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Carmilani: rate conversation has to change

Eyeing rate increases: pictured, from left, are moderator Taoufik Gharib of S&P Global Ratings, with CEOs Kevin O'Donnell of RenaissanceRe, Scott Carmilani of Allied World, and Mike Sapnar of Transatlantic Re, at the S&P Bermuda Reinsurance Conference (Photograph supplied)

Re/insurers are digging in for price increases across many lines of business at January renewals after several years of dwindling returns.

Scott Carmilani, chief executive officer of insurer and reinsurer Allied World, said at a conference in Hamilton that companies like his were looking for a significant pricing rebound in casualty business.

“We need rate across virtually every line of business to varying degrees,” Mr Carmilani said at the S&P Bermuda Reinsurance Conference at the Hamilton Princess and Beach Club last week.

“When you’re talking about specialty professional liability, you need double-digit rate increases and we’re only ever seeing less than 5 per cent, although in the last month or so we are starting to see some acceleration of that, but not across the board, in specific spots.

“Many of our distribution partners, like brokers and MGAs, who’ve only been in the business for the past ten years have never had to sell a rate increase. They very used to sitting down with their clients and saying: ‘How much are we going to take off the price this year?’

“That conversation has to turn 180 degrees to: ‘Not only do we not get to decrease this year, but we can’t fill your programme if we don’t get some kind of increase’.”

He argued that the economics were there for all to see in carriers’ financials and any look at combined ratios, regardless of the line of business, would show that “the industry needs rate”.

“The question is: is it 5 per cent, 10 per cent or 15 per cent?” Mr Carmilani said. “Sitting in my chair, I’d argue for 15 per cent rate increase. Sitting in a broker’s chair, they would argue 5 per cent.”

Low interest rates mean re/insurers are making meagre returns from their large fixed-income investment portfolios, which means underwriting profitability is all the more important.

“We’re in a relative 2 to 3 per cent interest rate environment. If we can’t make 4 or 5 per cent or higher on our investment portfolio — and very few enterprises are doing that — we need at least a 95 per cent combined ratio to make a profit,” Mr Carmilani said.

“At a minimum, the industry needs 5 per cent rate increases across the board and in particular lines of business, there’s absolutely an argument for double-digit rate increases.

“Execution will determine the outcome and January is going to be a very interesting time.”

Also on the panel was Kevin O’Donnell, CEO of RenaissanceRe, fresh from last week’s announcement of his company’s agreement on a $1.5 billion deal to take over Tokio Millennium Re.

Mr O’Donnell said the deal was very different from most of the mergers that have occurred in the industry in recent years, in that it was “a culmination of years of relationship”.

“We have a very strong relationship with Tokio and because of that we could be very transparent about what we needed from the deal and what they needed,” Mr O’Donnell said.

“It allowed them to focus on stuff that was strategically important for them going forward and for us to advance our business at a time when finding desirable risk is difficult.”

RenRe, one of the few pure-play reinsurers still in the market, celebrated its 25th anniversary this year and Mr O’Donnell gave some insight into how the company is navigating today’s challenging market conditions.

“The ability to build portfolios in today’s reinsurance market is about orchestrating the most efficient capital and finding the most desirable risk,” he said.

Pricing was only half the equation, he said, and companies needed to be fully aware of how much risk they were taking on.

“From our perspective, we only keep 50 per cent of the cat premium that we write,” Mr O’Donnell said. “There’s no magic to that number, other than that’s the right balance for us to optimise returns.

“If we add more risk to our balance sheet, then we get more for taking more risk than we do for transitioning into fees. Just go risk-on, if you want more return.

“I think this industry is demonstrating an enormous amount of discipline, recognising that there are challenges and positioning itself with strong liquidity and strong solvency and solid underwriting discipline.”

Mike Sapnar, CEO of Transatlantic Re, said the gap between losses and what was actually insured presented an opportunity to the industry that a collaborative approach could help to take.

“The biggest issue for us is that only a third of economic damages are recovered after an event,” Mr Sapnar said. “Insurance is a negative utility product — nobody wants to spend the money and when they benefit, something bad happened to them.

“We’ve got to do a better job of delivering value by driving costs out of the system — and that’s us collectively as an industry.

“We’ve got to try and use new ways of distribution and make better value insurance products that make people want to buy more.

“We’ve got to work to get to that point. Cyber is an area in which the industry has an opportunity to step up and solve the problem. I think we have to get together as an industry to decide: ‘do we want to cover it in regular policies or do we want to write cyber policies?’”

More sharing of information between insurers and reinsurers would help cyber-risk to be better understood, Mr Sapnar added.