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Reinsurance Industry Facing Challenge and Change, Chairmen of Upcoming Industry Conference Say

BERWYN, Pa.  – April 8, 2009 – Players in the multi-billion-dollar reinsurance industry are navigating their share of challenges these days.
 
“From a tough market to increased competition, from climate change to calls for regulatory reform, from emerging risks to the credit markets crisis.  They have it coming from all directions.  But,” said Tom Hagy, president of HB Litigation Conferences LLC, “in an industry where calculating risk is the name of the game, change is one thing our faculty of experts agrees is certain.  It also is often where they can find opportunity.”
 
HB Litigation Conferences, which is producing the sixteenth version of its “Insurance Insolvency & Reinsurance Roundtable” in Scottsdale, Arizona, later this month, asked its chairmen what is going on in this global market.

“The market is changing, and changing in a number of ways,” said Neal Moglin of Lovells LLP, a leading law firm in the reinsurance space.  He points to the soft market and competition in reinsurance of the last several years. “There are a lot of people who thought rates were going to go up,” he said, but there are also some companies right now “that are motivated to retain business against some challenges.”  However, he said, “that is just a function of the market.  There is frequently a disparity in the players and it is not always a level playing field.  You look to attract business the way you can and there might be some holding the line on rates that might be affecting other reinsurers.  So the market is potentially changing and the market might tighten up, at least at the upper end.”

In a survey of reinsurers’ statutory underwriting results conducted by the Reinsurance Association of America (RAA), a group of 19 U.S. property-casualty reinsurers wrote $23.9 billion of net premiums during the twelve-months ended December 31, 2008, an increase of $1.2 billion from the same period in 2007. The combined ratio for the group was 101.8%, deteriorating from the 94.7% combined ratio reported for the same period in 2007. The combined ratio is attributable to a 71.0% loss ratio and an expense ratio of 30.7 %. Policyholders’ surplus was $64.4 billion, down from the $75.9 billion reported for the same period in 2007.  A complete version of the report is available from the now 40-year-old trade association at www.Reinsurance.org.

Moglin said there also are new threats in the underlying insurance market.  “Underlying insurers, the ceding companies, are grappling with new products, new technologies, new threats like global warming and haven’t really decided yet, particularly in the area of climate change, how they’re going to react,” according to Moglin.  “As a reinsurer it is very difficult to underwrite the underwriting of a direct writer – particularly in the D&O market or the environmental insurance market – if you aren’t sure how that market is responding to potential threats.”

“On the flip side,” he added, “there is a potential opportunity to market some innovative products to deal with these challenges.”

New threats always result in this kind of uncertainty.  “We are at an interesting and exciting time in the industry because this hasn’t happened in a while,” Moglin explained.  “So insurers are trying to come to grips with what their products do and don’t cover, and what, if any changes they need to make in their wordings, but also what if any changes they need to make in their underwriting.”

Regulation of insurance and reinsurance is a blazing hot topic right now.  In the U.S. insurance is regulated by the states, but calls for federal regulation are being made.

National Insurance Consumer Protection Act

Debra Hall, principal with Global Regulatory & Risk Consultants, says “state regulators are touting state regulation as superior, or at least sufficient, because insurance companies weren’t hit as hard as banks.”  However, she points out “we haven’t seen the last of the problems. There is potentially more to come in the insurance area, particularly in the life sector and the mortgage insurance arena. Additionally, there are potentially severe consequences, as in the case of AIG, for insurance companies that were involved in other activities that have gone unregulated. This demonstrates a broad problem to which insurance regulation and insurance companies have not been immune.”  There are gaps in the current system, she says and those gaps illustrate the need for a different type of regulation.  Hall noted the National Insurance Consumer Protection Act introduced by Representatives Melissa Bean (D-IL) and Ed Royce (R-CA) on April 2.  The bill would establish a federal insurance regulator which, say the sponsors of the bill, would eliminate insurance as “the only major segment of the capital markets not subject to federal regulation.”
 
“The bill has promise,” Hall says, “because it provides a mechanism to view groups and sectors in a holistic manner, a fundamental step toward closing the gaps that have led us to where we are today.”

Reinsurance industry veteran Pete Thomas, Executive Vice President of Willis Re, says that, at its core, “reinsurance is the art of dealing with the unknown, unknown.”  And although that art has been eclipsed in the recent past by “financial engineering, financial products and other types of risk management mechanisms” that are “sexier and flashier,” the risks insurers face in the 21st Century are sparking a renaissance in more traditional reinsurance skill sets. 

“The reinsurance market as a whole right now is highly focused on rate changes with the market hardening and capacity becoming dearer as reinsurers are struggling with their own capital requirements,” said Thomas. While traditional reinsurance has taken a back seat in the last decade or two to other financial products, Thomas says that “with the recent subprime issues, the credit crisis, the problems we are facing in the entire financial service sector, traditional reinsurance is having a renaissance. The issue of reinsurance coverage is becoming far more important to clients and as a consequence we are discovering that traditional reinsurance skills are far more valued than they would have been five years ago.”

Moglin, Hall and Thomas are chairing the 16th Annual Insurance Insolvency & Reinsurance Roundtable which will bring some 200 executives from leading reinsurance companies and attorneys from law firms specializing in this area of the law to Scottsdale, Arizona from April 22 to 25, 2009.  Participants will come from North America, Europe and South America.

All three chairs – as well as other experts in the field – offered their comments for HB Litigation Conferences which compiled them into special reports and posted them on the web at www.LitigationConferences.com.

For more information, contact Sharon Boothe, vice president at HB Litigation Conferences LLC, by email at Sharon.Boothe@LitigationConferences.com or by phone at   (484) 3…  x208.  Or, visit the “Conferences” section of the company’s website – www.LitigationConferences.com – which has the full agenda, attendance lists, sample text and video content and more.  Given budget and travel challenges for corporations, in-house counsel and executives are encouraged to inquire about scholarships for this event.

HB Litigation Conferences, located in Berwyn, Pa., near Philadelphia, provides high-end legal education in multimedia as well as precision networking opportunities in the legal areas of insurance, reinsurance, toxic torts, asbestos, pharmaceutical, product liability, financial, securities, and construction.  

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