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Uncovering the main issues raised at the recent Guy Carpenter/Lloyd's sponsored summit series in the US

The second Reinsurance summit took place in New York. Another leading group of industry executives in the reinsurance sector gathered to discuss the market and how it may develop.

The discussion initially considered some of the trends that are emerging in the sector, in the context of a market that can no longer rely on the returns from the equity market and is now increasingly dependant on underwriting basics. It was argued that the market differentiates too much on price and that companies need to use true underwriting discipline as a business strategy. However it was also pointed out that this has to be balanced with growing the business.

This was put in the context of the current state of the rates which were considered 'adequate' and likely to stay firm for the next renewal season.

However, one contributor warned that the effort of building up soundly underwritten business could be threatened if rates softened after two years.

It was then suggested that this is only one side of the business challenge facing reinsurers and that the drive to build up capital also needs attention.

As one commentator said: "Investor discipline is the other question." The state of the equity markets means the need for new capital is a top priority.

The debate then considered catastrophe pricing. Terrorism cover was first on the agenda and it was suggested that the reinsurance industry was being receptive to the market need for cover and underwriting the risk. But the question was posed of how cover would be managed after the Terrorism Risk Insurance Act expires and whether primary insurers would still be able to cover terrorism.

The issue of modelling was also considered in the context of terrorism, but it was argued that every terrorism loss was different which meant modelling is very difficult. There was a suggestion that benchmarking could be used.

In general it was argued that reinsurance is much more reliant on modelling for pricing and this is leading to more efficient markets. The example of Hurricane Andrew was cited, when modelling was not used and it took a year to regenerate capacity. In comparison, after the 11 September 2001 attacks it took just 90 days for the industry to recover because companies knew of their catastrophe capacity.

Another difference between the reactions to Hurricane Andrew and 11 September was that there were hundreds of companies involved in 1992, whereas the World Trade Centre (WTC) involved a much smaller number - between 15 and 20. It was also suggested that there was rate retention after the hurricane but no retention in the aftermath of the WTC attack.

The discussion then centred on how it is possible to achieve competitive advantage now that modelling is so sophisticated. One contributor argued that the modelling systems meant it was impossible to achieve competitive advantage and that the large national companies are locked in to a consensus about pricing discipline. However, another guest argued that it had been used to competitive advantage and cited Renaissance Re as an example.

It was suggested that it has used modelling to make risk selections and get a better rate of return on new capital to provide gains that others would not have achieved.

The question was posed about whether reinsurance had become a commodity.

Some felt that it is not a bad thing although it was suggested that there was a down side in that it becomes a very bland product and there is the issue of whether there is enough capacity. But another contributor felt that it would have a stabilising impact. It was considered that there is a smoothing out because there is less volatility. But the dilemma with catastrophe loss is always the unexpected loss, it was concluded.

The summit also considered the question of security. One guest pointed out that managing counter-party risk was becoming an increasingly important theme. It was argued that this had become a long and short-term issue with companies such as Gerling and Trenwick struggling to find a solution.

It was pointed out that tools such as credit triggers had become a method to deal with the risk but it means "inviting the worst possible action at the worst possible time". It was considered that a consistent way of looking at the whole question of counter-party risk and collateral was required. In particular it was argued that a credit limit is currently under collateralised, which is something that requires work. But, one guest argued, there is also a risk of an overreaction and the question was posed 'who will pay for it'?

It was also suggested that there are other risks in the insurer/reinsurer relationship. In particular, if an insurer is in financial trouble the reinsurance company is the last in line for payments. It was argued that little investment is put into risk management and the banking sector puts all the emphasis on credit risk management rather than risk management and security, which are not as visible.

It was suggested that the industry is guilty of not paying the same attention internally as it does to its external business practices, and that banks have to apply the diligence because they are regulated, whereas the insurance sector is not measured. However, it was concluded that European measures such as Basel II would make their impact on the US too.

- Bermuda summit report is on page 39.

ATTENDEES

Wendy Baker, chief executive, Lloyd's US

Scott Belden, chief risk officer, reinsurance office, Travelers Property Casualty Corp.

Tom Corfield, Liberty Syndicate, Lloyd's

Dan Eudy, executive vice-president/chief underwriting officer, Industrial Risk Insurers

David Furby, president, Ace Global Reinsurance

Dee Megna, president, Guy Carpenter

Chris Milton, vice-president, AIG

Kent Miller, senior vice-president - reinsurance, Ace USA

Mark Puccia, managing director, Standard and Poor's US

Sal Zaffino, chief executive, Guy Carpenter.

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