Risk & Insurance’s Third Reinsurance Roundtable: Tough Talk, Hard Market

Risk & Insurance’s Third Reinsurance Roundtable: Tough Talk, Hard Market

Edward Santalone

A surging reinsurance market has all but wiped away the specter of a seemingly endless era of gross underpricing and poor underwriting. In this exclusive panel discussion, six reinsurance leaders pull no punches regarding the unfinished business of repairing their industry–and renewing its purpose.

The last time we convened our Reinsurance Roundtable, two years ago, uncertainty was bordering on disbelief. A lingering soft market had depressed insurance pricing, and everyone was wondering if the old paradigm–and the reliability of economic cycles–had finally been broken.

What a difference two years makes. Since then, and amid a variety of disasters, debacles, and a roller-coastering stock market, insurance and reinsurance prices have been firming, and this determined hardening of the market continues strongly as the renewal season is upon us.

This time, our Reinsurance Roundtable–held, as were the first two, in mid-July at New York city’s Windows on the World, at the World Trade Center–promised fresh perspectives on a much-changed market.

We were fortunate in gathering another diverse group of reinsurance leaders whose lively, thoughtful, and probing conversation provoked more ideas than even our generous allotment of pages can contain (and for your convenience, you can also access the entire Roundtable transcript on our Web site, www.riskandinsurance.com). In certain ways, they represent the industry old and new.

For starters, the world’s two largest reinsurers, Munich Re and Swiss Re, respectively, were represented by top executives from their U.S.-based operations: Andreas Beerli, CEO of Swiss Re Americas; and Albert J. Beer, president of American Re’s Domestic Insurance Company Operations. One of the emerging global reinsurance powers based in Bermuda, Overseas Partners Ltd., was represented by president and CEO Mary R. Hennessy.

Two previous Roundtable attendees–Robert Lippincott III, chairman and CEO of AXA Corporate Solutions Re; and W.J. Adamson, CEO of CNA Re–added important continuity to this year’s event. And the reinsurance broking community was represented by Rod Fox, new CEO of the newly formed Benfield Blanch Inc., which results from the recent merging of U.S. reinsurance intermediary E.W. Blanch with European broking power Benfield Greig.

As moderated by Risk & Insurance editor-in-chief Matt Damsker, the Roundtable tackled a range of issues, from dramatic rate hikes to reserve adequacy, and from underwriting discipline to the challenge of technology. What follows is an edited transcript of the conversation:

Matt Damsker: Let’s start by asking each participant to speak briefly about how his or her company is positioned in today’s market, and how you’re responding strategically to today’s challenges.

Albert Beer (American Re, Princeton, N.J.): I have a feeling many of us have very similar strategies relative to what I think is the most important issue–the changing marketplace. One of the most important things we’re all coming to grips with is the recognition that the marketplace will always be changing. We seem to have fallen into a trap where we think that there are plateaus that you move to, and back to, as opposed to some continuum. One of the things we as an organization have addressed this year is the recognition that we need to continue to evolve.

In particular, in the context of the competitive landscape, the products that we sell, the expense infrastructure that we employ, and finally, the strategy we hope to anticipate, there are two key issues that we’ve addressed over the last two-and-a-half years. That being primarily, number one, recognizing what industry we’re in. We are an underwriting company. No matter how we choose to distribute our product we all need to recognize that we are underwriting professionals, and our products should be based on using intelligent professional underwriters that are viable in the marketplace, but also produce value to our shareholders.

I think, unfortunately, many of us have gotten away from that. One of the things that we’ve emphasized significantly is the fact that our underwriting professionals are just as valuable in our organization as our production and account executives. And to try to avoid putting a priority between the two but recognizing that you need to work very closely together.

I think some of the mistakes we and others have made in the past are to assume that the same business model will be applicable to all products and all distribution forms.

W.J.Adamson (CNA Re, Chicago): I have a similar view to Al, in that I think that you’ve got to obviously look at your organization relative to what is an evolving market, and unfortunately the type of change today doesn’t take place over five to 10 years.

We’ve spent certainly the past 12 months reorganizing CNA Re around global practices. So all cap is controlled by one individual professional liability, standard lines, casualty, etc., again with the focus on underwriting discipline. I think the industry moved much too far away from the basics of underwriting. We have been emphasizing that. CNA organizationally has gone, since (CNA Corp. CEO) Bernie Hengesbaugh came on, to focus on being an underwriting company.

And we have really changed the culture at CNA Re over the past two years. We have completed, I think, our re-underwriting process that began in second-quarter ’99, have added a lot of new people with technical specialties in underwriting, as well as pricing, and are really poised to move forward again, as the number of products are moving toward a rate that makes sense and one can actually have a chance at making some money, unlike the past two years.

I know there’s a lot of thought that there is still too much capacity. I think there’s capacity there, but it’s at a price that makes sense. What we’re seeing is tacit recognition that ’98 and ’99 were very bad years for the industry, much worse than people think. It’s still too difficult, in any kind of actual reserve analysis, to determine what kind of trends are emerging because of the broadening of coverage. So things are getting back to basics. I see our primary clients have been moving on coverage and rate adequacy, and I think it’s time for the industry to continue to accelerate that process and get healthy again.

Mary Hennessy (Overseas Partners Ltd., Hamilton, Bermuda): In terms of the comments made about the market, I agree whole-heartedly. We have a tremendous advantage, and I’m not speaking of the advantage of being in Bermuda, but just the advantage of being a brand new company, essentially with less than 110 people, and $1.7 billion of capital that is being dedicated exclusively to the reinsurance business. So on that basis, we are among the top companies in the world, in terms of the size of our surplus, doing only reinsurance.

I believe that the market is going to go in a couple of different directions. One of which is, I think you’re going to see more and more commoditization, even in spite of the market turn. The larger the program, the greater the buying power they think they have. I’m not interested in playing that game, quite frankly. I’d like to focus Overseas Partners on a few specialty products where we can bring a lot of capacity to just a few products and just a few customers who are willing to pay for risk transfer, and for value-added because they like working with quality underwriters who will focus on their needs.

We’d love to be global, like some of the companies around this table. But I think that it takes 20,30 and 40 years to build a global company, and quite frankly, I don’t think any of us will be in the industry for that long. In the near term, trying to look at the advantages that we had as a company that was started 17 years ago by people who frankly don’t understand the business I’m in today, we really have the advantage of being in Bermuda, which is a terrific market from the standpoint of regulatory flexibility and speed to market with respect to products.

We have the advantage of our size, we have the advantage of not having asbestos and environmental liabilities to worry about because we didn’t write any outside business until 1995. But we have a disadvantage as well: it is very difficult to get top-notch talent in all areas to come to Bermuda. It’s very difficult in a country where there are immigration work permit regulations to get enough staff to write business well. So of necessity we really had to focus on just a few things.

Andreas Beerli, (Swiss Re Americas, Armonk, N.Y): I am head of the Americas division of Swiss Re, which also has nonlife operations in Europe and in the Asia-Pacific region. In addition, Swiss Re Life & Health is a leading provider of reinsurance services to the world’s life and health insurance market. Moreover, Swiss Re has a financial services group composed of Swiss Re Capital Partners, Swiss Re Investors and Swiss Re New Markets.

This is both a time of challenge and opportunity to be in the reinsurance market. Over the past year at Swiss Re, we have taken a look at virtually every risk in our portfolio. We saw that we needed to improve the quality of our business, through better, consistent and more focused underwriting, with the ultimate goal of achieving positive operating results. Currently, the main focus of Swiss Re’s Americas division is to the quality of the business.

We have to improve the underwriting quality, we have to train our people, and we have to make sure that we underwrite and accept only that business that we believe will produce profit in the future. It’s also important to have the right processes installed in the underwriting. I believe we now have them in place.

Robert Lippincott (AXA Corporate Solutions Re, New York): Corporate Solutions Re was put together in conjunction with our insurance operations. And, as Mary said, to be global, you need about 25 years. It has taken us about 25 years to put this global organization together. And what we’ve seen over those 25 years can be reflected in stages. I think Al mentioned we’re going through an evolution. If we look at the last five or six years, it’s almost a revolution as to how our business is conducted throughout the world, especially in sophisticated insurance and reinsurance markets.

We’re seeing the marketplace change dramatically. We’re seeing the lines between an insurance product and a reinsurance product be erased. We’re seeing consolidation. We’re seeing globalization.

We’re seeing one very important thing, and that is sophistication in every part of the insurance and reinsurance arena. What we’ve tried to do at Corporate Solutions is build a global network that deals with not just providing capacity, but providing a product that meets the needs of our insurance clients and our reinsurance clients.

One thing that we’ve forgotten about during this five or six year period is that our best friend is information about a client. Not just facts, because we’ve too often been given facts. To provide the right product for a client, you have to have information about that client: where they’re going, what they’re trying to do by buying your product.

Rod Fox (Benfield Blanch Inc., Dallas): Trim the Benfield Blanch operation in the United States. Globally, it’s Benfield Group. For all the reasons everybody else said, we think it’s a wonderful time in the marketplace. I don’t know how familiar the people at the table are with the Benfield Group, but it represents the combination of three intermediary firms over a relatively short period of time that represent the tine specialists in their marketplace.

As we summarize our business, we think we have some of the best people in the business, a combination of some of the best technology, and a truly global reach. So overnight we’re a real challenger firm. From a size perspective it is one of the leading intermediaries globally; and we think this marketplace represents a wonderful opportunity for us. We look at our business, frankly as the solutions business. Our job is to make our clients more successful.

Damsker: Let’s talk about the market. Two years ago, when we did this, the market was very different. I see a lot of numbers and a lot of percentages about things like workers’ comp business–Swiss Re renewing facultative contracts for workers’ compensation, with increases running in the 10 percent to 20 percent range. Natural catastrophe coverage increasing 25 percent to 30 percent, 30 Percent to 50 percent for California workers’ comp business. These are significant numbers.

I’d like to open the conversation and ask you to perhaps reflect on how you’re perceiving this firming in the market.

Hennessy: I think the trends are positive. I don’t believe that we’ve seen any abrupt increases to rate adequacy. And I would just say, going back to January 1, certainly prices were going up. But as a new market, for example, with no market position to protect, and not having to write a dime to make payroll, we were in a unique position to be able to say, What do we think is the right price? And I have to tell you, on casualty business in general, workers’ comp business in particular, we priced over 25 percent of the market here in the states, and there were plenty of companies that were still at 50 percent of a rate that our actuaries thought was adequate from a reinsurance side.

And, there’s a range, in terms of adequate pricing, and as Bob said–and I echo this completely–numbers can tell you one thing, and understanding where a company’s going and what it’s doing can tell you another. But when you believe that the market is so far below you on average, either you’ve got to say that all your actuaries are smoking dope, which is highly unlikely given that profession, or you basically say, OK, maybe a year ago, the rates would have been 10 percent worse.

Beer: What I find fascinating is that we don’t even know what ’98 and ’99 losses were, and yet where many people sought solace from 15 percent, 20 percent, 30 percent rate increases, well one of the phrases we use constantly is “Do the math.” Do 5, 10, 15 percent cuts for six, seven, eight consecutive

Fox:… and then put a 25 percent rate increase on it.

Beer: Precisely. But how easy it is to rejoice from a 25 percent to 30 percent rate increase. To me, a much more important measure of the marketplace is how much business have we walked away from, how much business have we significantly changed terms and conditions. Rate is just one aspect I think that’s just one of the more insidious parts about this term. And more importantly in the soft cycle was the deterioration in terms and conditions. And, by the way, there’s nobody else to blame but ourselves. We’ve just continually deluded ourselves by thinking, Well, we’ll only give a 5 percent reduction in rate, but we’ll expand the coverage significantly.

Lippincott: Al, I can’t agree with you more. When I received Matt’s e-mail, I wrote down two words next to that first question: coverage and price. It’s not just price. It’s what coverage we have chipped away from or added to the basic coverage for the price that we’ve charged over the years. And typical of underwriters–and I still bleed underwriting blood–but it’s like Jackson Brown and his song… “Underwriters forget about the losses and exaggerate the wins.”

The one trend that I see that’s a positive is that our underwriters are moving gradually rather than in a spike. In the past, when we’ve had that great big spike, the downward trend is just as severe and just as rapid. I don’t know how long that will last, or whether that will make the market last a little bit longer. But not only are our clients more sophisticated, but we tend to be, as managers, more sophisticated at looking at what has happened in the past and what we’re going to do to change it in the future.

Beerli: I fully agree with all of you. The industry has reduced prices too much. But I do see positive changes occurring in the market. We are at the beginning of a hardening of the market. By saying that, we have to be careful if we compare prices. Terms and conditions, which have expanded in most lines of business during the soft market, are also very important, and so are the products that we offer to our clients. Both aspects have an impact on the price.

One of the challenges, though, is that not many people who are underwriting are used to being in a hardening market–in the period where it is changing from a soft market to a hardmarket. It’s important, in my opinion, that top management of all the companies in the industry support the underwriters. We’ve all been involved in a situation where a client will call and complain about the high price he is being charged and will try to get a lower one by approaching top management. I have seen that several times last year with our company. It’s important in my opinion to say to the client, ‘our underwriters are right. We have to do it this way.’ I do think it’s important to note that the big players and the small players in the U.S. market are going in the same direction with regard to pricing. If only one or two players did it, it wouldn’t work.

Adamson: Reinsurers are going back to basics saying, OK, what are the exposures out there, and to demand the kind of information that’s necessary to understand the exposures. How can you possibly put a price on something if you don’t understand what the exposures are?

I’ve seen a move, not just within the U.S. market, but globally, to more exposure-based thinking from underwriters that have a product expertise really getting in on a client’s book and understanding what it is, and then putting up terms to obviously manage their balance sheet, etc. But the key is back to basics on exposures. And certainly during the soft market, that was out the window.

I look at the U.S. market, and the big change at the last big turn from the early ’80s was that things started to move at exposure ratings, you had limits profiles. The U.S. is far ahead of the rest of the globe. It’ll be interesting to see whether outside the U.S., in non-U.S. business, whether the amount of information required is going to increase. In many jurisdictions outside the U.S., there’s inadequate information to make a judgment on what you’re writing. It just boggles the mind the type of things that are being done with next to no information. And you set yourself up to lose. We really have to get back to basics.

Fox: I think Andreas’ point was critical. We face the same situation where we have young brokers who have not necessarily been through a hardening market. And, like the account executives on the direct side, it’s a question of working with the client. Because we all run into problems. If things are changing quickly, and the client’s not aware of where the market’s going or the pricing is going necessarily, then there’s a snap decision at the last minute where we all lose some favor.

In certain lines–professional liability, as an example–we’ re seeing some major changes in pricing. But, to me, the biggest change that we’ve seen is that bad deals are not getting done. Large, bad transactions, that maybe somebody was interested in previously for certain reasons, just aren’t happening. So there has been a weeding out. Strong clients with good experience are still able to purchase as much capacity as they want. We really look at it as, there’s a hurdle rate in the marketplace today, and if that hurdle rate is met, the capacity is available.

Damsker. This a good point to open the discussion to the issue of reserve adequacy or inadequacy on the P/C side, and again how reinsurers view that. There’s the issue of there having been so much capital in the market when, obviously, the stock market and the investment side of everybody’s lodger was going great guns–that has obviously changed even as the market has hardened.

Lippincott: I’m glad you took these two together. The next words I wrote down were reserves and what has happened to the investment portfolio. Too many of us in recent years have lived off of what our investment portfolio has produced. So what happens when the triple whammy occurs that we’re living right now. We had rate inadequacy. We now have a stock market and a bond market that is not conducive to producing the numbers that gave us results like we had over the last few years.

We probably, as an industry, have tapped our loss reserves down to a level that I wouldn’t say is inadequate. Then combine all those with what’s happening as a change in the marketplace. There’s your fracture point on what the change is all about.

Adamson: Along with risk-free rates down to near 4 percent, it implies that if you are not writing for underwriting profit, you can’t win.

Lippincott: That’s exactly right.

Adamson: Obviously you have to manage your cross structure. Both our ceding companies and the reinsurance markets have really got to look hard at the numbers and say, what does this mean where you’ve got no investment cushion? And you’ve just got to write for an underwriting profit, or not play the game.

Beer: What I feel much better about these days is there’s certainly a recognition and frankly an admittance that there is this issue. So you’re starting to see a lot more aggressive reserving behavior. The analysts are doing their work, consulting firms are doing their work. This is not something that’s sitting in the background waiting to explode. The question is, the bomb has gone off, just how much damage has it done?

I want to be careful. I’m not saying that reserves are inadequate, but certainly there’s a tremendous amount of uncertainty. It’s a skewed aspect. There’s probably more bad news to come. But I don’t think it’s the tidal wave that occurred throughout the ’90s.

One of the interesting things that we’ve done over the last year is to try to get an understanding of managing the business through cycles. We had a professor come in who specializes in change management. He knew nothing of the insurance industry, and in about 10 minutes, he identified our problem. We all have this vision of our business being this whitewater rafting trip where we wait for the calm water. We’re in the rapids waiting for the next calm water. But he described business, particularly global business today, as all white water.

There’s a fallacy to managing your business so that you’re on the verge of some significant stabilization. We’ve got a very complex business, but no more complex than most in the financial services areas, even though we feel sorry for ourselves.

Hennessy: Small-to-medium sized companies are going to have a difficult time over the next 5 years to 10 years because to the extent that they have even their share of some of these latent losses that may or may not emerge and may or may not get paid. It’s going to be harder for them than it is for the larger diversified companies to keep everything in balance from the standpoint of growing earnings, trying to meet with the right clients, trying to manage the pressures, even the reserve inadequacies of the ’98 and ’99 year, because we really don’t know how much that expanded coverage could potentially cost us. The industry is going to survive just fine, but I think that the smaller, weaker ones are going to have an awful lot of pressure.

Beerli: We shouldn’t forget that, this time, the soft market wasn’t just in the U.S. It also existed in Europe, which is the second largest market. In the past soft markets in the U.S., we were faced with a situation in Europe where prices were slightly better. So this time, you have in Europe and the United States, at the same time, low prices.

Fox: One of the pieces we’ve seen just in terms of primary companies trying to make corrections is a huge increase in the loss portfolio market. So, there are lines of business that are being discontinued, particularly in the merger and acquisition situation. But the interesting part for me is that I don’t see this as being just a door-slamming with the market hardening all at once across all lines. In certain areas, it’s going to be choppy, and with certain events, we could see a door-slamming situation, but at the moment, you’ve got $1.7 billion of capital. There’s going to be business that you think is adequately priced, and there’s still a lot of capital in the reinsurance market.

Damsker: That leads us into this question of what can you do to add more value to the transaction for your customers, and as brokers, to the reinsurance customers. It’s always a fair question to talk about what you can offer in turn to your customers that provides greater value.

Fox: From the broker perspective, and we talked about this in the introduction a little bit, we look at it as our job to make that customer more successful. Reinsurance is one of the tools. And, as we look at a firming market, whether it’s in the primary side or the reinsurance side, how do we help that company? We try to break it down by product line. We look at property risk management. How can we help them optimize their portfolio, make better risk selection, price more adequately, etc.? On the casualty side is a similar situation. How do you help them from a claims perspective? How do you look at their reporting, their capabilities and their lines of business?

So I really look at our job as being a partner with that client. And, rather than just placing an excess reinsurance cover or placing a quota share, make their business more successful and we’ll all be successful at the same time. We’ve invested in a lot of technology, financial modeling, catastrophe modeling, etc., to really be able to help clients quantify risk, so we can look at what is the correct price for that risk, whether it’s primary or in the reinsurance market. It’s all back to helping them make their earnings targets.

Lippincott: Just to give you a little quote from a real old guy who might have been in the reinsurance market, Ben Franklin said, “Tell me, and I’ll forget. Teach me, and I’ll learn. Involve me, and I’m committed?” I think what we want to be, and I think what Rod is saying, is that we need to be involved with the client. To be able to provide an adequate product and the right price and be available for the client when he needs that product to respond. To understand what the change in that product might be, and to choose strategic partners either within our organizations or outside of our organizations, to provide this product and service this product.

What surrounds all of this is expertise. At the Reinsurance Association of America conference several years ago, we asked senior executives, the board of directors, to give us some of their major concerns about our industry. “People” was one, two or three on everybody’s list. We, as an industry, have been horrible at getting talent from the college pools. And, we’ve been horrible in competing with the GEs of the world to get that talent. Our most valuable resource is our people.

Beer: I’ll confess a frustration on this topic and especially toward that nasty word “commodity.” We seem to be roaming in different directions within our own industry and even within companies. We allege that we want to bring value-added, we want to differentiate ourselves, we want to invest in people and expertise, and yet we fall victim to this wave of euphoria about the e-commerce solution. We pretend that we’re a value-added product, and yet we seem, in some cases, to be running hell-bent to try to commoditize as much of our product as quickly as possible.

In the ’70s, arguably we were an industry where deals went on our napkins. In the ’80s, they were on spreadsheets. And now we’re racing toward wireless solutions, which is wonderful. In fact, these are moves to efficiency and professionalism and that’s excellent. But, I think it’s a very slippery slope we get on.

The ease of doing business is one thing, but all that’s meant to do is provide a vehicle to allow us to bring this value-added expertise more effectively. Some of us, ourselves included, haven’t thought that through as well as I think I would like, to make sure that we do, in fact, send the message to the client that we are capable of bringing that expertise.

Adamson: To be value-added for a client, you have to have your underwriters understand the product and probably be as knowledgeable, if not more knowledgeable, than the clients. And, unfortunately, too many companies in the reinsurance business are everything to all people. And you end up with people dabbling in the lines of business that they only have a rudimentary understanding of. That’s when the problems begin.

Playing on Bob’s comment about the talent, if you look at the sophistication issue, where the buyers are now the CFO–who is obviously very numeric compared with the old days where the guy was the underwriter who was out to pasture the last five years of his career–you’ve got to have the best people, and we aren’t doing a good job of necessarily bringing them in. But it gets down to product focus and underwriting discipline and a deep understanding of whatever products you’re going to offer. And, stick to your knitting– it’s as simple as that.

Fox: Interestingly, I had a conversation this morning with a client who said they’re running away from me just when the primary market is firming, and they should really think about that. And I realize every case is different, but, just as an example, in certain markets where you are seeing huge increases, is this a time to jump in on multiyear transactions or something like that? Because there is a real kernel of truth in what that client was saying. Because we are immediately going to, I wouldn’t say predatory pricing, but you know, we start saying, the ball’s on our side of the fence, and we’ll show you how the cards are going to be dealt. Is it a better time to actually go in and say we need to make X percent return on our capital, which means your rates have to be here … and let’s go and see if we can make that work in the marketplace.

Beer: The easiest thing in the world is to declare we’re out of trucking, nonstandard auto, we’re out of program business. The difficult issue is to try to find where there are opportunities. But again, getting back to Mary’s comment before, it’s easy to delude yourself, after a 40 percent increase in trucking.

Adamson: Adequacy is in the eye of the beholder because getting underwriters to focus not just on expected loss but on what kind of margin one should make for the risk you take is not easy. It depends on the layer, the volatility, and we still have, at the underwriting level, a lack of real understanding of the financial drivers of the business.

Hennessy: It comes back to talent. Whether they’re part of the brokerage network or part of the companies or hopefully a combination of both, I think the skills are there. But I think the tone is set at the top of the organization, and every organization around this table, mine included, had some real talent two and three years ago that wasn’t being listened to because we didn’t have the flexibility, for whateverreason, to turn business away.

Underwriters and actuaries learn pretty quickly that their input isn’t being valued, so they tune out. When you empower people, they will find a way to get the business done. In my experience, most of the time, even in a difficult client situation, if you sit down and show your stuff, and say here’s how I got to my price, tell me why I’m wrong, here’s the return I have to make. I don’t mind telling people I have to make a decent return in this market. And, if we can work together to figure out how that works, that’s fine.

Damsker: This brings us nicely to the issue of technology–the issue of talking costs out of the insurance and reinsurance process through the technology that is available to us now: the Web-enablement. Now there’s the emergence of enterprises like inreon, which is building this Internet-based reinsurance exchange. Can we reflect on those key areas?

Adamson: I don’t see the need for reinsurance exchanges because we have a thing called e-mail and that really has improved efficiency. We have a thing called smartfac, which is a submission-based system that allows an underwriter to submit it to any market, and that is improving efficiency for those who sign up for that. We have more than 1,000 clients signed up in the U.S. Submission flow increases by the week on a multiplicative basis.

Things like that can make it easier to do business. I think most of the savings that we can get probably come on the accounting and administrative side. I’ve been a big proponent of EDI for quite some time.

CNA Re was noted in a recent Acord meeting for being the first reinsurer to adapt global standards in a paperless fashion. With two of our brokers, for the last six months, we’ve had 15,000 transactions done through EDI, 75 percent of those have been done untouched by human hands. That’s just a start. When you talk about claims and everything else, we can really knock costs out of the business. Unfortunately, everyone’s at different points in their life cycle, and it’s going to take some time to shake the costs out.

Fox: We’re big believers in creating efficiency. Probably five or six years ago, when I was at E.W. Blanch, we bought 50 percent of a company called Catex. We also handled the back room facilities for the Munich-Swiss venture, inreon. We do smartfac. We have a company called Unisure that handles claims in accounting for companies, so we’re huge believers in technology.

We also have a subsidiary that has 17 Web sites for the transaction of insurance, both commercially and on a retail level. My initial thought was that the Catex organization would allow us to deal with some commodity products, like a top-layer cat cover that could be done at an auction basis, etc., but that hasn’t happened yet.

As you’ve had continued consolidation, I think they will become efficient mechanisms for particularly facultative and the transmission of documents. I’m a believer in the EDI that Bill has talked about. I think it’s creating positive change.

Beer: I’ve been accused of being the flat-earth society. I’m not criticizing electronic data exchange. I’m criticizing the fact that there’s a difference between data and information. We can delude ourselves into thinking that we’re somehow better. There isn’t a line of business that we rank, certainly on the property-casualty side, where the loss ratio isn’t two to three to four times the size of the expense ratio.

There’s a wonderful allure to this electronic connection. But, at the end of the day, and I think every individual at this table has already said it, we are involved in purveying value-added services, solutions, etc. We may be leading people to think that this is just simply buying product on the Internet, untouched by human hands, according to some grid, and they’ll get a price in a tenth of a second. I don’t believe that for the large majority of our business that that’s possible, or more importantly, that we want to be in that business.

Why on earth would we try to attract good people if all they’re doing is creating grids? Artificial intelligence can look up those rates. I am skeptical, but not about there being tremendous opportunity for efficiency in that relationship. I think it gets back to the fundamental issue that we talked about from the first minute here–that it’s one thing to have access to the program; it’s one thing to have access to the business opportunity. It’s another thing to try to define ourselves in terms of how we handle it when we do get it. I think this is a great opportunity to at least be introduced to the client. But, at the end of the dny, it’s how we, as an organization, and each of us individually, react with that client.

Adamson: Technology is a great enabler, but we haven’t changed our reinsurance claims practices for 50 years. We still have people adjusting reinsurance claims as if they are the primary claims adjusters. So we have this horrendous paper chase that is unnecessary. It should be an accounting function, and on 95 percent of the claims, it should be just processed. And we have huge numbers of claims people, brokers, reinsurers, and it’s redundant activity. We’re going to change it at CNA.

Damsker: Doesn’t it make sense to assume there’s a space then for smaller primary insurers to place and process their reinsurance on an almost automatic online basis?

Adamson: I’d say the smaller guys need the value more than the larger ones.

Hennessy: After the underwriting decision is made, there’s awful lot that technology can do to take some cost out of the system, to make it more efficient, to make it easier for us to get in touch with our clients. Our clients are probably going to see a much bigger change in how technology impacts their business, because most of them are in a lot more of the commodity businesses or future commodity businesses than frankly I think many of us are.

I think if you look at the original risk, there’s going to be lots of areas for small commercial policies, small workers’ comp policies, personal lines coverages.

Lippincott: You can take this thought even further. We’ve done a lot of work with e-commerce objectives here atAXA. If you take the automobile customer, and if you take the insurance industry as we’ve seen it, a regular company that underwrites automobiles, you can’t say, I just want to write all the Cadillac offers because they’ll be red-lined.

Maybe I’m a dinosaur. I still feel that we, as a company, have to maintain an underwriting discipline, and we can respond to that top layer within our underwriting discipline. But I hate to see that top layer go in there, and it being name that price instead of name that tune. You know, I’ll do that cover for 14 cents. Well, if you’ll do it for 14,1 can do it for 12.I hate to see it come to that.

Fox: But isn’t that better for the client at the end of the day?

Lippincott Excess rate is always wrong. It’s either too high or too low. When is it right and where is it right? It’s right for the client when he buys it, but is it right for the reinsurer? Well, we’ve said here today, that in many cases, it’s not right forus. But it’s right enough to get the coverage placed. But I think we, looking at our ownership, whether it be public ownership or private ownership, we have demands on us now, to produce a retura on equity that are stronger than they’ve ever been.

To do that, we have to become more efficient any way we can. And I think electronic commerce, what Bill said about internal operations, has to come to that at some point in time.

And I think that, when we look at placing coverage on the net, or whatever the case may be, we have to view it as both a complement and supplement to the way we’re doing business.

But we cannot relax our standards just to do business. And I think there are some people out there that could relax their standards in that electronic realm.

Damsker: I’ll ask you to make any observations about going forward toward a renewal season. And so this is a good time to make any observations about how you see this crucial season for reinsurers,

Beerli: Compared with last year, we are one step further. There’s improvement in some terms, but there’s a lot more to do to improve the terms and conditions in the insurance industry.

Hennessy: Sanity is returning. But now the question is, will we have the moral sort of fortitude to stick to our guns? Actually, there’s just no room anymore for the reasons that were pointed out before in terms of the lack of investment return, and the lack of reserve redundancy and the inability to hide the problem anymore. We have our backs up against the wall, I think, as an industry. We must stay the course. I’m encouraged by everything that I hear and see in the market from so-called competitors.

Over the next five to 10 years, you’re going to see more cooperation and syndication of risk among cooperative partners who will compete on some things and who will partner up on others because the customer is going to demand that.

There are customers that demand large capacity, there are customers that demand specialization. I’m not sure that any one company is big enough or strong enough to be able to be all things to all people.

Lippincott: We feel exactly the same way. I meant very strongly that when AXA Corporate Solutions looks at partners, they look at them both inside and outside of their corporate corral. They look at our brokers as partners, and we don’t ignore the fact that we can’t do everything ourselves, so we have other companies that will partner with us.

That also means that there is an exchange of expertise between the partners, which adds that level of sophistication to the global marketplace that I think we need.

So I think there is a changing marketplace, it’s going to continue to change from all the facets that we discussed today. I’m cautiously optimistic about this change at this point in time. To put it into simple words: I want to see premium for profit, not for premium.

Fox: We talked about this in different areas today, but there’s the word choice, and giving the customer the choice. We think that’s what we represent today on a global basis, the opportunity to have somebody else providing ideas.

We look at it as we don’t have a big retail operation and we leverage our ideas. So it’s the energy and the creativity of our people every day. Al talked about the whitewater. If everything was always calm, I don’t think you’d need intermediaries.

So I think we thrive in the whitewater, and this is the marketplace, and people are looking for solutions.

The last point I’d make is, for all of us to avoid, as we look at a January 1, that door-closing syndrome, I think everybody’s got to be moving early, letting people know where they’re going, so that we’re not alienating the clients.

And, hold on to your hats if there’s a big cat between now and then.

Adamson: I’m certainly optimistic about where the industry is headed. I see a lot more focus on underwriting excellence, underwriting discipline. It is all about basic blocking and tackling, understanding exposure, having the underwriters who are asking the right questions, who understand that exposure, and then execute it.

It appears that, in general, at least the reinsurance industry is beginning to execute. But, like anything else, it has to become a habit rather than just a one-off.

Beer: I look at this as an opportunity to speak not only within our own industry, but to our clients. Now’s the time to walk the walk. We all talk about the discipline that’s being returned to the industry.

As long as we continue to allow our intelligence and our IQ to be defined by an almost ignorant competitor, how are we going to attract intelligent people? We have an opportunity now, and the duration of the opportunity isn’t some fortuitous issue.

This whole industry and our clients need to determine what type of volatility we’re going to experience and how we can deal with that from a management perspective.

In fact, to mimic my esteemed colleague, I’ll quote Carly Simon. We tell our people all the time, “These are the good old days.” In 10 or 15 years, you’re going to look back and say, remember ’01 and ’02?

Albert J. Beer is president of domestic insurance company operations at American Re, a member of the Munich Re Group. Through American Re-Insurance Company and its other subsidiaries, American Re provides treaty and facultative reinsurance, insurance and related services to insurance companies, other large businesses, government agencies, pools and other self-insurers, in the U.S. and abroad. American Re’s gross written premiums for 2000 were $3.67 billion.

WJ. Adamson is CEO of CNA Re, the reinsurance arm of Chicago-based CNA. It provides property casualty and costrophe cover; professional liability, health care, excess and surplus and surplus/nonstandard; property facultative and casualty facultative; financial reinsurance; and technical expertise.

Andreas Beerli is CEO Swiss Re Americas, which is the consolidation of the company’s non-life operations in North and Latin America. The division provides a comprehensive range of capital and risk management solutions. Swiss Re’s Americas division has headquarters in Armonk, N.Y., and 22 offices in Argentina, Brazil, Canada, Columbia, Mexico, the United States and Venezuela.

Rod Fox is CEO of Benfield Blanch Inc., the U.S.-based subsidiary of Benfield Group Plc., an international reinsurance intermediary and risk advisor. Formerly E.W. Blanch, Benfield Blanch has 14 offices and 750 employees in the U.S. and offers the following services: accident and health coverage; aggregate and financial covers; casualty per risk and umbrella covers; catastrophe modeling and dynamic financial modeling (through BG ReMetrics); e-commerce strategy and business case development; issuing paper and reinsurance for MGA and MGU entities; property per risk and catastrophe covers; and retro and specific retro covers.

Robert Lippincott is chairman and CEO of AXA Corporate Solutions, a member of the AXA Group. AXA Corporate Solutions provides risk management, insurance and reinsurance in specialized markets such as marine, aviation and space, motor, property, environment, information systems, liability, technical risks, builder’s insurance, and other specialty lines. Gross written premium in 2000 was $450 million.

Mary R. Hennessy is president/CEO of Overseas Partners Ltd. and Overseas Partners Re Ltd. OPL provides finite, workers’ compensation, accident & health, aviation/space and property catastrophe (through OPCat) reinsurance products. Gross premiums written in 2000 were $564 million; net premiums written for 2000 were $501 million; and premiums earned were $586 million.

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