Top 35 events since 1981

Top 35 events since 1981

9/11The 35 years in which Reactions has existed to serve re/insurance markets have been tempestuous for what is still viewed as an island of stability within the financial world – a heady compilation of landmark losses, game-changing deals, disaster events, financial collapses and regulatory reformations. Reactions’ editor David Benyon assesses the major events for the industry, from the 1980s to present.

Asbestos and environmental claims

Asbestos has been the recurring nightmare that just didn’t go away for the insurance sector. More than any natural or manmade catastrophe, asbestos is has been the loss that keeps on taking - forcing some insurers into bankruptcy over the years and the remainder to repeatedly boost their reserves.

Liabilities caused by the carcinogenic fibre once commonly used for fire-proofing and insulating – which led to mesothelioma in people exposed to it – have plagued the industry throughout Reactions’ lifetime. Rating agency AM Best’s latest best guess is that asbestos will ultimately cost the industry $75bn. It also emerged at the same time as environmental losses from pollution that the rating agency estimated will ultimately cost $42bn, giving a combined $117bn double whammy.

The rise of catastrophe risk models

The first commercially available risk modelling application for windstorm, CatMap, was devised by AIR Worldwide, a company formed in 1987 by Karen Clark. The first earthquake model, Iras, was created by a team at Stanford University, which would later become Risk Management Solutions (RMS). The use of catastrophe models has since revolutionised how the industry manages its exposures and prices its peak risks, so that no catastrophe underwriter would now feel comfortable without consulting at least one model. Today brokers have expanded their activities into the cat risk modelling arena, deploying their data and analytics, while the now-traditional cat risk modelling firms have begun responding to evolving industry demand, moving away from “black box” models into blends, hybrids and so-called open source platforms.

Piper Alpha and the LMX Spiral

The London market excess of loss (LMX) spiral nearly brought Lloyd’s to collapse. Events in the mid-to-late 1980s revealed syndicates had been reinsuring each other to such an extent that losses merely got passed around and around the market, creating a frightening spiral of losses. It began to unwind with the Piper Alpha loss, when a North Sea oil rig caught fire in 1988, killing 167 and destroying the rig. The claim triggered excess-of-loss policies, which triggered other policies. The initial claims of about £1.4bn led to total claims across the market of £15bn. Lloyd’s participants discovered to their horror that they had insured this loss - and subsequent events including UK storms in 1987, and Hurricane Hugo and the Exxon Valdez oil spill in 1989 - over and over. For example, 30% of the LMX market was with one Lloyd’s members’ agency, Gooda Walker.

Exxon Valdez oil spill

On March 24 1989, the Exxon Valdez oil tanker spilled 11m gallons of crude oil off the coast of Alaska. Although the insured loss was less than Deepwater Horizon, it was arguably a more crippling event, coming at a time when losses were getting out of hand for Lloyd’s insurers. Most of the losses were concentrated in the 14 market excess-of-loss syndicates, now reinsured into Lloyd’s run-off vehicle Equitas.

Hurricane Andrew

Hurricane Andrew’s cost was later to be dwarfed by Hurricane Katrina in 2005, but the 1992 hurricane was much more of a market changer. It occurred in a very soft market and stunned insurers and reinsurers into realising they had nowhere near the grip on their exposures that they should have done.

The category 5 hurricane tore through near Miami in southern Florida and through south-west Louisiana. It caused $15.5bn of insured losses, or $26.4bn in 2016 dollars, according to the Insurance Information Institute. Carriers hastily re-evaluated their exposures and hiked their pricing.

One response to the crisis was the establishment of the Florida Hurricane Catastrophe Fund. Another was the emergence of the class of 1993 in Bermuda, of which RenaissanceRe and PartnerRe are still independent. But the biggest impact of the hurricane was sparking the widespread use of catastrophe risk models.

Northridge earthquake

The most costly earthquake in the US struck on January 17 1994, when a magnitude 6.7 quake shook Northridge, California, and caused $15.3bn of insured losses. The loss equated to 28 times the aggregate earthquake premiums collected in 1993 and was far higher than the total historical earthquake premiums up to that point, pushing some insurers close to insolvency. The California Earthquake Authority was formed as a result but take-up remains low.

First catastrophe bond

The insurance industry started repackaging risk and selling it to investors in the 1990s. German reinsurer Hannover Re sponsored the first catastrophe bond in 1994. It took a long time for the cat bond market to come of age, with just a small group of diehards such as Swiss Re and USAA sponsoring deals before 2005. Although cat bonds offered multi-year cover and diversified security, doing deals was time-consuming and expensive. It was not until after Hurricane Katrina that the concept sparked widespread demand among insurers and reinsurers.

In the years since then the insurance linked securities (ILS) market has grown exponentially, reaching a record figure of $24.1bn in outstanding issuance in 2014. New perils, data, triggers and product types have diversified the market, while its appeal for insurers keen to transfer risk and investors keen to take it on has made it highly competitive. Issuance slowed in 2015, but a sizeable $6.83bn was issued in the year as a whole, maintaining 2014’s high level of overall outstanding.

Reconstruction and Renewal

In 1996, Lloyd’s of London implemented its Reconstruction and Renewal plan that saved the market from collapse. Lloyd’s Names and other market participants were asked to accept a settlement under which they would waive existing and future claims from pre-1993 liabilities. These were reinsured into a run-off vehicle called Equitas.

The controversial plan was accepted by 95% of Names in 1996 and ushered in the era of corporate players dominating Lloyd’s. The era of unlimited liability – with Names famously on the hook “down to their cufflinks” – was dead.

Berkshire Hathaway buys General Re

It came as a surprise when Warren Buffett revealed he was buying US reinsurer General Re for $22bn in 1998, the largest reinsurance acquisition ever. General Re was then the third-largest reinsurer in the world and would benefit greatly from Berkshire Hathaway’s formidable capital strength. But it took years for Buffett to solve problems at the firm, labelling it Berkshire’s “problem child” after years of having to boost reserves. In 2004, however, he proclaimed “Gen Re is fixed”.

Opening up India

India’s public monopoly of state-owned insurers ended in April 2000, when the Insurance Regulatory and Development Authority Act of 1999 came into force and the country’s financial regulator granted licences to several foreign firms to take 26% joint ventures in Indian firms. This was only the beginning for an ongoing liberalisation process, allowing limited access to a rapidly growing market. Since then many more direct insurers have entered India’s market, including Allianz, Axa and Prudential Plc, setting up joint ventures with Indian partners.

Politics, protectionist urges and India’s byzantine bureaucracy have meant progress since then has been glacially slow on raising the foreign direct investment (FDI) cap. After years of setbacks, in March 2015 the Insurance Act (Amendment) 2015 bill finally passed India’s upper house, raising the FDI limit to 49% from last April. However, foreign investment remains slack, and state-backed insurers still loom large.

In reinsurance, the state-owned General Insurance Corporation of India still dominates, despite a drop in compulsory cessions to 5% in motor and less in other lines. As of March 2016, reinsurers Munich Re, Hannover Re, Swiss Re and Scor have received initial regulatory approval to operate in India, while Reinsurance Group of America, XL Catlin and Lloyd’s (the latter via a special arrangement for the subscription market outlined in November) are not far behind.

Collapse of HIH

HIH, once Australia’s second-biggest insurer, collapsed in March 2001 with $5.3bn ($5.5bn) in outstanding liabilities. On investigating the collapse, Australian authorities discovered HIH had hidden its true condition from regulators through finite reinsurance. It prompted an overhaul in Australia and alerted regulators around the world to the dangers of misuse of finite reinsurance.


The terrorist attacks on September 11 2001 shocked the industry into the realisation that it is exposed to risks it could not even imagine. Insured losses from the event were $43.5bn in 2015 dollars, according to the Insurance Information Institute, touching many lines of business, including property, business interruptions, workers’ compensation, aviation, event cancellation and life.

The tragic event sparked an instant hard market with rates rocketing across all lines. It also spawned a new wave of insurance and reinsurance companies on Bermuda, the class of 2001, which continues to thrive today. The attacks woke the US industry up to the fact that terrorism is a real threat it had not been taking into account. The attacks also sparked one of the bitterest legal disputes in insurance history between World Trade Center leaseholder Larry Silverstein and his insurers over whether the attacks constituted one event or two. It did not help that the policy was not finalised when the towers were destroyed. This embarrassing situation for the industry led to a focus on contract certainty that still exists today.

9/11 also ended the soft market between 1997 and 2001, when optimistic reserving levels combined with a drastic spike in claims for casualty business in the US. The business written in those years hindered firms from fully taking advantage of the hard market following 9/11. By 2005 there had been $57bn of reserve additions on business written between 1998 and 2001 for the US property/casualty industry alone. It is estimated that reserve increases for those years reduced US reinsurers’ pre-tax profits in their results between 2001 and 2005 by 65%.

The cosy pre-9/11 world of many big global reinsurers enjoying triple-A financial strength ratings now seems a different era. The double-whammy of September 11 losses followed by large equity write-downs led to a correction in how rating agencies viewed the industry’s financial strength. When Munich Re was downgraded by Standard & Poor’s in 2002, there were no more AAA-rated standalone reinsurers, leaving just state-backed firms and Berkshire Hathaway (which has also recently lost its highest ratings). The result was an intense focus among insurance and reinsurance buyers on security, and much muttering about spreading their risks.

Opening up China

When China became a member of the World Trade Organisation in 2001, it agreed to make sweeping changes to liberalise trade and encourage private enterprise. The China Insurance Regulatory Commission (CIRC) gradually began to lift its restrictions on the number and scope of licences issued to foreign insurers, making steps to modernise its market.

In recent years, major catastrophe events have struck China, such as 2008’s costly Sichuan Earthquake, the Tianjin port explosion in August 2015, as well as the country’s long coastal exposure to typhoons and floods, highlighting a lack of insurance penetration and demonstrating the need for insurance as risk transfer for sustainable growth.

The meteoric rate of China’s economic rise has slowed to nearer normal growth rates recently – but still outstrips western economies. China’s re/insurance market is still changing fast.

 New regulation has transformed the market, such as CIRC’s new C-ROSS risk-based solvency regime, which borrows much from Solvency II, while granting CIRC has also moved to grant an increasing number of regional re/insurance licences, particularly in Shanghai and Beijing. Demand is high. Lloyd’s China, for example, which set up on the mainland in 2010, recently set itself an ambitious target of 30 syndicates in 2016.

China’s homegrown re/insurance presence is also growing fast, making itself felt globally within the industry. International groups such as Fosun, China Re, Oceanwide Holdings and China Minsheng have thrown billions of capital into the present glut of re/insurance mergers and acquisitions, as far afield as North America, Bermuda, London and Europe.

Creation of the Lloyd’s Franchise board

The creation of the Lloyd’s Franchise Board was part of a sweeping restructuring programme launched in September 2002. The board is responsible for instilling discipline in the market and keeping syndicates in check. Under the leadership first of Rolf Tolle and later Tom Bolt, the Franchise Board has been credited with restoring confidence in Lloyds around the world.

Collapse of Gerling Globale Re

All reinsurers were hit hard by losses from the soft market years of 1997, September 11 2001 and the equity write-downs that followed, but the highest-profile casualty was Gerling Globale Re, then the seventh largest reinsurer. The firm’s 1998 purchase of US reinsurer Constitution Re proved a terrible decision. As the losses piled up, Deutsche Bank, which had a 34.5% stake in the firm, wanted out. Rolf Gerling, who owned the rest of the firm, looked for a buyer. Scor showed interest in a deal, but was suffering its own problems and ended talks in September 2002. Gerling Globale Re was left with no choice but to go into run-off in November of that year.

Creation of Tria

Insurers and reinsurers excluded terrorism from policies following the September 11 attacks in 2001, arguing it was an unquantifiable risk. The result was the Terrorism Risk Insurance Act (Tria), which provided a government backstop for terrorism losses. Since then questions about Tria’s renewal have been a recurring source of industry angst.

After two years, just before it expired, Tria was renewed again for two years, though with insurers taking a greater portion of potential losses, and in 2007, another more sensible renewal until the end of 2014 was implemented.  In January 2015 President Obama signed legislation into law to renew Tria for a further six years, in a move roundly applauded by the re/insurance industy.

2004 hurricane season

In 2004, four hurricanes – Charley, Frances, Ivan and Jeanne – hit the state of Florida in quick succession, costing the industry about $34bn at 2016 prices, according to Aon. While this extraordinary sequence of events merely served as the warm-up act for what was to come the following year, it taught the industry a valuable lesson about how frequency, rather than severity, can hurt you.

Eliot Spitzer vs Marsh

Eliot Spitzer turned the broking market on its head in October 2004 when he accused Marsh, then the biggest insurance broker in the world, of falsifying bids and steering business towards insurers paying the highest contingent commissions. His complaint against the firm - including juicy emails and players with nicknames like Kill Bill - was a journalist’s dream.

An $850m settlement followed, as did smaller ones for Aon, Willis and Arthur J Gallagher. Marsh’s business model was shattered. It and the other big brokers forced to give up taking contingent commissions, while their smaller competitors could still take them. Five years later, in a move that seemed unlikely in early 2005, brokers were allowed to resume taking the controversial payments.

For Spitzer, clashing with the industry as New York’s attorney general was just part of his meteoric political rise. 2007 saw his inauguration as New York’s governor. Few in the industry would have shed a tear for Spitzer when in 2008 he fell equally dramatically, resigning from office, mired in a prostitution scandal.

Hurricanes Katrina, Rita and Wilma

Aside from dealing with losses of $105bn at 2016 prices from the 2005 Atlantic Hurricane Season, of which most related to Hurricane Katrina, re/insurers were forced into rethinking the way they wrote coverage for states exposed to such natural disasters. Re/insurers also focused on modernising models, many of which had failed to perform as expected during Katrina with losses far higher than anticipated, mainly due to the unexpected flooding and the storm surge that engulfed New Orleans. Since then, the models have been updated to factor in these additional exposures, while much has been learned about how to better protect communities from the impact of hurricanes, both in the lead up to and during such natural disasters. The catastrophe’s scale caused reinsurance pricing to soar, and companies such as Validus, Lancashire, Flagstone Re, Ariel Re and Harbor Point – the so-called Class of 2005 – opened to take advantage. Sidecars also grew in popularity, with investors given a convenient way to access business via special purpose vehicles, a trend which has resurfaced with the abundance of third party capital.

Florida gets into the reinsurance business

Following the four hurricanes that hit Florida in 2004 and Hurricane Katrina in 2005, Florida decided to get fully into the reinsurance game to address the high cost of insurance in the state, expanding the state reinsurer of last resort in 2007. The reinsurance market was outraged that Florida had effectively taken billions-of-dollars-worth of business off them at the same time as putting taxpayers on the line if an event struck.

Opening up Brazil

After decades of talk, Brazil’s reinsurance market opened up to foreign reinsurers in 2008. State reinsurer IRB-Brasil had held a monopoly since 1939. Foreign reinsurers have since rushed into the country, eager to take advantage of a new, developed and large market. However, protectionism combined with a proud, domestic market has meant it has not been easy for international companies to make quick inroads into Brazil.

The country’s recent economic downturn has also countered some of the wider optimism, with IRB-Brasil’s bid to go public via a $400m initial public offering postponed ominously last year. Nevertheless, with insurance penetration rates still so low, the sector has more to gain than most outsider investors despite the country’s broader present travails. Further liberalisation moves are underway. In July last year Brazil’s government unveiled CNSP Resolution 322, to reduce restrictions on intra-group transfers and domestic cedance requirements for re/insurers operating in the country, aimed for implementation from 2017. The new directive would gradually raise the ceiling for intra-group transfer each year until it reaches 75% in 2020. The new directive also plans to relax local reinsurance cession restrictions. The mandatory cession to local reinsurers currently sits at 40%, but would decrease annually to 15% by 2020.

2008 hurricane season

The 2008 Atlantic hurricane season was the fourth most costly on record with the six month period seeing the formation of 16 named storms with eight that developed into hurricanes. It was hurricanes Ike and Gustav that hit the insurance industry hardest though, with the former now considered to be the fourth most costly Atlantic hurricane in history from re/insurers’ point of view. The National Flood Insurance Program paid out almost $2.7bn from Hurricane Ike, but it was underwriters elsewhere that really suffered with total claims arising from the storm estimated to be at least $12.5bn. The energy insurance market was hit particularly hard by Ike, with more than 50 oil platforms suffering some level of damage. Gustav also took its toll on the re/insurance industry with claims from this added to those from Ike leaving underwriters nursing total losses somewhere in the region of $20bn – a significant hit especially considering that many companies were still nursing the impact of 2005’s Atlantic hurricane season when Katrina, Rita and Wilma handed the market record costs.

AIG’s near death, bailout and recovery

It was on September 16 2008 that the US Government stepped in and handed American International Group an $85bn bailout package to prevent the company from going bankrupt. The rescue came shortly after the US Government had allowed Lehman Brothers to go under, and questions were raised as to why AIG had been saved. The next day, the government removed AIG’s chief executive Robert Willumstad and replaced him with Allstate’s former CEO Edward Liddy. However, Liddy retired after less than a year with former MetLife CEO Robert Benmosche persuaded to come out of retirement to take on the responsibility of turning around the beleaguered business. AIG would go on to receive more than $182bn from the US Government as the company struggled to deal with the fallout from the subprime mortgage crisis and wider financial crash. Benmosche is regarded as having been the catalyst to revive AIG’s fortunes after he sold off assets and streamlined the workforce. By June 2012, AIG had managed to repay all of the loans it received, as well as a further $23bn in interest.

Global financial crisis 2008-2009

The 2008 financial crisis saw global economies flung into chaos and called into question the stability of the worldwide financial sector. The knock-on effects of the crisis range from global austerity to the continuing uncertainty in mature markets such as Europe. By and large re/insurers endured well through the hard times but the effects of the crisis have had a profound impact on the industry in the years that followed. Artificially low interest rates, put in place after the crisis, have put increasing strain on reinsurer’s books and have curtailed investment income leading to a renewed focus on underwriting. The problems that led to the bailout of AIG also led to regulators formulating capital standards regulations for insurers similar to those in place for the banking sector. New systems such as Solvency II in Europe, and in the US the Financial Stability Oversight Council (FSOC) and the Own Risk and Solvency Assessment (ORSA) have forced re/insurers into re-evaluating their regulatory compliance processes, made them more conservative with capital and have increased legal spend.

Deepwater Horizon

The explosion that destroyed the Transocean-owned Deepwater Horizon mobile offshore drilling unit on April 20, 2010 led to the largest accidental oil spill and corporate settlement in history. Deepwater Horizon was drilling an exploratory well when a catastrophic blowout caused an explosion to tear through the structure and engulf it in flames, leaving 11 workers dead. After burning for a day the mobile offshore drilling unit sank, although oil from the Macondo well continued to pour into the Gulf of Mexico until it was capped on July 15. Operator BP had no commercial insurance, but has since paid out over $50bn in criminal and civil settlements. Other parties in the project such as Transocean, Anadarko Petroleum, Halliburton and MOEX Offshore were insured and total claims are estimated to have been north of $3bn. Soon after, the US government held discussions on whether to impose minimum liability limits of $20bn on oil companies wishing to work in US waters, but those ultimately failed to materialise. However, underwriters now take a closer look at the aggregation potential on their energy books.

Christchurch earthquake

The fallout from the earthquake that rocked the city of Christchurch in February 2011 continues to be felt five years on. Combined with an earthquake that hit Canterbury on New Zealand’s south island in the previous year, and another smaller quake in June 2011, the re/insurance industry is thought to have paid out some $19.7bn from the three events.

The centre of Christchurch, as well as the eastern suburbs of the city, were the most affected from the February 2011 event and exacerbated the destruction that had been caused by the Canterbury earthquake in the previous year.

Arguments over claims payments continue to this day, and earlier this year, New Zealand insurers stated they had paid nine out of 10 claims from the quakes. However, hundreds of people remain frustrated at the lack of progress over their claims applications despite the New Zealand Insurance Council arguing the event was one of the most complex insurance losses in history.

Tohoku quake and tsunami

At magnitude 9.0, the Tohoku Earthquake that hit Japan on March 11 2011 is the most powerful earthquake to have hit the country in recorded history. Tohoku moved Honshu, Japan’s biggest island, 2.4m closer to North America, and shifted the Earth on its axis by up to 25cm. However, it was the resultant tsunami wave which struck the coast minutes after the quake which caused by far the biggest share of the destruction. In human terms the disaster killed 15,893 people, plus a further 2,572 people that were never found, and caused 6,152 injuries. In property terms, 127,290 buildings collapsed, 272,788 buildings were half collapsed, and another 747,989 were partially damaged.

Tohoku struck just days before Japan’s traditional April 1 reinsurance renewal. The effect was an immediate freeze in Japanese cat risk renewals discussions taking place at the time of the catastrophe, followed by a jump in pricing when terms were agreed a fortnight later. The $37.1bn (2016 prices) insurance cost of Tohoku was big, but also digestible. A surprisingly low penetration rate for quake insurance limited the industry’s loss, much of which was also transferred to reinsurers with diversified global books. The upshot of this was that while reinsurance prices jumped regionally and in the short term, the disaster did not produce a prolonged market hardening, with prices continuing to soften for Japan and globally today

Thai floods

It is one of history’s ironies that many of the manufacturing firms struck by Tohoku only months before had spread their logistical chains and supply chain risks by relying on facilities built on industrial estates in Thailand’s “catastrophe free” interior. Thailand’s 2011’s monsoon season struck hard, submerging huge areas, lasting between July 2011 and January 2012. By October several of those large business parks were under water, and Swiss Re put a $12bn industry loss estimate on the floods the following year.

Businesses thousands of miles away from the scene of the floods found their operations affected in unexpected ways. Aside from initial shock over the unexpected source and scale of such losses, the re/insurance sector conversation arising from Thai flood evolved into one major lesson: unexpected levels of interconnectivity within the globalising world, creating unanticipated loss correlations; and unmodelled supply chain risks, manifested in complex “contingent business interruption” losses.

Costa Concordia

The largest manmade loss marine insurers had ever experienced occurred on January 12 2012 when the Costa Concordia ran aground off the coast of Tuscany. Images of the stricken Costa Concordia lying on its side after hitting an underwater rock formation were all over the world’s media and will live long in the memory. However, the disaster could have been far worse. Of the 4,252 people on board the vast cruise ship when it ran aground, 32 lost their lives.

For the marine insurance market, it was the worst manmade loss in its history. The cruise ship itself, which belonged to Costa Crociere, had a hull insurance policy worth €395m which was paid out shortly after the casualty occurred. However, it was the specialist mutual protection and indemnity market that suffered the bulk of claims, with the International Group and its panel of reinsurers ultimately expected to suffer losses in the region of $1.5bn.

Hurricane Sandy

More than a dozen states were affected by Hurricane Sandy, although it was the neighbouring states of New York and New Jersey that were hit hardest from an insurance standpoint. Although it is the second most costly storm to ever hit the US, from a commercial insurance standpoint, it is the third worst behind 2005’s Hurricanes Katrina and 1992’s Andrew. Commercial insurance claims from Sandy reached $31bn adjusted for 2016 prices, according to Aon, while the US National Flood Insurance Program also suffered significant losses.

Marine insurers were hit disproportionately hard by Sandy with claims from this segment of the industry thought to account for more than $2.5bn of the overall loss. Some 16,000 new cars from companies such as Nissan, Toyota, Ford and Honda had to be scrapped owing to damage from Sandy’s storm surge causing cargo claims of some $400m. On top of that, approximately 15,000 containers were damaged at ports along the Eastern Seaboard. Furthermore, at more than $600m, recreational marine losses from Sandy were higher than from any other storm since records began.

Alternative capital surge 2012 onwards

Only five years ago it was a common refrain among re/insurance CEOs that alternative capital was the fair weather friend for risk transfer – as soon as losses materialised in the wake of some major catastrophe event, third party capital was expected to evaporate with its tail between its legs, leaving serious underwriting business to the traditional older hands. Clearly this has not been the case. The rise of alternative capital has disrupted the traditional re/insurance cycle, making a hard market that bit tougher to reach, and changing the way traditional players consider their business model. While catastrophe losses have been manageable for several years, the rise of alternative capital has gone from an annoyance for traditional reinsurers to the market’s main pricing driver. Industry leaders can no longer dismiss catastrophe bonds or hedge fund interlopers as a sideshow. From about $28bn in 2011, total alternative capital at work in the industry is now around the $70bn mark.

Nor has third party capital itself stayed the same. Using 2011 as the same watershed, catastrophe bonds at that point made up at least half the total in play, although the collateralised segment had already begun to burgeon. That has since mushroomed, doubling in 2012, and reaching an epic $32bn in the first three quarters of 2015, according to Guy Carpenter estimates. This private, unrated business that has come to dominate the convergence capital space also comes from an effectively inexhaustible source: the $25trn global pension fund industry. And no fund manager is overweight, as they are dabbling in reinsurance small percentages as a diversifier rather than a major driver as profit.

Traditional reinsurers have sensibly decided that “if you can’t beat them, join them”, upping use of sidecar structures for managing third party capital to represent about a tenth of the total alternative market in 2015. In absolute terms, that represents a similar amount of capital to that of the collateralised space back in 2011. Managing third party capital combined with traditional underwriting expertise is working well for some firms: in London, MS Amlin has a successful joint venture in Leadenhall Capital Partners; and in Bermuda, Hiscox says its Kiskadee Investment Managers entity is on track to reach $1bn in funds under management this year.

M&A surge 2014 onwards

Industry-wide consolidation of re/insurers has been a relatively recent trend but it will undoubtedly change the industry in the future. This latest wave of consolidation comes on the back of a highly competitive soft market and many are now looking for partners in order to prosper or, as Stephen Catlin said following his company’s merger with XL Group, companies may be also choosing to merge before it is forced upon them.

Some deals have clearly sought scale: Willis bought Towers Watson in its bid to scale up against larger broking rivals Aon and Marsh & McLennan Companies; while Ace’s deal to buy Chubb is so big it warrants its own section below. Some re/insurers have used mergers and acquisitions (M&A) to change their business models, such as Validus’ deal to acquire Western World, and RenaissanceRe’s move to acquire Platinum Underwriters. Others have used it to enter markets such as Lloyd’s, including Endurance’s deal for Montpelier Re, Sompo Japan buying Canopius, and Mitsui Sumitomo’s recent deal for Amlin. Not all deals have been successful. Outright hostile takeovers have also made a comeback. For example, Axis Capital was elbowed out of the way by investment group Exor in its bid to buy PartnerRe in 2015, after shareholders preferred Exor over the Axis offer previously agreed by PartnerRe’s board. Before that, Endurance’s hostile bid for Aspen was turned down by the Bermudian reinsurer’s shareholders.

Tianjin explosion

On August 13 2015 China’s port of Tianjin suffered a huge explosion, as an overheated shipping container of combustible materials turned the huge port’s huge cargo and vehicle storage area into a fireball viewable from outer space.

The cataclysm’s human cost was relatively quick to ascertain: 173 deaths, 8 missing, and 797 injured. The financial cost to the industry will take years to fathom. Thousands of burnt out cars, melted and crushed shipping containers and levelled warehouse buildings indicated the scale of the loss. Poor safety standards allowed the disaster to take place, and then opaque Chinese procedures for sealing off the area and preventing access helped prevent a quick appraisal of losses.

At a meeting of the International Union of Marine Insurance (IUMI) in February, the disaster was openly described as “probably the largest marine loss ever” – bigger than Costa Concordia. IUMI hesitantly put a $5bn loss estimate on Tianjin, about half of which is expected to be attributed to marine cargo, and most of the remainder to property.

While many global reinsurers have already declared loss figures, the true picture will take years to work out. The lessons, even at this early stage, are manifold, but two stand out: accumulation risk in such big port facilities is vast and unmodelled; and China’s developing re/insurance market and its exposures are growing exponentially.

Solvency II

The much-delayed EU directive has long promised to alter the landscape of the European reinsurance market and was finally live from the start of 2016, although phasing in will take some time to come, and it is far from clear how harmonised national regulators’ approaches will be in supervising its continued implementation, particularly in supervising the quality of risk management and in financial reporting standards.

The scale of the challenge posed to the industry in readying itself for the directive has been indicated by the low number of firms using internal models to calculate their capital, once expected to be much higher than it turned out to be in 2016. Considering the billions spent by the industry on implementation in the past decade – as well as lost sleep over vexing questions such as equivalency rules – the low number of bespoke models might be considered as a serious disappointment for the industry.

The directive’s capital requirements have already influenced a rise in run-off activity in 2016, as insurers have sought to shed capital-inefficient legacy business and refocus their efforts. For smaller insurers, Solvency II has also influenced industry consolidation in Europe. For reinsurers, competitive pricing conditions mean hopes of a boost in demand have been effectively offset by market factors, although the true picture will take time to take shape.

Ace Chubb merger

Ace and Chubb are now one, to use the words of Evan Greenberg, CEO of the new Chubb. The scale of the $29.5bn cash and stock deal, which was announced on July 1 2015 and completed on January 15 2016 meant that the combined entity became the largest US property and casualty insurer and the world’s biggest publicly traded property and casualty insurer, with operations spanning 54 countries.

In an unusual move, Ace renounced its name in favour of the acquired, branding the merged entity as Chubb (with a polished new logo design) at the deal’s conclusion. When Greenberg first addressed the legions of Chubb staff in July 2015 he described it as like going into the Roman Colosseum. Much in Greenberg’s tone was conciliatory. After an an initial “high school mixer” between the two management teams, he spoke to the troops about uniting “two great underwriting companies”, and the merger as “game changing for our industry”. At a recent Reactions event, one panellist referred to it as the “deal of the century”.

Like many of the recent spate of mergers, it is too early to say how smoothly the integration will go. Ace shareholders own 70% and Chubb’s shareholders the remainder. While moving its registered headquarters to Zurich, the new Chubb continues to be New York listed. The scale of the deal means Greenberg expects integration will allow annual pre-tax expense savings of approximately $650m by 2018.

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November 2018


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