Insurance Capitalising on opportunity: A time of change* The Bermuda Market Survey Apply one of PwC bright colours. Delete this note. © (Year) PwC copyright statement here (optional placement). Contents Introduction 2 Executive summary 4 Underwriting 8 The Bermuda Market 25 Contacts 26 PricewaterhouseCoopers Capitalising on opportunity: A time of change Introduction Welcome to the st Bermuda Market Survey – ‘Capitalising on opportunity: A time of change’. The global property-casualty industry of exposure, optimisation of • In-depth questionnaires from We are confident that you will find produced strong underwriting results reinsurance spend and protecting participants who, in combination, this report thought-provoking and in 2006, benefiting in particular and effectively allocating capital provide in excess of 75% of insightful. Copies of this survey, from a very benign year of natural among their top priorities. underwriting capacity to the along with our other publications catastrophes. In the autumn of 2006, Admittedly, none of these issues are Bermuda insurance and are all available free of charge from PricewaterhouseCoopers surveyed straightforward, but how effective reinsurance market (the ‘Bermuda our website (www.pwc.com/bm). a cross section of insurance will companies be in realising these Market’). Participants were and reinsurance companies objectives? Few would disagree selected to reflect a broad If you would like to discuss any (encompassing a substantial that 2006 was a period of great spectrum of capitalisation, of the issues raised in this report, proportion of the Bermuda market’s opportunity in which many product classes, insurance and please speak to your usual contact 2006 capacity) in order to provide capitalised to the fullest extent, reinsurance writers, independent at PricewaterhouseCoopers or one a unique insight into how they but following the losses of 2004 businesses and public (and of the editorial board members are addressing key operational and 2005 many feel that only an subsidiary) organisations. listed at the end of this briefing. challenges. The results reveal a adverse hurricane season or a cycle We would also appreciate your • Face-to-face interviews with high degree of consensus regarding downturn will realistically test the feedback on this report as it helps executives. the key issues facing survey effectiveness and sustainability of us to ensure that we are addressing participants, with most CEOs the changes companies have made the issues you are focussing on and The survey findings and interviews listing such factors as achieving as a result. would welcome suggested topics of were further supplemented by improvements in underwriting analysis for future surveys. significant desk research. performance, institutionalising The research effort for this report effective cycle management, comprised two dimensions: effective monitoring of aggregations In this publication, unless the context requires otherwise, the term ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. PricewaterhouseCoopers Capitalising on opportunity: A time of change 2 PricewaterhouseCoopers Capitalising on opportunity: A time of change Executive summary With capital providers and shareholders looking for a strong response to the heavy losses sustained in 2005, we asked CEOs to highlight and rank the top five issues on their agendas in 2006. Key issues and operational Figure 1 Please indicate the top 5 issues on your CEO’s agenda in 2006. drivers in the Bermuda Market Underwriting performance and cycle Record earnings in 2006 resulting management Aggregations of exposure and optimised from a combination of factors reinsurance spend including strong underwriting Capital levels and allocation performance, a light catastrophe load and solid investment income New distribution channels reflected a return to form for many New markets (geographical) participants following significant New markets (classes of business) capital depletion in 2005. CEOs, therefore, are looking to the future Investment management and performance and are focussing on opportunities Regulation for growth and improved cycle Human capital challenges management. The lessons learnt from the 2005 hurricanes, Katrina, Embedding risk management Rita and Wilma (‘KRW’), however, Cost control still resonate with participants Diversification and their capital providers, and this survey unsurprisingly found Improved management information that most CEOs are particularly Improved rating agency management focussed on improving underwriting Improved finance function effectiveness performance, ensuring effective aggregation and monitoring of Optimal use of technology exposure, optimising reinsurance Enhanced corporate governance coverage, and protecting and Lowest Highest effectively allocating capital (see priority priority Figure ). Source: PricewaterhouseCoopers PricewaterhouseCoopers Capitalising on opportunity: A time of change 4 The Top Five… seemed to show at the exposures Capital levels and allocation New distribution channels ultimately hitting their books. As scientists predict that higher The Bermuda Market demonstrated Participants highlighted the sourcing Underwriting performance and sea surface temperatures are likely unprecedented success in attracting of new distribution channels as a cycle management to increase the frequency and significant capital in the latter stages key priority, however, the survey’s severity of storms, and that 2006 of 2005 and early part of 2006 in the results show only single digit A combination of factors, including was in fact more anomalous than form of existing companies percentage changes in business nominal catastrophe losses, the previous few years, reinsurers replenishing depleted balance sourced from the ‘Big 4’ of Marsh, heightened competition and excess are re-evaluating their methods of sheets, the ‘class of 2005’ start-up Aon, Benfield and Willis, and an capacity in some sectors highlight assessing exposure to catastrophes. companies, Lloyd’s entrants and overall reduction in business that, despite a record year, views Participants are no different and this approximately $bn for the sidecars. sourced from other brokers. There are that 2007 will reflect a general survey highlights in more detail Following such a ‘surge’, however, was a single digit increase in softening in prices except in some some of the approaches being capital management is a topic on the business sourced directly. Various fairly specific natural disaster prone deployed to protect capital. agenda of most CEOs surveyed and discussions with participants areas. Top-line growth was not 2007 could highlight a return of highlighted that while they were always possible for participants to 2006 also proved an interesting year capital that companies are unable to keen to explore new distribution achieve despite first-rate underwriting for the capital markets which deploy profitably. For example, as channels the practical application profitability. Harder markets tend to provided various alternative various modelling firms are making was proving harder to deploy. mask weaknesses and flatter results. opportunities for insurers to offload changes to their models, most The acid test will come with the (primarily catastrophe) risk from their notably to include improved data New markets cycle downturn. This survey seeks balance sheets, particularly in light on ‘storm surge’ and ‘demand surge’, to identify what companies are doing of elevated reinsurance costs and companies look increasingly likely Number five of the top five issues to manage a cycle downturn beyond depleted capacity in certain zones. to pull back from certain catastrophe on CEO’s agendas in 2006 was the maintaining ‘underwriting discipline’. Catastrophe bonds and the zones. Participants are paying close penetration of new markets, both emergence of the ‘sidecar’ provided attention to the various modelling geographically and by business attractive avenues for certain changes being contemplated or Aggregations of exposure and class. The survey indicates, participants. Our survey has implemented by the rating agencies optimisation of reinsurance spend however, that geographical markets revealed several motivations for and the impacts these have on was more the priority of a smaller ceding to sidecars, with executives capital charges. For example, Whilst the magnitude of KRW losses number of participants who were citing cost effectiveness, capital Standard and Poor’s has revised the surpassed anything seen before, considering opportunities in London, charge relief, risk reduction and way it applies capital charges relating perhaps what was more interesting US, Continental Europe and Dublin rapid and opportunistic capacity to significant natural disasters. for market observers was the in almost equal numbers, than the apparent surprise some companies expansion as the most ubiquitous. PricewaterhouseCoopers Capitalising on opportunity: A time of change 5 preserve of the majority who On the face of it, the profile of risk asserted that they were not managers has never been higher. considering opportunities in any Regulators have enacted sweeping of these areas. The survey results changes to the way financial indicate that both the established institutions handle risk; senior participants included within the executives are keenly aware of the sample, as well as the new start-ups,