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To thrive in today's competitive reinsurance market, intermediaries must offer ceding companies an array of products and services.
This means being able not only to transfer risk to the reinsurance markets, but also to assist ceding companies in growing their top and bottom lines and to assess and mitigate volatility in their balance sheets.
Catastrophe and dynamic financial modeling services, therefore, are a must in order to service ceding customers' needs, brokers report. Most intermediaries now are offering new modeling capabilities or are enhancing their existing products.
In addition, ceding companies are seeking information on and access to capital markets to help finance risks. Reinsurance brokers say they are still waiting for and expect that trend to take off more broadly.
Intermediaries have "come a long way in integrating the various disciplines," including actuarial, claims and financial, noted Steven J. Ben-singer, president of Stamford, Conn.-based Chartwell Reinsurance Co.
They have become "more involved in really bringing the financial acumen to the transaction, analyzing it from a fundamental perspective of how it impacts the purchaser of the product," he said.
Catastrophe and financial modeling are two ways brokers are helping clients do this. For example, E.W. Blanch Co.'s new catastrophe modeling product, CATALYST 3.0, combines the latest technology and latest engineering and sciences to provide the most "creative solutions," said Bill Ashley, a Blanch executive vp.
The product, set to be released by the third quarter of 1998, contains an upgraded hail and tornado modeling feature, which will be added to existing hurricane and earthquake modeling features, Mr. Ashley said.
With the catastrophe modeling product, clients can "take the outcome from the models and apply that to strategic business decisions," he said. Furthermore, "the output from the catastrophe model serves as the input for dynamic financial analysis," he said, adding the company expects to integrate a financial model solution within CATALYST in the near future.
More brokers also are offering dynamic financial modeling services. That involves inputting data from a company's balance sheet and by by using probability and simulation, produces different outcomes based on such variables as interest rate fluctuations or catastrophe losses.
"We're seeing tremendously more financial modeling. The whole industry is more driven by financial results," noted Jacobus Van de Graaf, managing director and CEO of intermediary Towers Perrin Reinsurance in Stamford, Conn.
Cedents are looking for modeling products to assist in business decisions and they, as well as reinsurers, are looking to tap the capital markets to finance all sorts of risks.
So far, capital market activity has happened only in the catastrophe arena; leading the way is Aon Re Worldwide Inc. and its CatEPut product.
Over the past year, Aon placed three catastrophe equity put programs with clients.
In October 1996, Aon Re and Centre Reinsurance Co. sealed a $50 million catastrophe put program with RLI Corp. of Peoria, Ill., in the event a California earthquake blows through RLI's existing catastrophe reinsurance program (BI, Oct. 14, 1996).
A similar $100 million catastrophe put program was developed this year for Horace Mann Educators Corp. that will help recapitalize the Springfield, Ill.-based insurer in case of a large catastrophic loss (BI, April 7).
Most recently, Aon sealed a $100 million program for LaSalle Re Ltd. in Bermuda. The multiyear program provides LaSalle Re the right to access additional balance sheet equity if it experiences exceptionally bad losses from the business it reinsures during a single event or a series of events, explained Mike Bungert, president and CEO of Aon Re Inc. in Chicago.
Despite the deals, however, brokers say there still is more talk than action.
"Because it is new and it's different, there has probably been more hype than deals that have occurred," said John Pelly, chairman and CEO of Willis Faber Global Reinsurance in London. "But the deals are increasing every year; undoubtedly progress is being made in developing new forms of risk transfer; and some are seriously exciting new trends. . . ."
Clients all are asking about capital market alternatives, but this is an area that is still more talked about than acted on, noted Towers Perrin's Mr. Van de Graaf. Despite the publicity of a few deals, not much has happened yet. Most would say the capital markets will be part of the reinsurance process some day, "but right now I personally think that it's some ways away," he said.
Brokers say the continued soft pricing environment is preventing more capital market transactions and other alternative risk financing deals.
Alternative reinsurance solutions in the financial markets are moving slowly because of the competitive terms traditional reinsurance markets are offering, said Olivier du Passage, executive vp of Group Le Blanc de Nicolay of Levallois-Perret, France.
David Corben, chairman and CEO of Jardine Lloyd Thompson Reinsurance Holdings Ltd. in London, agrees.
There has been a "slowdown" in the alternative financial reinsurance market now that the traditional reinsurance market has "bounced back" from the hard market post-1994, Mr. Corben said.
Between 1990 and 1993, when there was a "massive shortage of capacity" for catastrophe risks, people had to find alternatives to solve their aggregate exposures. Companies then were set up to place that risk "in a non-conventional way," he said.
But now there is excess capacity in the traditional reinsurance markets after the $5 billion invested in Bermuda companies and the "resurrection" of Lloyd's of London, said Mr. Corben. "The conventional products have been more competitive than the finite products, and business has flowed back into the conventional market to a large extent."
In the meantime, many reinsurance intermediaries are developing new units to assist clients in capital market endeavors.
Aon Re, for example, formed Aon Capital Markets in May. The unit provides access to capital market-based investors and provides the capital available in those markets to help clients more effectively, efficiently and economically manage risk.
In the same vein, Guy Carpenter is announcing the formation of a new, specialized business unit devoted to incorporating capital market solutions for insurance and reinsurance.
Other reinsurance brokers also reported new offerings.
Benfield Greig Group, the combination of Greig Fester Group Ltd. and Benfield Ellinger Ltd., for example, is offering a new "double whammy" reinsurance product that would protect companies if a catastrophic loss coincided with the crash of the capital markets, explained David Spiller, managing director of the newly merged company in London.
Ironically, there hasn't been much interest despite the recent volatility in stock markets around the world, Mr. Spiller said. "As things change and people become less optimistic and want to tie down certainty, I think that kind of product will develop."
Multiyear, multiclass contracts also are becoming more popular, allowing clients to have three- to five-year contracts and allowing continuity over a longer period of time, Mr. Spiller said.
Another new development-at least in continental Europe-is multiyear property reinsurance programs, said Mr. du Passage of Group Le Blanc. France is home to decennial policies, but they are in the form of 10-year construction liability insurance policies for builders liable under French law for 10 years for any faults in construction. Group Le Blanc reinsures those decennial policies.
The new multiyear property policies for three to five years cover standard risks, such as storms and fires, Mr. du Passage said.
Judy Greenwald contributed to this article.