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The Bermuda Society The Bermuda Society Autumn/Winter 2010 Newsletter – Issue 13 IN THIS ISSUE O New Chairman O Aon Benfield Research ­ Lloyd’s Update – 2010 Interim results and Outlook for 2011 ­ The Aon Benfield Aggregate – 9M 2010 ­ Aon Benfield’s Reinsurance Market Outlook – January 2011 O Solvency II O Basel III O Society Events ­ Mr Bradford Kopp’s Speech O Bermuda Institute of Ocean Sciences ­ Sir Crispin Tickell’s Speech ­ Dr Tony Knap’s Speech O Bermuda National Trust O The Bermuda Society – Summer Internship Programme New Chairman Aon Benfield’s Reinsurance Market Robert Childs, Chief Underwriting Officer, Hiscox Outlook – January 2011 plc and Chairman of Hiscox USA Aon Benfield’s 2011 Reinsurance Market Outlook – The Chairmanship of The Bermuda Society passes from Dr Partnership Renewed – released 30 December – reviews the James King to Robert Childs with Raymond Sykes trends experienced at the January 01 reinsurance renewals remaining as Deputy Chairman. and analyses specific challenges facing insurers and reinsurers in the year ahead. Property catastrophe Upon his return to London from Bermuda, Robert was expectations are discussed for upcoming U.S. property appointed to the Society’s Committee of Management in catastrophe renewals. March 2009 and was elected Chairman in November 2010. The report contains updates by individual business line and Robert joined Hiscox in 1986; served at the Active region, and also focuses on key topical issues for global Underwriter of the Hiscox Lloyd’s Syndicate 33 between 1993 (re)insurers that have an impact on reinsurance supply, and 2005; and is the Group’s Chief Underwriting Officer. demand and pricing. It comprises sections on mergers and Robert was Chairman of the Lloyd’s Market Association acquisitions and catastrophe bond activity, the global from January 2003 to May 2005. financial market, and likely rating agency reactions to recent catastrophe model updates. The Society owes Dr King a huge debt of gratitude for his excellent stewardship whilst Chairman for the past seven years. The report reveals that the partnership between (re)insurers has been renewed, as reinsurers are now lowering rates at the same pace, or greater, than insurers. Aon Benfield’s outlook for renewals at the important April, June and July 2011 dates Lloyd’s Update – 2010 Interim Results is for softening at a pace similar to what the firm observed and Outlook for 2011 – released during the January 2011 renewals. The January 2011 21 October 2010 renewals are at the upper end of the range of softening that Aon Benfield projected in September 2010. U.S. catastrophe The Lloyd’s Update report reveals that Lloyd’s 1H pre-tax programmes that include hurricane exposure, which is the profit totals GBP628 million – a decrease of GBP694 peak reinsured global peril, fell by 5 to 10 per cent. million on the prior year period – while gross premiums written remained virtually unchanged over 1H2009, totalling During the first nine months of 2010, reinsurance capacity GBP13.5 billion. increased by 17 per cent, reaching a record high of USD470 billion and surpassing the prior peak capital level The lower result was due to a combination of factors experienced in 2007. In contrast, insurer capital increased by including decreased investment yields and a softening rates only 2 per cent throughout the first nine months of 2010 environment. However, a large increase in catastrophe reflecting the continued soft market. Our guidance for U.S. claims was the single biggest factor in Lloyd’s profits 2011 renewal expectations published by Aon Benfield decline – exposure to the Chilean earthquake and Deepwater September 12 are also reviewed and found to be predictive. Horizon oil rig disaster resulted in net claims estimated at USD1.4 billion and USD300-600 million respectively. The full report can be accessed at http://www.aon.com/attachments/reinsurance/201012_ab_an Source: Aon Benfield Research alytics_reins_market_outlook.pdf Source: Aon Benfield Research The Aon Benfield Aggregate – 9M2010 The Aon Benfield Aggregate (ABA) analyses the financial Solvency II: Current Trends and the results of 30 global reinsurers. This latest report – released 09 December – covers the first nine months of 2010 during Impact on Reinsurance which time ABA shareholders’ funds rose by 20 per cent to Solvency II – the new risk based regulatory framework for reach USD251 billion. The underlying increase was 9 per Europe – is now entering the final stages of implementation, cent excluding the capital raised by National Indemnity to with a proposed start date of January 2013. Throughout part-fund Berkshire Hathaway’s acquisition of BNSF. Net 2010, insurers who operate in Europe have been testing the income and unrealised investment gains made strong proposed capital rules by participating in the Fifth contributions, adding USD31.1 billion in total, which more Quantitative Impact Study (QIS 5). The industry has than offset the USD11.0 billion of capital returned to invested significant resources into risk management shareholders in the form of dividends and share buy-backs. functions, building up large teams of actuaries, risk Operating income for the 30 ABA reinsurers fell by 24 per managers and IT specialists. CEIOPS – the Committee of cent to USD13.7 billion, reflecting reduced investment European Insurance and Occupational Pensions Supervisors yields and the increased burden of catastrophe losses. – announced mid-December 2010 that 70 per cent of all However, pre-tax profit rose by 31 per cent to USD23.0 relevant (re)insurers across Europe participated in QIS 5. An billion, driven by a positive swing in realised and unrealised important positive aspect of the Solvency II project is to capital gains/losses of USD9.7 billion. incentivize a culture of risk management in the insurance industry, encouraging business strategies that target great The full report can be accessed at risk-adjusted reward and greater portfolio diversification. http://www.aon.com/attachments/reinsurance/201012_ab_re Realising these benefits requires a close alignment of search_aggregate_report.pdf regulatory capital to economic fundamentals, helping Source: Aon Benfield Research demonstrate to senior managers across the industry that Solvency II is a valuable initiative. The Bermuda Society 2 Ref: Qd14760 File: Qd11349f (p2) Date: 8.2.11 Solvency II provides two approaches to setting regulatory Annual Dinner for Members and Guests 2010 capital: the standard formula and the internal model. The The Society’s 24th Annual Dinner for Members and Guests Capital requirements obtained from the standard formula was held in the Livery Hall at The Worshipful Company of under QIS 5 should reflect a 1 in 200 year confidence level Armourers and Brasiers in the City of London on the and are deemed to be equivalent with a BBB rating. Current evening of Tuesday, 16th November 2010. Mr Bradford results show a capital requirement that far exceeds those of Kopp, President and Chief Executive Officer of The existing BBB rating agencies requirements suggesting that Butterfield Group delivered the keynote address. the calibration of the standard formula in QIS 5 is inconsistent with economic principles. Furthermore, the alternative internal model approach is regarded as cumbersome for any size of (re)insurance company due to Annual Dinner for Members and Guests 2011 very onerous requirements. Moreover, significant questions The Rt. Hon. The Lord Waddington, GCVO, DL, QC will be are currently being raised about the practicalities of internal hosting the Society’s 25th Annual Dinner for Members and model approval by 2013 – particularly given the limited Guests in the Cholmondeley Room and Pavilion at the resources of local supervisors in many regions. House of Lords. The problems surrounding international models is worrying The Government’s Fixed-Term Parliaments Bill is currently and suggests the standard formula will be the main measure being discussed by both Houses of Parliament; in view of of regulatory capital in the early years of Solvency II for the possibility of a clash with the State Opening of most of the industry. It is therefore highly likely that Parliament for the 2011-2012 parliamentary session, two Solvency II will follow the example of Basel III and dates have been reserved for the Dinner – these are: introduce transitional measures to gradually phase in the Wednesday, 16th November 2011 and Wednesday, 23rd new capital rules. November 2011. Source: Aon Benfield Research Members will be advised when arrangements have been finalised – the date for the State Opening of Parliament is likely to be fixed in June 2011. Basel III Implementation – Prospects and Implications for Bermuda The Basel Committee on Banking Supervision is currently Synopsis of the keynote speech given developing the Basel III Accord, an enhanced standard for by Bradford Kopp, President and Chief the prudential supervision of banks. The aim of Basel III is Executive Officer of The Butterfield to strengthen the global financial system by raising liquidity and capital requirements, improving risk management Group at The Bermuda Society’s Annual practices and expanding disclosure requirements. Dinner for Members and Guests at The Bermuda Monetary Authority believes Bermuda’s banks The Worshipful Company of Armourers are well-placed to meet these new requirements. and Brasiers in the City of London on As of 30th June, 2010, all banks reported Tier 1 capital in Tuesday, 16th November 2010. excess of the revised standards proposed under Basel III. In Brad Kopp started by expressing his delight in accepting the addition, as at September 2010, the combined risk asset ratio Society’s invitation to deliver the keynote address on the (RAR) of the Bermudian banking sector had increased to 25 occasion of the 24th Annual Dinner for Members and Guests per cent – well in excess of international benchmarks. and in the presence Sir John and Lady Vereker – Sir John being Source: Bermuda Monetary Authority Governor and Commander-in-Chief of Bermuda 2002-2007. Brad complimented Raymond Sykes – Deputy Chairman of The Bermuda Society and Acting Managing Director of Society Events Butterfield Private Bank in London – who gave the Welcome speech.
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