Testing times for reinsurers

For reinsurers it seems the response to the 11 September terrorist attacks in the US have left it wi...

For reinsurers it seems the response to the 11 September terrorist attacks in the US have left it with something of a dilemma. Whatever else it was, the event was also an extreme test of the reinsurance sector.

As the two year anniversary passes, there is a sense that the system of reinsurance is working well. Apart from the anomaly of the Silverstein case, which is as exceptional as the event itself, payments have been made without defaults or company failure.

But what does this say about the business model? When I heard the comment from an analyst (see page 46) that the market would have expected reinsurance failures to come in the aftermath of 11 September it indicated to me that the reinsurance sector is both extraordinary in business terms and also broadly misunderstood by the wider business community.

Primary concerns

This issue is exemplified by the debate on capital. The rating agencies have highlighted falling capital as one of their primary concerns in the recent downgrade spat. But reinsurers have suggested that the goal posts have shifted in the past two years.

What used to be considered a well managed balance sheet is not necessarily making the grade these days, it is claimed. Reinsurers are expected to meet the challenges of massive claims, a stock market decline and still have capital reserves.

In any conventional business case this would be unlikely; for the reinsurance sector, it is proving equally challenging yet much more misunderstood and misinterpreted.

Time for reflection

There is certainly no opportunity for the industry to sit back and reflect on its apparent successes. The challenge of learning lessons from the last two years looms large. The need to move away from the 'we know what we mean' method of drawing up contracts is fairly obvious but the pressure to meet claims efficiently is also a driver.

However the business methods are improved, the core of the business will always be managing risk to produce a profitable return on capital. And here lies the heart of the dilemma. To achieve this goal reinsurers may well not pursue top line growth in the coming year.

The stock markets' quest for growth is unrelenting but for reinsurers there are other issues that need to be addressed. A greater respect for the subtleties of the reinsurance dynamic would certainly go some way to moving on in the post 2001 era. Click here for a pdf of this story

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