If you are requested to write this assignment in no less than 3,000 words, this is actually a luxury rather than a pain in the ass! I remembered when doing my assignments for my MBA two years ago, the university insisted that we cannot write with more than 1,500 words! Wow! I thought this was easy but in reality is extremely difficult because to write long is not really a problem as most information is readily available from our internet super warehouse. The philosophy behind this is to train us to deal with real life situation. In today’s practical world, we are always overwhelmed with information overload, thus you cannot expect your bosses to read you lengthy masterpieces!
I guessed the following pointers are of relevance when answering this sort of questions.
|What caused the recent financial crisis?
|Separate out into regions – North America, Europe, Asia and Gulf States||The world over was affected by this financial turmoil, it is a matter of timing…. The contagion spread from the US into Europe and the major economies of Asia…Outside US, Europe is the most hardest hit with numerous banks hit by credit crunch – The Northern Rock, UniCredit (Italy), Franco-Belgian Bank (French-Belgium-Luxembourg) and many Spanish banks were affected. This shows how fragile is the global financial system….
As a result of the weakening financial markets, it is very likely the availability of capital market is also affected. While reinsurance capital has dwindled downwards between 15% to 20% but it is still readily available for primary insurers having good underwriting track records….
|Which major reinsurance companies were affected?–
||Most major reinsurance companies were not severely affected by this financial turmoil except AIG-US, and they are still in the doldrum. Nevertheless, Munich Re and Swiss Re were not spared as they suffered substantial investment related losses…. Generally most reinsurers would have recovered by the 2nd Q of 2009. In addition to the financial crisis, weather related claims also hit the CAT portfolio substantially… Reinsurers having sizeable exposure in MBS and ABS: Swiss Re was the major reinsurer of AIG and also invested in securities issued by AIG, with total estimated exposure at CHF250 million, inclusive of Lehman Bros’ CHF50 million. XL Capital has the highest exposure to such securities and the gearing in this respect to their SHF is also the highest todate. The others more familiar to us Malaysian are Hannover Re, Paris Re (process of being taken over by Partner Re), IPC (taken over by Validus) and Odyssey Re. Investment income (largest component of pre-tax profit) is one area requiring further discussion…. as most reinsurers had always been relying (in a soft market) on investments to offset the thinning underwriting margin. While generally underwriting profit has improved a fair bit in 2Q 2009, investment income has dropped significantly by some 20%.
Pre-tax profit – Although severely affected in the 1Q 2009, most had recovered but profit level is still below those recorded in last corresponding period.
Change in Shareholders’ Fund (SHF) – Generally most have a double digit growth as recorded in the 2 Q this year.
|Is reinsurance capacity affected? Is pricing on an uptrend? Are terms and conditions of cover retained?For the purpose of discussion it is best to separate out into major portfolio – Property & Casualty, Specialty, Marine, Aviation and CAT.It is also best to cite significant increases in respect to region(s).||While reinsurance markets may have suffered some balance sheet losses mainly in respect of investment losses, generally there is no major lost of capacity. With most countries adopting risk-based capital (one form or the other) and the lack of alternative capital, reinsurance remains one of the main functioning capital markets for insurers. Has there been significant price increase in reinsurance programmes? Generally none save for those portfolio relating to Hull, Aviation and CAT related. While Hull rates had always known to be uptrend for the past few years, aviation pricing is significant affected by recent crashes (eg. Air France Flight447)….. and CAT related pricing may be affected by the major losses in the Florida hurricane, Windstorm Klaus, earthquake in China and Indonesia, and windstorm and flooding in Taiwan. Property & Casualty portfolio tends to continue on the competitive path.There are potential effects in respect of some “Specialty” classes like D&O where it is expected claims would be on the rise in anticipation of increasing EPL claims…., Credit insurance in respect of continual weakening of trades. Reinsurers are monitoring closely those claims that are crisis related.
Terms and conditions of cover – Reviews are already a reality for cedents that have been performing badly over the last couple of years.
|Are Primary insurers buying enough of reinsurance or are they increasing their Net retention?||
|Financial Strength Rating (FSR)||It is worthwhile to discuss issues in respect of FSR of reinsurers as cedents usually factored this as part of their Risks Management policy. A downgrade means the professional reinsurers would sufferred as renewal rate and new business underwritten are certain to drop drastically…..|
|Summary||The reinsurance market proved resilient in the depths of the credit and liquidity crisis; instead of shrinking, requiring government assistance and cancelling commitments, it provided critical liquidity to cedents. Reinsurance continued to provide material and accretive capital to insurers, most of whom were suffering from the affects of the credit and liquidity crisis. The pricing at renewals was less than anticipated and the firming that did occur was focused appropriately on lines that represent peak reinsurer exposures such as U.S. hurricane, U.S. earthquake, European wind, and Japanese typhoon and earthquake.Indeed, there was no hard market even though the capital of the reinsurance sector was strained more severely from the credit and liquidity crisis than it had been in the wake of Hurricane Andrew in 1992, Hurricanes Katrina, Rita and Wilma in 2005 or the terrorist attacks of 2001. Insurer capital bases have recovered by growing eight percent through the first half of 2009 after decreasing by 29 percent in 2008. Over the same period, reinsurer capital bases increased by nine percent after decreasing by 15 percent in 2008. Read latest article written by Aon Benfield.By the 1st Half of 2009, most reinsurers have recovered a fair bit although many of the bigger players are still very much exposed in respect of MBS and ABS as a percentage of their SHF. Special provisions would have been made in respect of unrealised gain / loss…. That is also why Swiss Re posed a sizeable 2Q pre-tax loss. In respect of Munich Re and Partner Re, both have squeezed itself clear from such securities. These three major players are determined to (Aug2009-MunichRe) see increases in reinsurance rate.|
Please note plagiarism is not a nice word if it comes out from the mouth of your examiner or lecturer… Just “google” the internet for terms used, there are just so many materials for reading pleasure unlike the days in the 80s and before!