Executives warn of capital-risk imbalance

Insurers in Canada are carrying “a disproportionate risk to underlying capital” that must be remedied by rate adjustments and long-term planning in conjunction with all three levels of government, a panel of international executives at this year’s National Insurance Conference of Canada warned.

They all expressed concern about inadequate or nonexistent modelling for earthquake, tsunami and cyber risks.

“We have a disproportionate risk to underlying capital,” said John Charman, chairman and ceo of Bermuda-based Endurance Specialty Holdings, which has separate primary insurance and reinsurance companies.

“How is the capital market able to deal with such risks?”

Brit Insurance group ceo Mark Cloutier said Canada’s risk-to- capital ratio is out of whack. In recent years, he said, the industry’s return has declined from about 10% to about half of that.

“Canada is a sort of imbalanced book,” he said. “We need to build more balance.”

Mike Sapnar, president and ceo of Transatlantic Re, a global reinsurer based in New York, said Canada was not alone in this regard, and rates needed to rise across the board to keep up with risk.

“We need to get paid better as insurance companies and reinsurance companies,” he said

But Mr. Charman said the problem of managing catastrophic risk is not that simple.

“It’s not just a matter of providing insurance and reinsurance,” he said.
“It’s a matter of involving municipalities in planning — where do you put schools (and other infrastructure)?

“This requires a 50-year plan.”

Mr. Charman also said size counts when it comes to insuring against catastrophic risks.

“These are difficult times for regional companies because of the unbalanced portfolios they necessarily have,” he said.

“Small businesses with small portfolios and large exposures — the numbers just don’t work.”

Mr. Cloutier agreed that this would force further consolidation of smaller insurers.

“The imbalanced nature of some of the regional carriers means their business model has to change.”

Moderator Peter Hearn, president and ceo of Guy Carpenter and Co., asked the panellists if Canada was a truly diversified market for reinsurers.

“We’ve been here for 30 years,” replied Mr. Sapnar of TransRe. “It is still a profitable market.”

Noting that the Office of the Superintendent of Financial Institutions was widely praised for precautions that left Canada relatively unscathed by the 2008 financial crisis, Mr. Hearn asked the panel if the regulator had become overconfident and unduly restrictive rather than “the backstop it’s supposed to be.”

“Unfortunately we’ve been lumped in with the banks; we’re suffering guilt by association,” Mr. Cloutier of Brit Insurance said. “The deployment of capital in Canada could be easier.”

Not surprisingly, the panellists differed on the best models for catastrophe reinsurance.

“The alternative capital market will have to move closer to traditional reinsurance marketplace,” Endurance’s Mr. Charman said. “Not every loss is black and white.”

He said successful reinsurers work on their relationship with their client base.

Mr. Cloutier agreed, saying the advantage of a good reinsurer lay in “building a long- term relationship with a financial partner, versus negotiating an annual deal with a client.”

Another issue Mr. Hearn put to the panel was the estimated gap between the estimated $75bn total loss expected from a major earthquake off the B.C. coast and the $25bn insured loss. Would public-private partnerships be mandatory to bridge that financial gulf?

“It’s going to have to be at some point,” said Mr. Sapnar. But he stressed that money is best spent before the ‘big one’ hits.

“Every dollar spent in planning and mitigation yields $4 or $5 in mitigating loss.”

Said Mr. Charman: “At the end of the day it’s taxpayers, the ordinary citizens of Canada, who will have to pay.

“We all have a vested interest in finding a better way.”

Mr. Hearn asked the panel how reinsurers could remain relevant in the face of competition from alternative models.

“By solving all sorts of problems,” Mr. Charman said. “Discussing plans with our business partners that are long-term.”

He said major reinsurers have capital assets that few alternative firms can match.

“Reinsurance is still the swiftest, most reliable way raise capital for insurance companies,” said TransRe’s Mr. Sapnar. And in an apparent dig at rivals offering both direct insurance and reinsurance, he added: “We’re going to stay relevant by not com-peting with our clients — we’re going to stick with reinsurance.”

The fourth panel member, Laura Taylor, managing partner and cfo of Nephila Capital — which deals in alternative financial instruments — naturally took a different tack.

“We view our model as bringing capital to clients as efficiently as possible,” she said. “The cost of delivering that capital is still quite high.”
Nephila used whatever vehicle made sense to a given client: direct insurance, reinsurance or catastrophe bonds, she added.

With 40% of premium in Canada coming from auto insurance, moderator Mr. Hearn asked how concerned the industry should be about the impact of Uber and autonomous vehicles.

“The implications for a market like Canada are going to be quite far-reaching,” said Mr. Charman. He said that if income from auto starts to diminish, insurers would have to sharpen their underwriting of other lines to survive.

Mr. Sapnar of TransRe was more optimistic, at least regarding competition from disruptors such as Google.

“If Google wants returns from our industry to blend with returns from their industry, good luck to them,” he said. “I don’t think they’re going to find that very attractive.”