Movin’ & Shakin’: ERC, Lloyd’s Shake Up Reinsurance Market

The events of Sept. 11 were a defining moment in the reinsurance market; a watershed event that opened up the eyes of everyone in the insurance industry, forcing a re-evaluation of the industry’s practices, especially in the global reinsurance arena. When thousands of insurers and reinsurers met recently at the National Association of Independent Insurers’ 57th Annual Meeting, change and reform for companies and the industry as a whole were hot topics of discussion. Insurance Journal spoke with Tim Carroll of Employer’s Reinsurance Company (ERC), and later Wendy Baker and Julian James of Lloyd’s of London (Lloyd’s). All had much to say about the future of the reinsurance market, and the many changes their own companies are facing.

• “I think all insurance organizations at almost every level were impacted by 9/11,” Tim Carroll, president & CEO of GE Reinsurance, said. “At the reinsurance level, there’s obviously been a very hard look on the part of most reinsurers as to how their clients are pricing their business, and how we at the reinsurance level are pricing for risk. That’s led to, not just rate increases, but also to coverage restrictions, coverage withdrawals in some cases, and a pretty dramatic reaction to the events of 9/11 just in the way we conduct our business—the depth of analysis we do, and the level of data we’re now requiring our clients to provide us.

“This is an organization that constantly reevaluates where it is,” Carroll said. One step ERC has taken is to carefully assess the aggregations it writes. “While the industry had always understood it has natural peril aggregations to earthquakes and storms and so on, I don’t think it had ever really envisaged an aggregation of property damage, business interruption damage from a man-made event like 9/11,” he added.

In the past year, ERC combined its global reinsurance operations—previously consisting of two units, Europe & Asia and the Americas—into one. (Their global life reinsurance and commercial p/c insurance operations remain unchanged.) “We decided to combine the two reinsurance operations to create a global P&C reinsurance business that embraces everything that’s reinsurance anywhere on the globe in all lines of business,” Carroll said. The decision came about in efforts to streamline the two operations, which were operating independently, allowing them to perform at similar levels. “Our approach to writing catastrophe insurance in Europe & Asia is quite different from our approach in North America where the appetite was somewhat less,” Carroll added. “That’s the type of business that only makes sense on a global basis.” He noted that the merge would hopefully enable ERC to optimize its portfolio and reinsurance book of business.

But in November, General Electric Company, ERC’s parent company, lowered its 2002 earnings forecast by 8.5 percent. GE attributed the downgrade to $1.4 billion in after-tax costs it will be liable for to boost ERC’s finances. The company also confirmed rumors of an impending sale of ERC. According to chief spokesman Dean Davison, GE is considering selling part or all of ERC, either to another company or through an initial public offering. The possibility also remains that ERC will stay within the company’s portfolio. The first step will be to explore the sale of ERC’s life reinsurance operations, which comprises 25 percent of ERC’s operations.

Despite the imminent changes, ERC maintains a positive attitude. Although the industry is still knee-deep in the hard market, ERC has re-evaluated their business practices to ensure a profitable return in the future, with or without GE. “We continue to be excited about the future as we have taken a number of steps to improve our organization,” Davison said.

• Lloyd’s has made several new reforms over the past couple of months in efforts to modernize. The first step was to replace the existing regulatory and market boards and committees with the creation of a single franchise to restore profitability. The three year accounting review has been replaced by the GAAP standard of annual accounting, allowing investors to track financials more easily.

“The idea of the franchise in very general terms is to have the ability to look at the individual businesses and to make sure that the individual business owners are making good business decisions… and to basically identify early on those businesses that are not making money or their business plan looks as if they will not be profitable,” Wendy Baker, president and director of Lloyd’s America Inc. “Basically the aim is too get rid of [unprofitable businesses]… the bottom portion drags the market down. That’s what needs to be done because the ratings are done of the whole marketplace. You’ve got businesses within Lloyd’s that have never lost money, are always profitable but deserve better than ‘A-.'”

The move away from three year accounting will allow Lloyd’s to easily identify those businesses that are unprofitable, Baker continued. In the past, some syndicates would have poor results in their first year of the accounting cycle, but would go identified because of the three year accounting.

The reforms are expected to have a major impact on the Lloyd’s organization, including syndicates in the United States. “The U.S. is the largest market for Lloyd’s. Anything they do reform-wise affects what we do in the United States,” Baker said. “Some of the reforms being pushed stem from comments and issues raised within the United States. A lot of those reforms are being driven by the rating agencies, security analysts, and buyers of reinsurance.”

Julian James, director of Worldwide Markets at Lloyd’s, delivered a powerful message to the NAII conference attendees, summing up the role Lloyd’s has vowed to take on in the industry. “Lloyd’s is setting out to challenge the cycle,” James said. “Too many of us believe that the insurance market is dictated to by the insurance cycle.

“We’re coming out of a major period of financial disaster to our industry,” James told Insurance Journal. “We are actually operating in a completely new environment.” He emphasized underwriting discipline as an important aspect in the return to profitability.

In addition to the many reforms Lloyd’s is facing, James also announced the search for a franchise director. “We’ve created a new role which is what we call the franchise performance director,” he said. “That person would be charged with the responsibility in making sure the businesses in the market are operating profitably. And if they’re not, to help them get to the stage where they are profitable. The first part of that is the business planning cycle.”

Both James and Baker emphasized the importance of the business planning cycle, where syndicates would be required to share their business plans with the franchise director. This would, again, allow both the director and the syndicate to recognize fairly quickly any potential problems in the syndicate’s ability to make a profit.

The New Year will bring about a positive outlook of the reinsurance industry thanks to companies like ERC and Lloyd’s, who are leading the way in a beleaguered market. To return an underwriting profit, reinsurers will have to assess their current operations, make necessary reforms, and exercise disciplined underwriting. While the events of Sept. 11 were a defining moment in the industry, 2003 has the potential to be a significant year as well as the industry digs itself out of the hard market.

Topics Trends USA Excess Surplus Reinsurance Market Lloyd's