European Insurance Forum puts Ireland in the spotlight

EU Reinsurance Directive, Solvency II, killer risks and catastrophes all up for discussion

Eighteen years ago an Irish insurance conference would have consisted of a broker and an underwriter from Dublin having a pint of Guinness in a pub (most likely in London). Times have changed. Since the founding of the Dublin International Insurance & Management Association (DIMA) in 1990, Ireland’s international insurance presence has grown to become one of the most important in Europe.

DIMA organized the European Insurance Forum, held March 15-16, at the Four Seasons Hotel in the fashionable Dublin quarter of Ballsbridge. It featured a wide range of speakers, and touched on a number of timely topics from financial regulation — the EU Reinsurance Directive and Solvency II — to “killer risks” and catastrophic mass terrorist threats.

Despite Swiss Re’s announcement that it had chosen to centralize its European operations in Luxembourg, rather than Ireland, most of the delegates and speakers expressed confidence that Dublin would continue to be a hub for international insurance and reinsurance activities.

“I don’t see Swiss Re going to Luxembourg as competition,” said Sarah Goddard, DIMA’s CEO. “There needs to be a choice in Europe, as the various business models vary, so do the choice of locations.”

DIMA’s Chairman Scott McIntosh, who’s also the managing director of Swiss Re Ireland [formerly part of GE Insurance Solutions], noted that Dublin seems to be more attuned to the needs of companies from English speaking countries, not only due to the language, but also to cultural and legal differences. Given those parameters Swiss Re’s decision seems logical.

“Ireland and Luxembourg are complementary,” said Victor Rod, who heads the Duchy’s Insurance Supervisory Authority.

EU Reinsurance Directive
With the European Reinsurance Directive set to come into force on Dec. 10, 2007, both McIntosh and Rod acknowledged that the move had become necessary, even if Europe’s reinsurers seem to have gotten along just fine until now without EU regulation.

“It will give the industry greater legitimacy and transparency,” McIntosh said, “as well as creating a more level playing field and creating leverage to move ahead on the question of collateral requirements.” Rod observed that the directive was the result of requests by “international financial bodies,” which, after the Sept. 11 attacks, mutually recognized the need to standardize reinsurance regulations. “When it came to discussing reforming the collateral requirements, the U.S. told the EU it would have to act first [to enact uniform regulations] before having discussions.”

EU countries are required to adopt the necessary legislation to make the directive part of their national laws. Ireland got a jump on the rest of Europe by passing the provisions in July 2006, the first EU country to do so. The directive — despite lingering objections from France — mandates abolishing collateral requirements throughout the EU in January of 2008; when that happens the EU will have “additional leverage” to negotiate with the U.S.

The imminent changes weren’t lost on Walter Bell, who brought all three of his current hats to the conference — insurance commissioner of Alabama, president of the National Association of Insurance Commissioners, and vice president of the International Association of Insurance Supervisors. Bell defended the U.S. position and pointed out that 95 different countries sell reinsurance in the U.S. “We’re focused on assuring the solvency of both the ceding companies and the reinsurers; we don’t regulate rate and form [for reinsurers],” Bell said.

He also stressed that the U.S. has taken steps, citing the model law on credit for reinsurance. “What I support is a ‘re-calibration’ [of reinsurance regulation], not elimination.” He added that the NAIC is at present assessing the feasibility of a “broad-based risk approach,” which it hopes to have ready by the fall.

The Reinsurance Directive is based on the EU’s Solvency I financial standards; it will be modified when (and if) the revised Solvency II requirements for the regulation of the insurance and reinsurance industry are put into force in 2010. Goddard echoed most industry experts in describing Solvency II “as a revolution in European regulation.”

The proposals, which are varied and complicated, basically aim to replace the current insurance regulation, which concentrates on assessing annual capital requirements, with an ongoing risk evaluation system; i.e., the riskier the business, the more reserve capital will be required. How to assess risk levels is the key question.

Dr. Herbert Luethy, former director of the Swiss Insurance Regulatory Authority, offered suggestions from his experience, which included posing various “disaster scenarios” to companies that required them to produce appropriate plans to deal with such eventualities.

Killer risks
The phrase “killer risks” conjures up fires, explosions and terrorist attacks, but that’s not what sophisticated risk managers for big corporations really worry about. They’re much more concerned with financial meltdowns in the securities markets and damage to their brand names and reputation, arising from product recalls and liability actions.

For them insurance is just one tool to manage risk. “We’ll transfer some risks [through insurance],” said Thierry Van Santen, head of Group Danone’s Corporate Business Risks and former chairman of FERMA. “But if we can absorb them, why buy insurance?” Many large corporations are frequently rated higher than their insurers. If they lose a facility to fire, flood or other disaster, their internal funds and borrowing power enables them to take the loss at minimal cost and retain funds otherwise spent on insurance. Many of them also use captives for the same reason.

There are, however, a lot of other risks out there.

John O’Connor, former head of London’s Flying Squad, an elite police unit that has taken on the IRA and more recently the subway bombers, gave an assessment of the worldwide terrorist threat. “It’s not a war, it’s a conflict,” he said. “You’ve got two opposing sides; what the terrorists want [such as an Islamic State in the UK] is unachievable, but there is no way to ‘win’ as you’d have in a war.” He pointed out that one of the goals of the second set of UK bombers (whose devices failed to explode) was to inflame Britons against Muslims, “so as to create more terrorists.”

Chemical, biological and radioactive terror threats got a good going over too from Dr. Steve Hajiof, a public health specialist, whose clients include the London Public Health Service, UNICEF, the World Health Organization and the EU. “The people who plant these agents aim at disruption through terror,” he said. “They’re hard to spot and it’s sometimes hard to tell who’s been exposed.” He discussed some past attacks, such as the release of the Sarin nerve gas on the Tokyo subway, which “created a panic and had a devastating effect.” However, he also indicated that “although most chemical and biological agents are relatively easy to produce, they are hard to deliver.”

Dr. David Cook, medical director-UK of International SOS, diagnosed the threat level posed by avian influenza. He compared it to the Spanish Flu of 1918, which killed at least 40 million people around the world and probably many more. Cook thinks it’s only a matter of time before the H5N1 virus develops the capability to spread through human contact. If that happens, “30 percent of the world’s population could contract the disease within a relatively short period of time. The mortality rate in those who’ve been infected has been 60 percent.”

The latest saga in the climate change debate received the attention of Bill McGuire, the director of the Benfield Hazard Research Centre. In addition to bigger and more powerful hurricanes, the world also faces threats from earthquakes and volcanoes. Their increased activity may be triggered by the changing climate through melting ice caps and higher sea levels, which increase the strains along the earth’s major fault lines. “Three billion people live within 60 kilometers [36 miles] of the coast,” he pointed out.

So, how is the insurance industry to cope with all these threats?

“Reinsurers cannot support maximum losses,” said Hannover Re’s Juergen Graeber. “Adequate prices would assure more stability, but you cannot write under funded business.” Discussing the situation along the Gulf Coast and Florida, he said the U.S. “needs all the capacity it can get,” but if it has to be priced too cheaply, then the industry is “big enough to lose a billion in premium.”

The conference closed in time for St. Patrick’s Day festivities. Even the weather cooperated — it didn’t rain.