“But we are actively looking for opportunities to deploy our capacity at the right price and terms,” she adds. “Given the difficulties in pricing the tornado/hail peril, we look to have open discussions with our clients and are willing to consider the impact of re-underwriting and other portfolio improvements when pricing their reinsurance covers.”

MUNICH RE: PRICING MUST EVOLVE AS INVESTMENT RETURNS WANE

The capital base of insurers and reinsurers remains strong—but low interest rates are taking their toll on business models, says Munich Re.

“More than ever, our industry faces the challenge of achieving stable earnings in its core business and further reducing its dependency on the investment result,” says Torsten Jeworrek, Munich Re's reinsurance CEO. “The key question will be how quickly and to what extent insurers and reinsurers will succeed in factoring the low interest-rate level into their price calculations.”

To lower interest rates, he says, the insurance industry must also add the following challenges: the crisis in the Eurozone and highly volatile capital markets.

Nevertheless, Munich Re predicts that prices—as well as terms and conditions—will remain stable when treaties are renewed Jan. 1, due to an abundance of capacity.

The reinsurer sees a “trend toward slight [rate] increases” in the Casualty classes since low interest rates are already negatively affecting profits from this long-tail coverage.

SWISS RE'S CIO DEPARTS

David Blumer, chief investment officer at Swiss Re, has announced he will leave the reinsurer on Nov. 1.

Blumer started with Swiss Re in 2008 as its head of asset management. In October 2010 he assumed the role of chairman of Admin Re, Swiss Re's business unit responsible for acquiring closed blocks of life-insurance business.

Prior to joining Swiss Re, Blumer was a member of the executive board at Credit Suisse.

A successor has not been announced.

RAA URGES INTERIM SOLUTION FOR U.S./E.U. REGULATORY COOPERATION

Frank Nutter, president of the Reinsurance Association of America (RAA), testified Oct. 12 at the International Association of Insurance Supervisors' Annual Meeting in Washington, D.C. on the need to establish a near-term framework for regulatory cooperation between the E.U. and U.S. on reinsurance.

“While E.U. and U.S. efforts to modernize their regulatory environments to facilitate cross-border business continue to move forward, the reality is that implementation of the E.U.'s Solvency II, and adoption by the states of the NAIC Model Credit for Reinsurance law under the umbrella of the NAIC's Solvency Modernization Initiative, is unlikely to occur for years.”

Recognizing that, Nutter urged the E.U. and U.S. to consider interim measures under existing authority to advance a mutual understanding about a framework for global reinsurance companies from the U.S. and E.U. that provides uniformity, greater efficiencies and lower costs for providing capital support for domestic insurers.

“The RAA is not wedded to a particular approach, but the potential options for further analysis include the authority of FIO [the Federal Insurance Office] under Dodd-Frank to enter into agreements with trading partners; and the authority in the E.U. under the 2005 Reinsurance Directive, adopted to authorize cross-border reinsurance by proposing treaties with third countries regarding reinsurance supervision.” 

REINSURANCE BROKERS 'NOT GETTING THEIR CUT'; SHOULD CHARGE FEES FOR SERVICES

Reinsurance brokers can no longer rely on the traditional means of commission compensation for placing risks and must begin charging fees similar to other professionals billing for services, says a business professor studying the industry.

In an interview with NU, Paula Jarzabkowski, a professor at Aston Business School and a Marie Curie Fellow, says the current compensation structure for reinsurance brokers is becoming obsolete as large insurers seek to place business directly with an increasingly smaller group of reinsurers.

“Brokers are not getting their cut,” says Jarzabkowski, who led a three-year study of the reinsurance industry that was released in a report late last month titled “Beyond Borders: Charting the Changing Global Reinsurance Landscape.”

That report, sponsored by the Insurance Intellectual Capital Initiative (a consortium of organizations associated with the Lloyd's insurance market), says the industry is seeking to bundle more and more risks, especially catastrophic risks, into single, complex programs that could open the industry to financial meltdown.

Discussing the role of brokers in the reinsurance-placement transaction, Jarzabkowski does not fault brokers for these placements, noting that they are following the desires of their clients—and her thoughts on broker compensation do not reflect a belief that the role of brokers is any less vital. In fact, she argues, broker services are just as necessary as they have been, perhaps more so.

In the past, brokers did the work of designing, structuring and developing a program, then placing it. Brokers were then paid a fee for the placement.

What is happening more often today is that brokers work on a program and then are not adequately compensated because they do not place the coverage.

“Increasingly, those services have to be valued just like any other consultant,” says Jarzabkowski. “If you got KPMG or someone like that to do consulting services, you would pay KPMG for their services.'”

She continues, “In the past, the broker was the sales machine. Now, they are not the sales machine; they are more of an information and knowledge broker. And in some cases, I think, [brokers are] a very important aspect of the transparency of major financial deals that are global.”

One of the impediments to changing the compensation model is tradition, she notes. Some brokers are attached to their clients and find it difficult to change a long-standing relationship from its commission compensation model to fee basis.

“It can be a hard cultural change to make,” she says. 

S&P: REINSURERS ARE UNDERESTIMATING CAT EVENTS 

A recent Standard & Poor's report says that although reinsurers' catastrophe losses appeared to be contained in 2011, modeled large losses closer to home (the U.S. or Europe, for most reinsurers) could prove to be trickier.

The report, “Catastrophe Risk Insurance: Just How Much Capital Is at Risk?” concludes that modeled reinsurance exposures to top U.S. and European zones clearly exceed those in Japan and New Zealand, and a large U.S. or European catastrophe is more likely to be a major capital event (defined by S&P as an event that erodes more than one year's worth of earnings).

S&P says such a home-field event could stress reinsurers' risk-management framework—even more than the events of 2011—providing a harsher test of efficiency.

“Some reinsurers with thinner tails may be underestimating their Catastrophe risk exposures, and consequently may be overexposing their capital and investors to major catastrophe events,” says S&P credit analyst Miroslav Petkov.