Reinsurers may be licking their wounds, but 2001 was a vindication of the industry, and a testament to its strength, says Marie-Louise Rossi.
Last year the reinsurance industry was forced to show what it can do. The World Trade Center (WTC) was a tragedy of such enormity that it eclipsed other events that occurred during 2001. So let's not forget that, even before September 11, it was going to be a major year for insured losses world-wide. Afterwards, of course, it became a reinsurer's nightmare.
While it is still far too early to discuss a final outcome, there is confidence that the vast majority of legitimate insurance and reinsurance claims arising from the WTC will be met in full. This is something that we now perhaps take for granted, but turn the clock back a few months and the papers were full of predictions of Armageddon for the industry. Some commentators had virtually written us off. The International Underwriting Association (IUA) was involved in countless media interviews, assuring the public that its members would cope and that claims would be paid.
To quote the IUA's chairman Stephen Cane speaking last year: "IUA members will respond positively, the industry will survive, and the London market will still have an important role to play. There's little we can do about the human suffering that terrible events like this cause ... but we can and will play our full part in helping the victims of this attack, both corporate and individual, make a full financial recovery." And so it has proved. Of nearly 50 IUA members active in reinsurance, only one ceased underwriting as a result of the disaster, and it expects to pay any claim arising. With one further exception, all our members retained their security ratings. The bulk of WTC claims have fallen on the strongest reinsurers, many of who remain triple-A rated.
Correction of rates
Furthermore, many analysts, including Standard & Poor's, believe the industry will emerge stronger than ever, partly because the WTC accelerated a long overdue correction of rates. Insurers buy reinsurance precisely because it promises financial certainty in an uncertain world, and this is now in more demand than ever.
The London market continues to be the world's main international market for insurance. Indeed, the company sector of the London insurance market has been enjoying a period of expansion. Consolidation might see us with slightly fewer participants, but the latest IUA figures, which pre-date the WTC attack, show IUA premium income in London increasing 20% year on year.
Of more immediate concern following the attack was the aviation insurance industry's response to WTC. Faced with virtually unlimited potential exposures, insurers invoked the seven-day notice period reviewing their war liability write back clauses. This move sparked a week of frantic negotiations between insurers, brokers, airlines and governments world-wide.
Some press reports had the industry threatening to withdraw all cover, and insurance once again found itself headline news in the broadsheet business pages. While this was never the case, the market's decision to restrict third party liability war coverage made the threat of airlines being grounded, on account of their contractual obligations to their lenders, become a very real one. Government-backed insurer, Troika, was set up literally over a weekend to enable airlines to keep flying. Its future is currently being discussed.
Some commentators have said the September 11 tragedy had accelerated the market cycle by up to three years. We were already moving to a hard market. Premiums were already on their way up. The September 11 loss just made it happen more quickly. There is no doubt that both insurance and reinsurance became more expensive across all classes of UK business at the recent year-end renewal season, and wordings were also made tighter, with more exclusions than before. While this was partly a reaction to September 11 and the subsequent loss of insurance and reinsurance capacity worldwide, it was known before then that rates were rising after several years of a sharp downward cycle. Nevertheless, they have not risen nearly as high as some had predicted.
Of course with a hardening market come new entrants. As we saw in the early 1990's, start-ups are basing themselves in Bermuda. But this does not mean that all the business will remain there. I expect that just as XL Re and Ace opened London market operations, once established, so the trend will continue with these latest entrants. It is certainly not unknown for capital to be based in one place and expertise elsewhere. Indeed, this is the case with most of the IUA's international members, whose capital may not be based in London, but who come here - the hub of the distribution of international wholesale business - to take advantage of the concentration of expertise and specialist support services.
The events of September 11 are certain to act as a catalyst for further change. For example, it has demonstrated the need to rethink certain aspects of how insurance and reinsurance are conducted and underlined the already perceived need for reform in London. There is likely to be a continued `flight to quality' and the IUA and Lloyd's are determined that September 11 should not deflect attention from the current programme to modernise the London market. Certainly, 2001 was a significant year for London market reform, with the merger of the IUA and Lloyd's back office processing bureaux London Processing Centre (LPC) and Lloyd's Policy Signing Office (LPSO) to form Ins-sure Services and the development of the first LMP format slip.
Merging the bureaux of the Lloyd's and company market had been discussed for many years. Today it is a reality and Ins-Sure commands market-wide support. Though it was the first tangible move for the market toward reforming outdated and inefficient practices, it marked only the beginning of modernisation. Indeed the end of the year saw the revised slip published, embodying much of what the market is trying to achieve. A General Underwriting Agreement was also agreed last year and is now in the public domain.
The year 2001 served to remind us of how much has improved, and of the value of working together. The coming together of the market organisations saw not only the streamlining of processing services and development of a new slip but, for example, success in lobbying on a reduction in tax rates, and a redraft of English Law Commission proposals on the period of limitations. It also saw the launch of the market mediation initiative (MMI), intended to inform and educate market practitioners of the benefits and financial advantages of alternative dispute resolution (ADR) and a strengthening of ties with the marine market and shipping bodies. Most notably, it served to remind us of why we are here and of our vital role in a global economy.
Looking ahead, I believe the consequences of the events of 2001 will bring fresh challenges to the London market. To quote Stephen Cane once more, "The World Trade Center event may have been entirely unplanned, deeply distressing and unwelcome. But it provides a unique opportunity to demonstrate what the London market can do; to show that our service improvements have been real. " And I think we will.
By Marie-Louise Rossi
Marie-Louise Rossi is chief executive of the International Underwriting Association.