Review

Use of reinsurance to manage peaks

Another key ingredient in the management of underwriting exposure is the availability and affordability of reinsurance. Following the severe events of 2004 and 2005, reinsurance for the Syndicate’s reinsurance account became prohibitively expensive. A decision was made to purchase less cover and reduce peak exposures rather than to buy protection which provided little genuine risk transfer.

For our direct portfolio, however, coverage has remained available and we were able to increase the vertical coverage in 2007 by separating the Marine and Non-marine property damage programmes. This reduced the need for umbrella cover protecting both the direct account and excess of loss portfolios. In 2007, as more coverage has become available at an acceptable cost, we were also able to purchase more retrocessional cover for our excess of loss portfolio. We now have US$177 million of such coverage, albeit in excess of a higher deductible than that applicable in 2005. As a result of all the above changes, our risk appetite and the potential exposure to a major modelled loss has reduced as a share of our net tangible assets. This development is shown in this table.

A feature of the reinsurance market in recent years has been the development of alternative capital market solutions to risk transfer. The catastrophe bond market is the most mature of these alternatives. Catastrophe bonds enable reinsured companies to buy cover through the issuance of a security against which a recovery may be triggered by a predetermined event, such as a Californian earthquake or series of events. This market has grown significantly in recent years but remains a small proportion of catastrophe reinsurance purchased. It is generally concentrated at the more remote end of the risk spectrum – in other words for very extreme and less probable events. The catastrophe bond solution offers longer term coverage than traditional annual reinsurance coverage, but typically offers less breadth of coverage and less certainty that a recovery can be made. We have carefully considered the potential for such instruments to be used for our own reinsurance protection but, to date, have not been convinced that they offer an attractive alternative, or addition, to existing arrangements.

A better alternative has been the development of reinsurance companies capitalised by new capital market investors that are able to commit to standard reinsurance contracts and even provide retrocessional coverage for reinsurers such as Amlin. This has become a valuable additional source of reinsurance capacity and we have purchased US$66 million of such coverage during 2007, which is supported by collateral provided by the reinsurance company. The development of this and the catastrophe bond markets continue to be watched carefully so that we understand the opportunities that materialise.

© Copyright Amlin 2007