Change favours the innovative

Compared with last year, the beginning of 2012 has been relatively benign—so far. Aside from the sinking of the Costa Concordia and the record-breaking number of US tornadoes in March, catastrophe activity has, so far, remained fairly temperate.

This is clearly good news for an industry which may be set to benefit from an increased demand for its services. While many full year results for 2011 have revealed losses for reinsurers, many companies also reported increases in gross written premiums last year.

Couple this increase with admittedly modest price hikes on some lines of business and this year has the potential to allow many insurers and reinsurers either to return to profitability or to increase their net income to more satisfactory levels.

The Bermuda market as a whole, which is largely focused on catastrophe business, has taken a monumental battering. Individual companies seem to have pulled through, however, and despite heavy losses last year, many seem well placed and upbeat about their potential to return to profitability this year.

But 2011 should serve as a warning to the industry. There are important lessons to be learned about letting exposures build up in unexpected places. The floods in Thailand, for example, illustrated how, if insurers and reinsurers are not careful in the wording of their policies, they can be liable for losses they had not fully accounted for.

Other less-considered risks have also come to prominence, such as Contingent Business Interruption. The ability of reinsurers accurately to assess and come to terms with emerging risks such as these will increasingly determine their success going forward.

Other big challenges also lie ahead. Solvency II is still looming in the unknown but not-so-distant future, and the wrangling over when it will be implemented is causing unwelcome doubt across the industry at a time when a little certainty would make a welcome change.

There is also the issue of equivalency for several important jurisdictions—principally, the US. This issue has even driven a couple of big insurers to make veiled threats about relocating their head offices outside Europe. The prevailing hope is that a political solution will be reached on this.

Change is happening elsewhere. The Lloyd’s market is making big strides towards further developing its efficiency. Improvements have already been achieved in its claims handing times, and discussions about the latest modernisation initiative, Project Darwin, are now in full swing. The market is setting a good example for other reinsurance hubs, especially given the increasing competition from emerging centres on mainland Europe and the Far East.

The industry must maintain its ability to adapt and innovate in what is an ever-changing world. As the complexity of risks and severity of losses continue to increase, so the industry must find ways to keep on offering a sustainable and attractive proposition for clients and investors alike.


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