High Finance

In a Canadian reinsurance market generally described as non-eventful, Sharon Ludlow’s appointment in June 2010 as CEO of Swiss Re’s Canadian and English Caribbean operations has injected some new life into the party.

The word ‘life’ above is used advisedly. In addition to her experience in finance and property and casualty insurance, Ludlow brings to Swiss Re an extensive professional background in life insurance. In fact, when Ludlow joined Swiss Re in 2005, she saw the move as an opportunity to weave together her experiences in both the life and property and casualty sectors.

“The reason I joined Swiss Re — there were lots of good reasons — is that by then I had a background in primary P&C insurance and primary life insurance, and this was both life and P&C reinsurance,” she said. “I viewed it as kind of a triangle, with reinsurance being the centre point at the top that brought the foundation of life and P&C together.”

Point taken. But it could be argued that finance is in fact an adhesive that binds together all of her professional experiences in reinsurance, life and P&C insurance. In fact, her career in insurance spawned from her career in finance with Deloitte. From Deloitte, Ludlow joined a life insurance client, Prudential, to implement Canadian GAAP accounting. She later participated in the sale of Prudential to London Life.

From here, she moved to Canada Life Financial, where she led the demutualization and initial public offering (IPO) of the company. After the company went public, she launched an independent subsidiary company, Kanetix, an online site for insurance and mortgage purchases.

Knowing that the Canada Life group was about to be acquired, she joined Liberty International Underwriters in 2001. As the company’s chief financial officer for four years, she played a part in two major divestitures at the company, Liberty Health and Liberty Mutual Personal. This took her to joining Swiss Re in 2005.

Ludlow is proof of her statement that chief financial officers are much more active in their executive roles than executive bean-counters. They are integral and dynamic figures in developing the company’s financial strategies.

“For me, in the five years that I’ve had the opportunity to shape the CFO role at Swiss Re in Canada, the finance function and the CFO is a partner to the business,” she says. “It’s not simply checking the numbers with a rearview look, it’s part of the business. So much of our business today is driven by regulatory and other capital considerations and financial considerations. I found that almost all of our interesting transactions over the past five years have had CFOs or financial people from our client companies at the table.”

Ludlow’s financial background is a natural fit for Swiss Re, considering the reinsurer’s work in coming up with innovative ways to transfer risk to the capital markets. These would include, for example, Swiss Re’s ventures in the areas of mortality bonds, catastrophe bonds, insurance-linked securities (ILS) and industry loss warranties (ILW).

“I find reinsurance really takes an intense amount of thought and consideration as to where you should pool your capital and your risk, where you should accept the risks geographically and how do you share that using the capital markets,” she said, listing the areas in which Swiss Re has sought to transfer risk to the capital markets. “These are examples demonstrating use of the capital markets to continue sharing the risk and diversifying risk among the stakeholders. To me, that’s the interesting part of it.”

On the face of it, the Canadian reinsurance market doesn’t seem to be an ideal location to create similar sorts of risk transfers such as catastrophe bonds, she observes. She notes that, to a different degree than primary insurers, reinsurers are able to leverage climatology research to assess risk concentrations — she uses flood risk as an example — of insurers throughout the country. “The step further, although we haven’t completed it yet in Canada — none of the reinsurers have — is whether or not the risk and the appetite in the Canadian market is big enough to share risk into the capital market,” she says. “There, we are talking about a catastrophe bond.”

But although Canadian reinsurers may not be ready to launch the country’s first cat bond yet, they may be soon, Ludlow believes. She believes one of the triggers could be the actual occurrence of all of the significant mergers and acquisitions (M&A) activity that is always rumoured, but never seems to happen.

“We will see some M&A” in Canada, she predicts. “The timing is uncertain, but we will see it. In my mind, it’s the bigger of the primary players that will complete the M&A. As primary insurance companies get bigger, the risk that they have more concentration in a given geographic area will becomes greater as they acquire another book of business or a company that also operates in that jurisdiction.” This greater concentration of risk in certain areas will, in turn, have primary insurers thinking about using reinsurance.

Also, primary insurers in Canada are already somewhat primed to think about purchasing reinsurance in light of RMS introducing its new B.C. earthquake model last year. The new model ultimately caused Canadian primary insurance companies to look for additional capital in anticipation of an increased risk of damage than previously modelled.

A dove-tailing of these trends could reach a tipping point that would lead to reinsurers being able to transfer these risks to the capital markets, Ludlow says.

“I think we’re not at that point yet,” she says. “Certainly last year, with the release of the new RMS model, that caused companies to look at their B.C. quake exposure a little differently. It caused their boards and their risk committees to encourage management to ensure they have sufficient reinsurance. So that, by and large, increased the reinsurance purchasing by Canadian companies. But it didn’t hit a trigger yet — for example, that Company A has so much [risk concentrated in a single area] that they might consider a cat bond. But having gone through this review of B.C. quake, if you had M&A, and if the largest Canadian primary company were to acquire Number 2, that’s going to make a very different size in their portfolio, and so there may be a trigger there.”

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The step further, although we haven’t completed it yet in Canada — none of the reinsurers have — is whether or not the risk and the appetite in the Canadian market is big enough to share risk into the capital market. There, we are talking about a cat bond.