I see the problem. In the wake of the wave of deregulation and liberalisation that we have experienced in the last decade, insurance company insolvencies are no longer a rare exception, even in markets that were previously stable. And the continuing trend towards the formation of financial conglomerates brings new risks with it, ranging as far as possible domino effects. But I think one should be careful not to take a one sided view of the situation. There are many market players today with a sharpened risk awareness, due not least to the activities of rating agencies. This is one of the main causes of the flight to quality observable almost everywhere in the reinsurance market, favouring the big global players. But nowadays players on both sides of the market have to look closely at their commercial partners. They have to demand information and to provide information themselves. Those who only know their business friends from the internet should not be surprised if perhaps one day they get an unpleasant shock.

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?

From the insurers' point of view, what they cover are “calculated risks”. If one can succeed in making a risk reasonably calculable, one is already on fairly safe ground. In principle, I believe that this continues to apply to our natural hazard potentials even today, despite urbanisation, increasing concentration of values in exposed areas and climate change - all challenges that should certainly not be underestimated. A single company or even a single regional market cannot deal with these challenges alone. But there is a global network and there is experience with losses, from which one can learn. The large professional reinsurers in particular have a function here not just as risk carriers but also as an early-warning system for the insurance industry, and beyond that for society as a whole.Really threatening, in my opinion, are risk potentials that are initially not recognised as such. In the 1980s, for example, we had depressing experience in liability insurance with latent claims. As cases of damage to health and property dating back many years manifested themselves, a large number of liabilities became payable which nobody had reckoned with decades before. Today, when we are on the threshold of employing biotechnology on a broad industrial scale, we must be extremely careful not to get into a similar situation. Everything must be done to keep these applications controllable as “highly protected risks”. Of course, the insurance industry cannot achieve this on its own. But it can and must make its influence felt so that this happens.

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 development of insurers' and reinsurers' business is naturally very closely connected with overall economic development. I certainly believe that reinsurance will remain a growing field of business, particularly for large global players offering high security, individual service and utmost professionalism. Opportunities will arise from emerging markets such as China or Vietnam and certain eastern European markets, to mention just a few. In addition, there are those large markets with an established but nationalised insurance industry that are expected to eventually deregulate such as Brazil and India. Another example: Having just established our office in Santiago de Chile we are promoting our life reinsurance activities in the growing South American market. Last but not least, deregulation and fierce competition on the one hand and attention to shareholder value on the other are forcing direct insurers to protect themselves even more.Furthermore - and now I am referring to the more developed markets - there is a clear tendency for industrial risks to keep on increasing in size and complexity. Values at risk and consequently their exposure to natural catastrophes, among other things, are on the rise worldwide.

Products, or let me rather say solutions, for large corporate buyers will increasingly be integrated concepts, typically involving both sides of the balance sheet and covering many lines of business, possibly also over more than just one year.

Again I see the large global reinsurers benefiting from these developments. So, all in all, it is not a bad picture for those prepared to act on the challenges presented by a rapidly changing business environment.

As to the second part of the question, I would say that Munich Re has always considered itself a “multi-specialist” or “niche player who wants to operate in all niches”. We have, however, placed particular emphasis on those lines and products that meet unconventional requirements of current and future clients. In the last few years, for example, we have considerably strengthened our financial reinsurance team and our workers' compensation operations and have formed Munich-American Risk Partners.

Andrew A. Barnard, president and ceo, Odyssey Re Group 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?

I think focusing on shareholders' value concentrates the mind, and aligns strategy and execution with the goals of shareholders.I believe customers prefer dealing with successful companies, so achieving realistic shareholder goals are key.

But, the pure focus on the creation of wealth can be circular logic. It is really the by-product of how creative and valuable you can be to your customers that determines whether they will prefer to grow their relationship with you. Market domination does not really apply in reinsurance.

Likewise, talented employees are the only way to create distinctions of quality in delivering a financial service.

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 issue has two sides.

Consolidation has concentrated demand, moved up attachment points, and introduced new forms of “stabilisation” coverage.In the process of consolidation, however, a lot of business is spilled out to regional or specialised companies whose cost structure can accommodate the economics of that business.

So while cat covers are leveraged by the large capital bases of some companies, increased demand can reappear elsewhere.Is capital a perfect substitute for reinsurance? I do not think they perform identical roles.

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

Multi-year policies are a double-edged sword. Are you locking in relationships, low prices, or good terms? In property catastrophe covers, it makes sense to extend limits over a longer horizon. In casualty, I think the concept cannot be applied generally, without some explicit terms that permit re-balancing the account.

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 biased on this issue, for good reasons. We think brokers can bring advocacy, service, and syndication to clients in a way that makes them creative and customer-driven.

There is some natural overlap in risk assessment tools between brokers and underwriters, but when used in combination, a better answer surfaces for the client.

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

There is a direct effect on the models we use to project the outcome of risk assumed. Extended periods of low inflation add to perception of stability, and obviously reduce our yield from fixed income investments. But the future impact of economic and social inflation on long-tail claims costs is still as unpredictable as interest rates themselves, which is a hazard particularly to excess underwriters.

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

Not very. Leverage tends to be low overall and investments have obviously performed well, expanding surplus faster than writings or reserve growth. We know there will be some exceptions, where companies operate at the edges, and their reserve base will prove inadequate. Those companies tend to be identified long before statistical evidence reveals solvency problems.

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?

Any concentration of risk is a concern, and therefore a potential opportunity as well. The key is to invest in technology and analytic capability to avoid being surprised by concentration. Beyond the obvious Y2K concerns, there are potential new problems in areas of genetic engineering, new “lifestyle” pharmaceuticals. Very prominent to us is the fundamental repricing of financial assets over the last decade, which has dramatically increased the market capitalisation of certain companies, particularly those engaged in e-commerce, and with it the exposure to professional liability of insurers who protect them.

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?

Whatever creates concern, fear, or scarcity is an area of potential opportunity 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.

Max F. Furrer, chairman and ceo, Rhine Reinsurance Co 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?

I do not think that it is relevant whether the emphasis on shareholder value is helpful or not. For me increasing the value of the company - and thus the shareholders' value - must be a prime objective of each ceo. Increasing shareholder value means that for each decision we make we have to consider whether it is ultimately strengthening the profitability of the company and thus increasing its value. Remunerating a successful employee and consequently increasing his commitment to the company is adding to the value of the company. Community work too will enhance the company's image, etc. Increasing shareholder value means to ensure sustained growth in profitability rather than initiating short term actions that are to the detriment of the future of the company.I strongly believe that in a properly run company all stakeholders profit when the shareholders' value increases.

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 among primary insurers definitely reduces the demand for traditional reinsurance. This applies to retention levels which are being increased as well as to the extent that cover is being purchased. The merger of two large primary insurers will not require that the size of cover for the combined reinsurance programme will be equal to 1 + 1. It is, however, correct that the merged insurance companies that now dispose of larger amounts of capital need - apart from protection for the largest loss events - different types of risk management solutions. Such solutions may involve for instance the securitisation of risk portfolios, covers that work with different triggers or are laid out to run over an extended time span, are multi-line and take into account the time value of money.

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

Reinsurers must be able to develop attractive solutions for their clients if they want to stay in business in the long run. This means that more resources must be allocated to the customer/solutions oriented business segments. With more sophisticated IT systems the pricing and risk assessment of the commodity/capacity oriented business can be made more efficient. Overall it is very likely that the cost basis will increase but the risk inherent in the business will be lower.

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?

Reinsurance brokers play an important role in the process. They are able to take an independent position when exploring the customer's needs. It is, however, required that they share the development work with the reinsurer to avoid duplication of efforts. The margins of our business are and should not be allowing duplication of work.

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

Low interest rates are having a serious impact on certain life insurance products where future benefits are based on certain interest rate assumptions. With lower than assumed rates it will be difficult to match the monetary amount of pay-out. Low inflation has no adverse impact on either life or non-life business.

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

I am not particularly worried about the solvency of primary insurers.

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?

I think we must keep in mind that a change in climate is taking place. It is difficult to assess its impact. The fact that the economic and insurance loss of natural catastrophes is increasing requires us to be in a better position to monitor the exposures we are taking into our books. What worries me most is the potential of future losses that will be claimed under present covers for risks that we do not know today and for which we never got premiums.

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?

I believe that the solutions oriented business, the so called “non conventional” reinsurance products will play an important role in the future. I also believe that the convergence of the financial and reinsurance industries will be a fact of life. At Rhine Re we have invested substantially in developing the expertise and hiring highly skilled and specialised staff to cope with this challenge. I furthermore believe that close customer relations where we can add value to their risk management solutions will continue to be an important success factor.


Jacques Blondeau, Chairman and CEO, SCOR
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?

Generally speaking, the emphasis put on shareholders' value has brought large benefits to investors and companies alike, particularly in Europe: more discipline, transparency, accountability, etc. I do not think that we could, today, manage our company the way it was managed in this respect 15 years ago.On both sides of the Atlantic, the debate between shareholders' and stakeholders' value is far from over; I think that it is much more a question of nuance, balance and probably good solid common sense than a philosophical issue. A good compromise has to be and will be found between giving “everything to the shareholders now!” and the necessary defence of stakeholders' value, employees, clients, etc.

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 per se has not really changed the way primary insurers are controlling their risks and organising their reinsurance coverage; among the leaders of the industry in the world, we still see widely different approaches to risk management: centralised, decentralised, multi-year or not, etc.

On the other hand, in terms of behaviour towards reinsurance, we see the gap widening between the small and medium size primary insurers and the large international groups which have become much more sophisticated buyers: with the exception of Germany, proportional reinsurance is gone, demand for cat and large peak risks covers has grown markedly, some balance sheet protection has been put in place, etc.

What we have seen so far is not really a reduced demand for reinsurance in terms of risk transfer, but a better management of the risk portfolios and more innovative solutions.

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

The issue with multi-line/multi-year policies is not really the impact on the cost base but capacity allocation and pricing of the risks.Multi-year policies are the flavour of the day for two different reasons: in some cases, clients simply want to take advantage of today's soft market conditions, in others they truly want to extend their horizon, get price stability, smoothing mechanisms, etc.

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?

As with all the players along the value chain, brokers are more and more required by the market to demonstrate that they are adding value to the overall process. Brokers are less and less the typical “middleman” basically helping its client to find the least expensive possible capacity. Concentration of the reinsurance industry and change in client demand have given the brokers a different role, which is to be a technical and financial advisor.In this respect, some overlap occurs with the technical role of reinsurance, but overall I think that both are quite complementary.

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

In a zero or very low inflation environment interest rates are not low, they are high and increasing in the US. I do not see anything specific to reinsurance on this issue.

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

Primary insurers' insolvency can only be a problem for reinsurers in the very unusual case when deposits would exceed actual claims.I am 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.

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?

We are, of course, following very closely all the developments on the natural catastrophe “front” but keeping in mind that no two scientists can agree; for example, is the climate changing permanently and if so, what will be the consequences? Beyond this debate, we think that we can model properly the natural catastrophe exposures and manage the risk, at least to a large extent. We can even dream that politicians and governments will be forced to act responsibly and, for example, improve and strictly enforce building codes or even ban the construction of towns made of mobile homes in hurricane prone areas.We feel much more concerned with the new emerging risks leading to casualty or third party liability.

As demonstrated with the “mad cow syndrome” or the “Belgian chicken crisis”, under extreme pressure from business interests with new technologies, the onus has been transferred from the manufacturers to the consumers. As very positively stated by the Prince of Wales, it is no longer “not marketable until proven safe” but “marketable unless proven unsafe”. This opens the likelihood of very serious problems indeed and huge potential claims.

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 development of reinsurance in two main broad directions.Primary insurers are rapidly becoming low cost mass producers of standardised covers. More and more, it will be uneconomical for them to allocate resources and time to take care of the “special” risk which will be transferred to reinsurers. A good example is in life insurance: when you manage tens of thousands of accounts, billions of euros in assets, etc, it does not make a lot of economic sense to take care yourself of one or two thousand cases of impaired life each year.The second direction is linked to question 7: the technological boom, the public reaction to environmental problems, etc, are opening a huge potential market in third party liability.


Dan Malloy, President and CEO, Stockton Reinsurance Limited
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?

Over the long-term, shareholder value is certainly of paramount concern. However, too often for publicly traded companies, the view about what constitutes shareholder value is influenced by arbitrarily imposed benchmarks and time frames. As a privately held company with a long term view of performance, Stockton Re finds opportunities to enhance our clients' shareholder value by transforming their short-term volatility into long term value.

In order to determine which exposures are suitable for our approach, we often ask senior decision-makers: “if you could report results every five years instead of every ninety days, which risks would you prefer to retain and manage rather than just sell into a traditional reinsurance portfolio?”

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?

Although we agree that demand for traditional reinsurance has moderated due to consolidation, there is a simultaneous increase in 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.

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

The kind of expertise required to devise sophisticated and effective solutions does require a significant dedication of resources, including professional staff and technology. This cost may or may not be material, depending on the size of the reinsurer. However, what is more important than the cost is the ability of such groups to add value to their parent and clients. Specialist writers (such as Stockton Re in the field of finite risk) who dedicate both experience and resources to the particular task may be more effective in the long run than a “bolt on” specialist team. Since we commit to a smaller number of transactions, each with greater potential value, we have lower expense ratios and can pass efficiencies on to 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?

Reinsurance brokers play a significant role in the design and placement of programmes for their clients. Brokers who know their clients' interests well add great value particularly when they are able to facilitate the explanation and evaluation of complex reinsurance structures. The overlap in expertise is complementary (rather than competitive), particularly for finite and other custom designed products, so that everyone involved understands all aspects of the relationship, which often spans a number of years.

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

Although low inflation tends to help keep loss costs from accelerating as quickly as they have done in the past, this loss cost trend cannot offset inadequate pricing. Earnings throughout the industry have been under pressure not only from lower rates, but also from dwindling reserve redundancies from prior years. Lower interest rates also drives down ROE in traditional insurers' investment portfolios that are heavily weighted towards bonds. In addition, given continued low interest rates, reinsurers can no longer rely on investment returns alone to enhance income. Unlike many other companies, Stockton Re's actively managed global investment strategy insulates us and our clients from some of the negative impacts of this low yield environment.

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

At this stage in the economic cycle when reinsurers are faced with a difficult operating environment there have been a number of failures, reorganisations and instances where reinsurers are choosing to litigate rather than settle claims. As such, it is very important for both primary companies and reinsurers to look carefully at their partners. As our finite risk contracts are typically in force over a 3 to 5 year time frame, financial security and solvency are indeed important factors in choosing clients and partners.

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?

Part of Stockton Re's mandate is to help our clients manage such concerns. Given a full understanding of our clients' fears, we are able to provide them with tools to transform these challenges into opportunities.

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?

Stockton Re's business is the creative deployment of capital. We have acted as an insurer to corporations and governmental bodies, a reinsurer, a retrocessionaire, a counterparty for derivative transactions, and an investor - directly applying capital. The combination of our Bermuda domicile, private ownership, proven asset strategy, and demonstrated willingness to evaluate both risk and return over the long term allows Stockton Re to offer to our clients a window to a rational world. As such, the greatest opportunities have and will continue to arise from our ability to provide our clients access to this same rational environment.


John Engeström, CEO and President, Tempest 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?

Generating shareholder value is a key driver for any business. European reinsurers have been lagging their US counterparts in emphasising return on equity. Opaque accounting methods and non-demanding shareholders (and cross-shareholdings) have been the major obstacles. Things are gradually shifting as more European reinsurers introduce US GAAP or IAS accounting and/or list their shares in the US. Ideally, reinsurers should assess each risk based on its specific ROE potential. At Tempest Re we even estimate per risk ROE based on the marginal capital required to write the cover. There should not be any real long term conflict of interest between shareholders and other stakeholders like clients and staff. No sustained value creation occurs without satisfied clients serviced by motivated skilled staff.

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 generally true that retentions have gone up as a result of primary insurance consolidation. But there are also instances, mostly in the US, where the creation of large financial conglomerates have led to more low-level profit centre protections.The increased demand for catastrophe cover is probably as much a result of lower rates and available capacity as driven by primary industry consolidation.Large buyers clearly look to protect their balance sheets via composite and multi-year deals often combining insurance and asset risk.What effect does devising more sophisticated solutions, such as multi-line/multi-year policies, have on the reinsurer's cost base?

There is no obvious impact on reinsurers' cost base due to integrated covers or multi-year deals. What can impact negatively are costs around securitisation, especially legal costs.

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?

Reinsurance brokers will increasingly act as consultants, unbundle their services and be fee rather than commission remunerated. There will inevitably be some overlap of expertise, such as modelling, between reinsurers and intermediaries. Even in direct dealings reinsurers can ultimately expect the primary insurers to have run their own models thus improving the technical dialogue.

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

Lower inflation is generally beneficial to insurers and reinsurers, introducing more stability to claims cost. 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%.

To what extent generally are you worried about the solvency of primary insurers?As a reinsurer we are not overly concerned about primary insurers' solvency. Obviously, we monitor the credit worthiness of our clients and take any necessary remedial action. The greater insolvency risk is in regard to any outstanding reinsurance recoveries which would therefore relate to retrocessionaires.

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?

Beyond the year 2000 concerns the biggest longer term uncertainty revolves around courts globally following the US precedent in reinterpreting the wordings and the limits of liability. Who knows what the future holds in terms of insurance claims in health related areas like smoking and alcohol. In the UK specifically the life and pensions industry is exposed to regulatory re-interpretation of Policyholders' Reasonable Expectations (PRE) and adequate consumer information as evidenced by the pensions mis-selling saga and future uncertainty around “guaranteed” annuities.

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?

Life and health reinsurance offers opportunities as state provided benefits are scaled back. Equally, integrated solutions covering insurance and asset risk and even operational risks (“enterprise risk”) will be more sought after by risk managers and primary insurers.


Nigel Rogers, CEO, Terra Nova (Bermuda) Holdings 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?

We have always had an emphasis on shareholder value. Since the IPO in April 1996 Terra Nova Group has grown recognising the importance of shareholders' interests.

The important thing in a volatile risk business like reinsurance is to have shareholders who understand the long-term objectives of your business. The good news is that, today, there is a much better understanding of the insurance and reinsurance business by those who follow our performance. It is, however, important to realise that enhancing shareholder value is not synonymous with corporate growth. What matters is the quality of the business not just its size.I welcome the scrutiny that shareholders and their advisers bring to bear. I feel I learn from the experience and as chief executive I seek to ensure that Terra Nova performs as close to expectations as possible given the volatility of the business in which we operate. Our business is to enable others to protect their balance sheets and smooth their performance when losses occur. We carry their risk. The irony here is that the market can still penalise insurance and reinsurance companies when the unexpected impacts our own performance, even though this is at the very heart of our business. Clearly the stock market suffers to a degree from “short-termism” and each quarter's results are keenly scrutinised. While fully aware of this we take a longer-term view in our efforts to grow shareholder value.

Inevitably there is a delicate balance between the interests of shareholders, trading partners, employees and policyholders, but the company which is successful, profitable, and takes pride in the way in which it transacts business is the one which is most likely to satisfy the aspirations of all the stakeholders.Our goals can only be achieved by having talented and motivated people within the organisation. As part of this strategy we seek to enable senior and middle managers to become shareholders in the business. Share price performance is of material interest to those running the business.

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?

Approaching 50% of our gross written premium income is reinsurance, much of which business stems from long term relationships going back 20 or 30 years. Our premium volume from traditional reinsurance arrangements has been impacted by the recent spate of mergers and acquisitions. However, increasing concentration among insurers has coincided with opportunities to develop new approaches and new products, which have helped maintain both premium volume and profitability. The diversity, location and ingenuity of our various operating units have helped us in this.

While there has been consolidation among primary insurers there has also been continued growth in the creation of “captive” (re)insurance entities which has led, on one hand, to greater risk retention, but on the other, to different approaches to the purchasing of reinsurance. This style of underwriting can give rise to demand for additional catastrophe reinsurance but since much of the growth has been in small commercial and personal lines business there has also been a demand for different types of risk-financing arrangements capable of protecting attritional exposures. Excess capacity within the reinsurance market has increased the enthusiasm for “new” products or long-term deals and some reinsurers have established dedicated ART teams to offer corporate reinsurance. The quality of the security they offer is no different from that available to the subscription market. Only a handful of (re)insurers have so far made use of the capital markets.

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

Working with primary insurers on multi-line/multi-year policies can involve a considerable investment in research and development to produce a product which serves the best interests of both parties. Savings in transactional costs can offset these expenses, however.

Many cynics would say that the advent of the long-term agreement and multi-line “whole account” protection coincided with and was the result of the soft market. While the timing from the point of view of price was unfortunate it is true to say that the insurance and reinsurance 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.

We should not be afraid of offering multi-line/multi-year policies as long as we can assess the current and ongoing risk. Over the last few years these policies have also become more sophisticated from the reinsurer's point of view and now often contain review clauses or provisions for increased premiums in the event of losses.

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?

Most of our business, including our reinsurance business, is sourced through intermediaries and we certainly believe that reinsurance brokers have an important role to play. 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.

With the greater sophistication that has, without doubt, developed in reinsurance in the last 10 years, the modern reinsurance broker can continue to play an important role as he guides his clients through the complexities of recent developments in risk management and reinsurance products.

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

Given that we do not write particularly long tail business at Terra Nova, it has always been our philosophy that interest rates should not, in the main, affect our underwriting approach, although within our modelling we do factor in lower inflation to the degree that we believe it impacts claims payment. Having said this we will need to concentrate even more in making underwriting profits in the current low interest rate environment.

Writing business for volume on the back of high investment returns is not a basis for building long term profitability. Presumably those companies that have relied on higher investment yields in underwriting their business will now have to adjust their rating upwards to compensate for the downturn in the investment markets.

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

The solvency of primary insurers is a concern. In many classes we are seeing business being written at rates below the historical burn 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.

Of course, in current market conditions, primary insurers should also be concerned about the solvency of their reinsurers, particularly where they have used them to reduce, dramatically, their retentions.

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?

With insurers taking much larger shares of individual risks, future losses will be that much larger to reinsurers, both on a per risk and event basis. Catastrophe losses, especially those of an elemental nature will almost certainly involve total insured values far in excess of previous loss experience. There will be those who, in the chase for premium, find themselves over exposed or alternatively, by concentrating on the most expensive risks, find they are also underwriting the most hazardous ones. However, a reinsurer's exposure to this type of event should be quantifiable and somewhat easier to predict assuming no shortcuts have been taken in calculating the accumulative aggregate. We are benefiting in this area by advances in IT and the use of sophisticated risk modelling software.It is much more likely to be in the areas of wordings and the coverage granted that mistakes will be made. Lawyers will no doubt grasp these opportunities and litigation awards will follow. Y2K could potentially be an example of this regardless of the exclusionary wordings.

There is obviously no shortage of pressing issues for the reinsurance industry to address. Global warming, Y2K and other exposures such as lead paint, tobacco liability, electromagnetic fields and now genetically modified food are well documented. Only time will tell whether one of these issues develops into an industry-threatening calamity. From a Terra Nova standpoint it is imperative that good underwriting management controls remain in place and that our reinsurance clients are responsible in their underwriting of the original risk.

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 list of major sources of potential loss raised in the previous question would suggest that there is little danger of the reinsurer running out of business to insure. The challenges facing the insurance industry are greater than ever and the nature of the insured risks increasingly complex.In addition, deregulation and liberalisation are opening up demand for reinsurance from emerging markets in Latin America, Eastern Europe and the Far East which provide new opportunities for developing our business over the long term.

In our traditional markets we will continue to build long-term relationships with our assureds and work with their brokers to develop policies which meet their needs. In some instances these will continue to be conventional reinsurance treaties, in others they may be of an ART or derivative nature. The success of either approach depends on a good working relationship between assured and reassured, an understanding of the business and the risks involved and good underwriting controls.

Finding innovative solutions to clients' reinsurance needs is a core part of our business. To take just one example, in 1996 Terra Nova established a syndicate at Lloyd's specifically to meet the need for a reinsurer able to offer a reinsurance-to-close for the open years of account of orphan syndicates. This has proved very successful. Our expertise in this area is now being used to develop finite reinsurance products such as loss portfolio transfers and adverse development covers for insurance companies.