Nobody can dispute that 2001 proved to be the most traumatic year the re/insurance sector has ever seen, one which led to a change in both the perception of risk and the shape of the market unforeseeable before the events of September 11. Even so, for some commentators, the impact of the terrorist attacks in the US has not been as profound as expected. The year-end renewals proved a lengthened affair, but in general the rate increases did not reach the stratospheric levels predicted - though some classes did experience difficulties as multiline coverages were unbundled and certain lines proved uninsurable.

Now all eyes are turned to the next round of renewals. Where re/insurers had less than three months to analyse, assess and adopt a response to the changed risk environment, the April and July renewals come after several months of taking a long hard look at the new risk patterns and exposures. This look has, inevitably, rested on areas not previously before considered problematic, for example, new aggregation issues brought to light by the events of September 11. Workers' compensation, for some time a problematic line, has now become an area of previously unforeseen concentrations of catastrophic risk, while terrorist cover remains almost impossible to purchase. Modelers are beginning to respond to the new requirements of catastrophe underwriters, not only looking at the natural perils-related property exposures of re/insurers, but also taking into account concentrations of population for life, health and workers' compensation exposures.

New prominence of aggregation
Aggregation has also taken on another aspect in light of the Enron failure. Suddenly re/insurers have found themselves on the receiving end of losses on both sides of the equation - investment loss and re/insurance payouts for surety bonds and doubtless D&O cover in the future. Although the Enron failure does not seem to have proved fatal to any re/insurers, the implications of one of the largest corporations failing, in such spectacular fashion are obvious and wide-reaching. Size is no longer a guarantee of security, and received wisdom on quality is no longer a guarantee of longevity. Inevitably, more data is now required to cover the same risk, with more investigation of how that risk interacts with others in the portfolio, irrespective of which side of the organisation it falls on.

For some, the pressures have become too much. A number of re/insurers across the globe have either been forced out of business or have decided they can no longer compete. Others have put themselves or their reinsurance arms up for sale, though there is speculation that most of the investment money for the sector found its way in during the post-September 11 flurry of interest. But as one door closes another opens. The run-off sector looks set for a major boost with the changing shape of the market. Even before last year's catastrophic events - which include the Petrobras, SriLankan Airlines, tropical storm Allison and AZT, Toulouse losses as well as September 11 - the run-off sector was growing at around 10% per year, and there is little doubt that growth will accelerate as more and more re/insurers decide the risk kitchen is far too hot. Traditionally, US companies have been more likely to retain their run-off portfolios and manage them in-house, but the current retrenchment to core business could see a blossoming in business for third-party run-off service providers.

Capital entry
Even though some capital is waving adios to the re/insurance sector, multibillions have found their way in to take advantage of the hardening market. "Generally one of the features of the current marketplace in North America is the influx of new increased capital," commented Rory Carvill, chairman of independent reinsurance broker, Carvill Group. "The underlying rationale is that more attractive rates can be obtained for writing catastrophe risk in the wake of September 11, even though the coverage is not extended to include terrorism. The new capital would be encouraged by the view that risk is reduced with the prevalence of new modeling techniques. However, if both buyer and seller have access to the same modeling approaches there is a presumption that they would both result in the same quantum. The resulting issue would be that, if these risks can be that well quantified, where is the risk transfer? In fact, the nature of catastrophe risk is that the quantum of loss has never been accurately predicted by a model."

This inevitably leads to the question of how re/insurers can deal with the inherent uncertainty of their business, particularly when the accepted risk environment has been changed out of all previously-accepted models. "What September 11 really exposed was the catastrophic exposure caused by individual risk," said Mr Carvill. "The exposures, for example, of one apartment complex in a major city exposed capital in a way not previously thought probable and only remotely possible. This points to a need for everyone to keep sight of that fact that real risk transference remains in the domain of underwriters who can apply their business knowledge, which can do more than theory and computer modeling in measuring risk. A good intermediary to navigate the best solution completes the equation."

Catastrophic exposures are now more widespread than the windstorms and earthquakes that traditionally have shaped the business, but the risk-bearing community is continuing, shaken by recent events but not stirred into large scale retreat. In the city of the (in)famous hurricane cocktail, RIMS members will gather for the fortieth time to discuss the pressures on their business, and for the first time together look at the new hurricane forces that are shaping their new world of risk.