Reinsurers are hardly likely to look kindly on a loss which reached that attachment point “because even though it wasn’t in the customer’s contract, we felt like being nice guys”.
Do politicians make statements that are economic nonsense because they do not understand economics, or do they do so, knowing that their statements are nonsense, but aware that any speaking of hard truths will be a shortcut to political oblivion?
It is a question that I have often asked myself over the years when a politician comes out with a proposal of such unparalleled stupidity that it strains credulity to accept that he or she actually believes it.
Take “portable annuities”, proposed by pensions minister Steve Webb in an interview with the Sunday Telegraph at the beginning of the year. Webb seemed to imagine that you could permit annuity holders to switch from one provider to another without any changes to the terms that the providers offered. “Why shouldn’t you be able to change your annuity provider so a few years later somebody else could offer you a bigger pension,” he asked.
Well, plenty of reasons, when you think about it for more than a nanosecond; not least the fact that, if you offer a customer what is effectively a one-way bet on interest rates, you are going to make sure that you have a far larger cushion than if the customer takes on his or her share of interest rate risk.
It was also noted by senior insurance executives that this proposal came out at the same time that UK Chancellor George Osborne proposed a £25bn infrastructure fund, to be funded mainly by the life industry. This, it was observed, would be precisely the kind of long-term investment that would be abandoned if assurers had to worry about Mr and Mrs Jones moving their annuity to a company down the road.
In late February insurers were called to 10 Downing Street to discuss the floods that have affected much of Britain in the past month. I was fearful that insurers would be leant on to “bend the rules” when it came to assessing claims. This line has been taken by politicians in the past, and has met with the solid refutation that it is not the insurers’ money to play with. For a start, in cases of major loss, there will often be a call on a reinsurance layer, but reinsurers are hardly likely to look kindly on a loss which reached that attachment point “because even though it wasn’t in the customer’s contract, we felt like being nice guys”. Secondly, if insurers start paying out to customers no matter what the actual wording of a policy, just to keep friendly with the ruling politicians, then shareholders would have a strong legal case that the insurer’s board was not acting in a proper fashion, in that it has a duty of care to shareholders – the real owners of the company.
It would appear that politicians stepped back from such nonsense. Their assertion that claims should be made promptly and that 12 months was too long to wait will be less controversial. Although I recall that after the 2007 floods many houses were unoccupied for more than a year, not least because they remained uninhabitable. It is rather hard for insurers and reinsurers to make final settlements when they have no idea of the final bill.
This month’s Reactions features an analysis of the Bermudian reinsurers’ results and the first official confirmation from the sell-side that at the 1/1 renewals natural catastrophe reinsurance rates continued a rapid descent that was first evidenced at last year’s June and July renewals.
Reinsurance suffers from the fact that, although a $100bn potential insured loss from an Atlantic hurricane is massive in terms of insured losses, and as a proportion of reinsurers’ capital, it is only a small proportion of the funds available throughout the hedge fund and pension sector. Put bluntly, reinsurers’ rivals can afford to pitch at a lower price than can the reinsurers themselves.
The impact of that was first felt in the nat cat market, notably for Atlantic hurricane, because this was the area where potential losses were bestmodelled. But the signs are that hedge funds and pension funds are now beginning to look beyond the Atlantic nat cat market, partly because other areas are becoming better modelled and partly because the yield on natural catastrophe risk is beginning to look unattractive even to hedge funds.
In that sense, the year ahead offers both good and bad news for reinsurers. The good news is that Atlantic nat cat rates might have fallen just about as far as they are likely to go – even hedge funds like to think that they are writing at a technically sound rate. The bad news is that hedge funds and pension funds are thinking of casting their nets wider. Sectors where rates have held up well in the past few years might soon find rates coming under as much pressure as did the Atlantic natural catastrophe market in 2012 and 2013.