With the market recovering from the exertions of getting the January 1 2012 renewals done, thoughts are inevitably turning to what the coming year will bring for the insurance and reinsurance industry.
Fortunately, Guy Carpenter has those wondering what this year will hold in store covered. Its epic reinsurance renewals report included, tucked away on page 74, a handy list of the 10 big themes that the market will face in 2012.
The first theme to watch out for this year is aggregate covers, and the plethora of jargon such as “basket cover”, “top and drop” and “whole account aggregate stop loss” that comes along with them. Guy Carpenter reports that many companies are revisiting the benefits of aggregate coverage following the catastrophes in 2011 and 2010. “While much of the focus for catastrophe coverage is around severe shock losses, aggregates are also useful for horizontal coverage needs or a combination of frequency and severity,” the reinsurance broker noted.
The second theme to watch out for is cat model changes – a dominant and controversial theme in 2011 that looks set to rage into this year. Understanding and achieving the right blend of cat models can be a “make or break” in terms of predicting cat losses, said Guy Carpenter. “As the changes in RMS v11 become more fully implemented in 2012, the impact on companies’ probable maximum losses (PMLs) will continue throughout the year. Guy Carpenter, therefore, recommends adopting a multiple catastrophe model approach so as to better estimate risk and control uncertainty,” said the broker.
The third theme is that of tightening reserves. Guy Carpenter reckons that insurers “have been sticking their hands in the cookie jar” for the past few years through reserve releases that have propped up results. The broker believes some releases are left but that they may start deteriorating in 2013 and beyond.
“However, for some carriers that write specific lines, like workers’ compensation, reserve deterioration may come sooner,” warned Guy Carpenter. “Heading into 2012, Guy Carpenter’s analysis of the reserving cycle suggests that the industry is about to enter a new, challenging phase of reserve deterioration.”
The fourth theme is rating agency assertiveness. The broker believes 2012 will be a year of mixed fortunes for reinsurers and this may be reflected in their ratings. Rating agencies have become more active in the past year for both sovereign and carrier actions. “This has significant implications both for reinsurance buyers and for reinsurers,” Guy Carpenter cautioned.
The fifth theme – inevitably – is Solvency II, implementation of which looks to have been postponed until January 1 2014. “The delay has led to indecision for some companies around how to proceed. Concerns also exist with regards to Solvency II equivalency in Asia-Pacific,” said Guy Carpenter.
The sixth theme is the Dodd-Frank Act. Although insurers were relieved the act was not more punitive on them, it did establish a Financial Stability Oversight Council (FSOC) to expand the ability of regulators to oversee large companies that could be systemically risky. Guy Carpenter warns that, although this will only apply to a small number of insurers, it is not yet clear whether the oversight causes a competitive disadvantage for those affected or whether being deemed too big to fail is a benefit. In addition, the Federal Insurance Office, set up under the act, was scheduled to issue a report on state insurance in January this year, though at the time of going to press this had not yet surfaced.
The seventh theme is reconciliation between the International Accounting Standards Board and the Financial Accounting Standards Board, with more decisions needed on convergence between the standards the two boards are working on.
The eighth theme is positioning Lloyd’s of London for the future. In 2010 43% of the market’s gross premium came from the US and Canada, while 36% came from Europe. Asia accounted for just 10% and Latin America 7%. With China, India, Russia and Brazil tipped to become top six economies within the next two decades, the balance is set to change.
“Lloyd’s is therefore looking to form stronger business ties with these markets in conjunction with the broker network, to ensure it maintains pace with the opportunities from the emerging economies,” said the report.
The ninth theme is cyber risk, with Guy Carpenter predicting that interest in cyber liability insurance will grow as concerns about privacy and data breaches increase.
The final theme identified by the broker is “cold spots” – emerging peak risks that were not previously considered that risky. Last year’s catastrophes, many of which were non-modelled losses, hammered home the fact that it is not just US hurricanes or earthquakes that should worry cat underwriters.
“Globalisation will inevitably lead to increased demand for reinsurance in new regions and markets that have not historically been considered peak zones,” said Guy Carpenter. “This, in turn, will see losses becoming ‘internationalised’ to an extent never seen before seen and further reinforce the need to understand exposures, particularly non-modelled countries.”
The list makes interesting reading, and is perhaps most noticeable for what is not included in it. For example, there is no mention of mergers and acquisitions. In the type of market we are in, this would normally be a hot topic. But with market valuations remaining stubbornly below book it is tough to see many meaningful deals getting done.
The crisis in the eurozone is also not considered a big threat, with it only implied in the rating agency theme. So far, it does seem the reinsurance industry will not be greatly affected by the problems in Europe. But if the problems in Europe are not resolved satisfactorily all bets could be off.