Reinsurance is currently a robust and cash-rich market, and has weathered the financial storm well. But now is not the time to get complacent write James Geffen and Mike Papworth of Miller.
It is a paradox that, when comparing headlines between the general press and the trade press, our industry is, from a pure financial perspective, a provider of good news.
Underwriting is more disciplined than ever; balance sheets are both fully replenished and robust; and there is also more capital propping up the reinsurance industry than ever before. Reinsurance market capitalisation is somewhere in excess of $400bn, and we are all quietly getting on with our own business.
Even significant losses have been, and continue to be, settled with little or no fuss, and money has been quickly pumped back into the wider economy.
One only need look at the devastating floods in Cumbria, UK, to see an illustration of this. More than 2,000 homes and businesses were flooded in November 2009, and since then nearly £300m has been paid out in compensation by the insurance industry (with support from reinsurers), making us a substantial contributor to the effort to get the affected communities back on their feet.
Recently, we have also seen several major earthquakes and windstorms, and resultant large-scale (re)insured loss events, such as the earthquake in Chile and Windstorm Xynthia in France, both in February of this year. Even events of their magnitude have not managed to dent market reserves.
The reason for this has to be that the reinsurance industry has learned a great deal from prior catastrophes. To inflict any serious financial damage today, it would take an event with significantly more impact than major catastrophes, such as 9/11 in 2001 or the devastating sequence of the Katrina, Rita and Wilma hurricanes of 2005.
This shows that the industry is weathering the storm and is more robust than it has ever been. But the fact remains that it is still suffering from a perception problem.
The economic crisis was a clear demonstration of this. Since the start of the decline, (re)insurer share price indexes have steadily tracked the downward fortunes of the banks, when technically there is no reason why this should be the case. In fact, while the financial crisis has seen in excess of 200 worldwide bank failures, in the same period not a single (re)insurance company has failed.
The main reason we are not getting the credit we deserve as an industry is our reluctance to step into the limelight. After all, it is everyone’s responsibility to improve our collective reputation.
We should be promoting the good news stories that our industry is responsible for, and illustrating that, through professionalism and high levels of service, something good can come from a crisis.
As well as promoting positive messages about the industry, it is crucial that we continue to achieve strong results in order to maintain our hard-earned reputation. While there are obvious benefits of a robust and cash-rich reinsurance industry, an element of caution should be maintained.
This is particularly important in the current climate. Despite cautiously optimistic reports emerging about the global economy, the reality is that most economies around the world remain weak. As a result, the insurance customer base is under great pressure, and insurance companies are facing enormous strain in a number of key areas. Uncertainty in the political environment across Europe; pressure to grow business in a stagnant economy; increasing cost bases; and falling or stagnating premium income are all serious concerns.
Therefore, with balance sheets awash with capital, reinsurers must all ensure that discipline continues to be maintained and objectives remain focused. We must avoid succumbing to the temptation of entering into new areas of business where we may have less expertise in a short-term bid to increase sales.
After all, we may have weathered the storm so far, but it would be unwise to become complacent while we navigate the choppy waters that could result from a cash-rich industry. GR
James Geffen is head of reinsurance and Mike Papworth is head of facultative reinsurance at independent specialist insurance and reinsurance broker Miller