This year's RIMS conference promises to be a busy affair. After years of risk managers being able to pull the punches, the past 18 months have seen tables turned, and insurers and reinsurers taking the upper hand. There is little doubt the new discipline is welcome in the re/insurance sector, which spent too many years languishing in the mire of underwriting losses buoyed by investment returns. But to corporate insurance buyers, many of whom saw the great insurance giveaway of the late 20th and early 21st century as the defining market condition for ever more, there are complex questions about just what risk the so-called `risk carriers' are prepared to bear. Where, they are asking, are the covers requested by the corporate risk management community in its hour of need?
Interestingly, some of the solutions provided by the re/insurance community in the face of the new risk environment, have not been embraced by the risk management community. For example, the recent closure of Special Risk Insurance & Reinsurance Luxembourg (SRIRL), set up last July by XL Capital, Allianz, Hannover Re, Swiss Re and Zurich to provide capacity for non-US terrorism risks, points to a lower-than-expected demand for specialist cover, a situation reinforced by the malaise at Terminus, a German terrorism insurance operation.
So there appears to be a discord between what the buyer wants and what the carriers can - or will - provide.
Across the risk divide
At March's European Insurance Forum, sponsored by Aon and co-organised by Global Reinsurance, international risk managers and senior executives from the re/insurance sector tackled the problem, trying to find a way across the risk divide. Chris Lajtha, corporate insurance and risk manager for French multinational Schlumberger, asked whether the insurance industry would deliver on its promises. With an unprecedented run of loss years from 1996 to 2000, and legacy problems still in the pipeline, Mr Lajtha commented that the number of "significant carriers" in the industry had fallen to less than ten. "There is a major confidence crisis in the insurance industry," he said.
His view was echoed by that of Aon UK chairman and CEO Dennis Mahoney, who sees the current trading environment as a marked shift away from the traditional insurance cycle. "Asset depletion - or some might call it asset meltdown - is a very serious problem, and there is a crisis on the asset side of the balance sheet." Mr Mahoney's supporting facts and figures were stark: $250bn has left the industry, $30bn has entered the industry, and reserves could be short to the tune of $190bn. The market, said Mr Mahoney, has entered the "perfect storm".
Munich Re's Clem Booth, a member of the Board of Management, concurred that the market has, indeed, entered a new period, with asset erosion and potential economic deflation both looming over the industry's head. The dark spectre of uncertainty was resulting in a focus away from straightforward selling, and towards strong capital and improved risk management techniques. Brokers, he said, would continue to shift towards the consulting role, providing both quantitative and qualitative advice, though Atle Farstad, risk manager with Norwegian paper company Norske Skog, questioned whether brokers had any type of role to play.
As Brian Duperreault, chairman and CEO of ACE Group in Bermuda, commented in an interview with Global Reinsurance, "The world is more risk averse than ever." But unlike the capital markets, insurance carriers "don't close our position at night - we take it and keep it." Nevertheless, there is a distinct risk aversion within the industry, and, allied with changes in ownership and leadership, this is leading to a more conservative perspective coming through.
This is not necessarily being echoed in the investment market's view of the insurance sector. "There is a growing capital shortage in the industry," he observed. The market is producing good returns - "where else could you employ capital with such positive prospects?" he asked. But the insurance industry is finding it nigh on impossible to attract new capital. The reason, said Mr Duperreault, is that "returns produced to date by the insurance industry have been anaemic." With reserve increases for back year problems, and the plummet in investment income, which in years gone by has been "a dominating force ... the world of capital says `until you show returns, I'm gonna go somewhere else'," he said. Ironically, with the current market conditions, "anybody who has the ability to write business is in a great position," observed Mr Duppereault.
So the paradox is that the strongest position the market has been in for years is not being recognised by the investment community, while risk managers are sitting in the middle, feeling that their needs are not being recognised by their carriers. Nevertheless, the market meltdown predicted by some commentators towards the end of 2001 has not come to pass, and risk management is increasingly taking centre stage, pushing risk management professionals to the fore. This, as much as anything else, will be a good reason to lose the blues in Chicago.
Sarah Goddard is the editor of Global Reinsurance.