Mark Shumway, Vice President
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A sagging economy has pushed non-life insurer earnings lower in Japan. After-tax net income for the seven largest companies dropped 67.1 percent for the first half of fiscal year 2008 (April 1, 2008 to September 30, 2008) relative to the same period in 2007-after adjustments for contingency reserve movements.
Despite these major changes in financial markets, asset allocation did not change substantially in the aggregate. Declines in nearly every other asset category offset partially the JPY1.3 trillion (USD13.5 billion) decline in the carrying value of domestic shares, which dropped 3 percent to 24 percent of cash and invested assets. Fixed income investments increased from 34 percent to 39 percent.
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Sean Mooney, Chief Economist
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Despite the ambiguity pervading financial and reinsurance markets, it is clear that systemic risk has increased. Unprecedented chaos in financial markets left investors more risk-averse than they were at the end of the summer. They are demanding greater returns on the capital they put at risk. A closer look at the economic conditions underlying the marketplace, however, suggests that an increase of 1 percent to 3 percent is warranted for catastrophe covers, which should result in a minor impact at the January 1, 2009 renewal. Other factors, including the impact of the global recession on premiums and claims, the collapse in equity values, a rising distrust of modeled results arising out of Hurricane Ike, increased demand by cedents seeking to preserve their diminished capital, and diminished supply of reinsurance capacity, are likely to have a much greater impact on rates.
John Major, Senior Vice President, Instrat
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How do you put a price on risk management? In the early days of finance theory (1950’s), the value of risk management was questioned—unless, of course, it was costless. The nuances of a more complex business environment have rendered this position untenable, but we still struggle to quantify the benefits of risk management, especially in the (re)insurance industry. Thus, the fundamental activity of risk-bearers has not been measurable, leaving a cloud of ambiguity in the middle of every carrier’s operation.
This changes now.
David Piebe, Chairman of Global Client Development
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(Re)insurers have come to expect that alternative sources of capital will always be available. Private equity funds, hedge funds, and other alternative investment vehicles have contributed copious capacity to risk-bearers since the turn of the millennium, and especially following the 2005 storm season. The well, however, may be at risk of running dry.
David Priebe, Chairman of Global Client Development
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Earlier this year, the (re)insurance industry celebrated an abundance of capital. Buybacks and dividends were common, as carriers struggled to find productive uses for their extra cash. Only a few months later, we are in the midst of a financial catastrophe that is wreaking havoc on balance sheets and constraining carrier access to capital. And, the situation could worsen. A major catastrophe event could place substantial demands on (re)insurer capital in a climate where replenishment would be both time-consuming and costly.
Peter Zaffino, President & CEO
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While hurricanes spun through the Gulf of Mexico last month, a larger catastrophe ripped through New York, London, Shanghai, and every other major financial center in the world. Tropical Storm Credit Crisis (which started as Tropical Depression Subprime) intensified quickly and became a Financial Catastrophe that destroyed vast amounts of shareholder wealth.
Nick Frankland, CEO of European Operations
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The (re)insurance market is fraught with uncertainty. As the next renewal looms large, buyers and sellers are attempting to find common ground for risk-transfer pricing, particularly in the wake of a high-frequency hurricane season and a severe financial catastrophe with implications for both sides of carrier balance sheets. While it is too early to tell if reinsurance rates are turning, it is clear that continued substantial declines are unlikely.
Christopher Klein, Global Head of Business Intelligence
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The ongoing financial catastrophe is already shaping the market’s perception of the next reinsurance renewal. A unique confluence of factors has complicated the annual ritual of anticipating the direction of reinsurance rates. Though a number of factors have coalesced to prevent the continued rapid decline in risk-transfer pricing that characterized 2008, pricing on average at January 1, 2009 renewals is likely to remain within a narrow range of expiring rates. Nonetheless, the global credit crisis is far from over. Conditions are changing daily. New financial developments—or a mega-catastrophe—could change market conditions substantially and with little lead time.
