Reinsurance 2010 Outlook Revisited

Correction/Apology

Canadian Underwriter incorrectly published material attributed to PartnerRe chief agent Francis Blumberg in the cover story of its November 2009 reinsurance edition.

Blumberg’s correct submission (reproduced below) was submitted for publication in Canadian Underwriter’s 2009 November reinsurance edition.

Due to an error in Canadian Underwriter’s publication process, Blumberg’s submission for the 2009 edition was in fact substituted with his submission for the 2008 reinsurance cover story.

Canadian Underwriter is embarrassed by this error and fully regrets making it. We offer our deepest apologies to Francis Blumberg for any confusion, and for any inconvenience he may have experienced arising from our mistake.

Also, in the same cover story, a submission by Caroline Kane, senior vice president and chief agent in Canada for the Toa Reinsurance Company of America, was regrettably omitted.

We reproduce Caroline Kane’s submission here in its entirety, along with sincerest apologies to her as well for our error and oversight.

Francis Blumberg Submission

The re/insurance industry offers products and services that help others manage their risks. The past 18 months have demonstrated that no matter how well we try to understand the risks, there will always be some risks or a correlation of risks we do not anticipate or get quite right. Re/insurers can hold additional amounts of capital or include additional margins within their pricing, but a potentially discomforting level of uncertainty will always remain.

As we approach the end of 2009, investment results are improving, but claims are still increasing. It’s important to have a long-term view of risk.

Under-pricing risk is not sustainable and ultimately does not benefit either reinsurer or insurer. Therefore, as rates continue to soften below technical price, we need to look at the risk factors that we do understand, such as the risk-free rate and loss trends.

Risk-free rate is an important pricing measure. It is essentially the yield that we will earn on the premium that we receive before we pay out claims.

The higher the yield (and the longer the duration), the lower the required premium and vice versa. The return on risk-free investments has decreased dramatically over the last 12 months and will remain this way for the foreseeable future. Equally, increased loss trends are emerging in many lines of business; with every passing year, we have better data and additional knowledge about the expected claims costs.

If we ignore the tangible facts that we do know, such as interest rates and loss trends, we might end up in another costly exercise. This would be a pity given the Canadian re/insurance industry has fared better than others in the most recent crisis.

Caroline Kane Submission

The Canadian insurance industry has seen underwriting profits diminish in almost all lines of business over the past two years. This can be attributed to several factors including inadequate pricing for the risk exposure and the increasing cost of inflation.

While reinsurers generally exercised more underwriting discipline over the past few years than the primary market, reinsurers’ results have also deteriorated.

It is important that reinsurers maintain underwriting discipline and focus on effective capital management in order to support the long-term viability of the Canadian reinsurance market.

While inflation is of concern to the industry as a whole, it is of increasing concern to reinsurers providing excess-of-loss protection on long-tail business.

Most auto/casualty treaty programs are placed on an excess-of-loss basis in the Canadian market with fixed retentions and limits; in other words, non-indexed covers. This means reinsurers must effectively price the product today, even though most losses will not be paid until several or more years in the future. Thus social, medical and legal inflation must be factored into the cost of writing long-tail business.

While inflation is not something new facing reinsurers, it is exacerbated by current economic conditions and low investment returns.