June 18, 2015 by Canadian Underwriter
The reinsurance industry must overcome the current state of “structural crisis” in order to remain relevant, Philipp Wassenberg, president and CEO of Munich Reinsurance Company of Canada, said during a Property Casualty Underwriters Club luncheon and panel discussion held in downtown Toronto Tuesday.
“From a reinsurance perspective, but this drives into the insurance perspective as well, we are in a state of structural crisis and we have to overcome this crisis in order to stay relevant,” Wassenberg argued. On a more positive note, though, he told attendees that the reinsurance industry is “aware of being in a crisis. It is not running blindly like the lemmings over the cliff.”
Wassenberg characterized the 9-11 attacks as the “last drop in the ocean” that contributed to the insurance and reinsurance industry – which had been “caught in a terrible downward cycle” – entering a hard market for about seven years, far longer than the more traditional three years hard/seven years soft cycle.
To date, though, “a lot of insurers and reinsurers still release the reserves from those very good, long fantastic years,” he explained.
Then with the financial crisis in 2008, regulators took steps to impose low interest rates to help economies recover. “The low interest rate was directly put upon the world to save the economies of the world and was ever since the biggest problem, I think, that the insurance industry had to face,” Wassenberg argued.
“Our models were basically built on higher interest rates” and that goes for all long-term business, casualty, workers’ compensation and life insurance, he said.
This is coupled with what appears to be “a very benign nat-cat scenario ever since,” he pointed out. The last nat-cat that was “bad” in terms for the model of insurance was the Rita-Katrina-Wilma hurricanes that hit the U.S. in 2005.
The models are built on U.S. hurricane as opposed to worldwide global catastrophes, he said. As such, 2011 – which included flooding in Australia and Thailand, and earthquakes in Japan and New Zealand and saw more than US$100 billion in losses – did not produce much of a ripple.
“It didn’t hit the U.S. east coast, so it had very little effect – or none – on cat bonds, it had very little effect on the pension funds and hedge funds that invested into those east coast cat models, and it had very little effect on most of the Bermuda property carriers that were also focusing on the east coast of the U.S.,” Wassenberg (pictured below) explained. “So while all the global bearing of this incredible 2011 year was mostly borne by the international global reinsurers, and some local insurers,” he pointed out, “the loss situation seems benign.”
Nat cat in the U.S. is “really where the profits are made,” Wassenberg told attendees, and since it has been so benign, it “is a big problem now,” he added.
“So that’s the big crisis, because competition is hard at it. The pension funds and the hedge funds, again, not having any yield anywhere else, go into reinsurance every year with a higher stake,” Wassenberg reported.
“If you compare the reinsurance capital to the hedge fund and pension fund capital of the world, the reinsurance capital is about 2% of the rest,” he noted. As such, if these funds put money into nat-cat and reinsurance to gain return or diversify their portfolios, “that’s a serious structural problem for reinsurers.”
To those funds, with benign nat-cats, “it seems an incredibly profitable business. They have no clue what can actually happen, that you have to make money over time and that it’s about recurrence and calculating the recurrence,” he said.
Wassenberg suggested that is also what is helping to drive consolidation among insurers and reinsurers. “It’s really because everyone is desperately trying to get scale,” he explained, adding that the aforementioned funds are “directly competing with the sophisticated reinsurance market and we have next to no answer. That’s the sad part about it. We cannot become cheaper and cheaper because we have to stay with our models.”
More coverage of the Property Casualty Underwriters Club luncheon