Global Crisis Dominates A.M. Best’s London Conference

Execs Say Market Remains Attractive Even as Crisis Puts Pressure on Prices

The by now all too familiar litany of the world’s financial woes took pride of place at A.M. Best’s conference in London on Oct. 15. Roger Sellek, the rating agency’s managing director-global financial services, called the credit crisis a “turmoil” in his opening remarks, and went on to detail the potential fallout. He cited the downward pressure on ratings, liquidity problems across all lines, and the dubious status of insurance linked securities, as the main concerns.

In the first presentation John Andre, Best’s group vice president, described the crisis, as “a market changing event,” that “may be big enough to affect underwriting conditions.” He was cautious as to just what such effects might be. So far the world’s insurers and reinsurers have not felt a significant impact.

“Overall terms and conditions remain attractive,” Andre said. “We’ve had relatively disciplined renewals to date, but there’s clearly pressure on prices.”

Vasilis Katsipis, general manager, A.M. Best Europe, discussed the current state of the life insurers. He also explained how the current credit crisis combined with turbulence in the equity markets is affecting insurers throughout Europe.

Miles Trotter, general manager of A.M. Best Europe, went a bit deeper into the insurance pricing cycle in his discussion of underwriting management. He illustrated his presentation with the “Warburg Wheel.” It starts with full demand, but then declines as competition increases, companies chase market share and profitability collapses. At stage No. 6 a nadir is reached, as underwriting losses increase and investment returns decrease. But, he pointed out, it then begins to recover until — at stage 12 — “Euphoria” is attained. That’s right before it starts going down again.

However, Trotter’s real aim was to map out how to avoid the highs and lows in favor of disciplined underwriting, which includes keeping existing clients in down markets, and trying to attract new business only when conditions are becoming more favorable.

Lloyd’s Franchise Director Rolf Tolle added a complementary view. He detailed Lloyd’s efforts since adopting a franchise system in 2003 to “get a better handle” on how the Syndicates operate. One guiding principle emerged — knowledge of how every aspect of your business works is absolutely necessary in order to achieve a measure of control over it. That’s a lesson the banking world could certainly profit from.

In presentation after presentation one salient point emerged – be careful. In dealing with the financial crisis insurers must maintain an up-to-date analysis of reserves and solvency capital, as well as both operational and enterprise risks; loss ratios should be carefully monitored. To achieve this larger companies, and a number of smaller ones, are placing greater emphasis on perfecting their internal capital models. They’re also hoping, as the implementation of the Solvency II regulations nears, that their own models will be acceptable to regulatory authorities to meet the requirements of the new risk-based regulations.

“First target the loss ratio,” said Janet Nelson, chief risk officer for the Catlin Group, in outlining how models are constructed. But, she explained, it’s also “necessary to have feedback and diversification,” and to anticipate the risks that could emerge. The results should then be built back into the company’s capital model. “Companies and their underwriters make better decisions about how to deploy their capital,” Nelson said, “and what kind of capital is needed.”

While companies continue to work to improve capital models, there’s still a great deal of debate as to just what Solvency II will require when it comes into force in 2012.

“Economically the idea of a non-linear approach to risk assessment is a good concept,” said Eberhard Mueller, chief risk officer of Hannover Re. “However,” he continued, “now we’ll see if this general approach makes its way to the final outcome.”

Tony Brooke-Taylor, who heads the wholesale insurance unit of the United Kingdom’s Financial Service Authority, reminded everyone that regulators must first approve the internal models a company wants to use. He added that such models are “very strong business tools,” which should be employed to guide the company, and not just to satisfy regulators.

Edward H. Easop, Best’s vice president, rating criteria and relations, reinforced the “back to basics approach” to risk management, which has become increasingly important, as the financial crisis deepens.

“You need solid guidelines,” Easop said, “and you need to reexamine them on an ongoing basis.” The size of the company, the type of business it writes, the areas it serves and how advanced its enterprise risk management is are among the factors Best considers in establishing its ratings.

The concluding panel’s discussion of “Evolving Business Models” focused essentially on the attractions and deficiencies of more traditional insurance centers, i.e., London, and those that have recently attracted more company formation and changed domiciles such as Bermuda.

The debate between Chris Hitchings, senior vice president of Keefe Bruyette & Woods, and an acknowledged expert on Lloyd’s, and Hiscox CEO Bronek Masojada was particularly spirited. Are Bermuda’s insurers having trouble employing the capital they’ve amassed? Is the island’s infrastructure at a saturation point as far as providing support and services are concerned? Are Bermuda’s tax benefits really that important? Has London sufficiently reacted to the island’s challenge?

There was little disagreement, however, about the importance of facing the ongoing financial crisis. To sum it up: it will get worse before it gets better, and, if companies don’t get their act together with better risk management, both operational and enterprise wide, they will be in for a lot of trouble in the near future.

Topics Legislation Europe AM Best Training Development London