BADEN-BADEN, Germany—The reinsurance and insurance industry must make significant changes in order to address future challenges, a panel of experts said.
At the “2010-Reinsurance in the Future” symposium sponsored in Baden-Baden, Germany, last week by XL Re Europe, a division of XL Capital Ltd., panelists discussed how the industry might change in the years to come.
Huge challenges face the chief executive officers of reinsurance companies as they look to the future, according to Stephen Searby, rating advisory director at Societe Generale in London. Investors want to see the growth of companies and profitability and to get their money back, he said, but top-line growth and profit “have not been frequent bedfellows in our industry.”
Reinsurers are also facing competitive pressures, Mr. Searby said, and he noted that cedents can retain their reinsurance risks if they so wish, creating another form of competition for reinsurers.
The recent storms in the United States have illustrated “that we have what appears to be an increase in volatility” of natural catastrophes, he said.
The recent hurricanes have shown that catastrophe modeling “is not a perfect science” and that underwriters must still exercise judgment and not blindly follow models, noted panel moderator Charles-Werner Skrzynski, CEO of XL Re Europe in Le Mans, France. “More than ever, underwriters are under pressure to add value to models,” Mr. Skrzynski said.
Increased regulation of reinsurance may add to reinsurers’ costs in future, Mr. Searby noted. And managing the underwriting cycle is another huge challenge for the industry, he said.
These challenges will lead to the reinsurance industry seeking to improve efficiency, Mr. Searby predicted. Some reinsurers may question their size, Mr. Searby said, because “there are some diseconomies of scale that cannot be offset by diversification.” Several large reinsurers have already stated their intention to reduce premium volume, he noted.
Widespread merger and acquisition activity is unlikely, Mr. Searby said, although there will likely be some consolidation among smaller players. The financial strength of reinsurers “will remain a key differentiator,” he said.
In a presentation entitled “Insurance Industry: Where are We Going?” Alan Punter, CEO of Aon Capital Services Ltd. in London, a division of Aon Corp., urged the insurance industry to address some of the risks faced by buyers that previously have been considered “uninsurable.”
Mr. Punter said studies by Aon had found that insurance buyers consistently rank risks such as reputation risk as their top priorities but that such risks are not currently insured. Typically, he said, “when the insurance industry comes across a risk that is difficult, it excludes it.”
Alongside this, he noted, is a growth in self-insured retentions and greater use of captive insurance companies among buyers. If the insurance industry excludes a risk, “it doesn’t go away,” Mr. Punter said, “the client has still got it.” The result is that the premium-and perhaps the client-go away, he said.
In addition, Mr. Punter told attendees, one of the reasons that companies buy insurance is to reduce volatility by replacing variable and unknown future losses with known premium costs. “But how much stability do we give when the cost of insurance is so volatile?” he asked.
The insurance industry and governments should work more closely together to ensure that certain risks are insurable, Mr. Punter added. For example, in some cases, pooling mechanisms for natural catastrophe risks might help to ensure that such risks could be insured in the future, he said.
Carl Christian von Weizsäcker, a senior research fellow on collective goods at the Max Planck Institute für Informatik in Bonn, Germany, also contributed to the panel.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.