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State of the Reinsurance Market

State of the Reinsurance Market. Gary Blumsohn Arch Reinsurance Company GBlumsohn@archreco.com CAS Annual Meeting: Boston November 2002. Post-9/11 New Companies. Allied World Arch Axis DaVinci Endurance Goshawk Montpelier Olympus Platinum. New Capital Raised. Over $35 billion

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State of the Reinsurance Market

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  1. State of the Reinsurance Market Gary Blumsohn Arch Reinsurance Company GBlumsohn@archreco.com CAS Annual Meeting: Boston November 2002

  2. Post-9/11 New Companies • Allied World • Arch • Axis • DaVinci • Endurance • Goshawk • Montpelier • Olympus • Platinum

  3. New Capital Raised • Over $35 billion • Both new and existing companies

  4. Reductions in capital • 9/11: $40B - $50B? • Capacity exiting • Gerling • Overseas Partners • A&H markets for WC • Reliance, Legion & other fronts • Stock market losses • Reserve strengthening

  5. More Reductions in Capital? • Further reserve deficiencies? • Morgan Stanley: $120B (12/31/01) • $55B asbestos • $65B 1992-2001 AYs • Mostly commercial lines • WCIRB: $12.6B deficiency in CA WC

  6. Combined Ratio: Reinsurance vs. P/C Industry *First Quarter 2002 figures. Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  7. Source: RAA

  8. Asbestos Source: A.M. Best, Insurance Information Institute.

  9. In Sum…. An industry in turmoil

  10. But, more favorably… • Rates up virtually across the board • Compounding of higher primary and higher reinsurance rates • Large differences by line

  11. Emerging Trouble? • What are loss trends? • D&O • Med Mal • Re-emergence of inflation? • Low interest rates

  12. Real returns after CPI now 0.8% - long-term average = 2.2% Real returns after medical CPI now negative for first time in nearly a decade

  13. Thought Experiment • WTC + Asbestos = $110 billion • Let’s guess that today, half would find its way to domestic reinsurers = $55 billion. • Gross WP for US Reinsurers in 2002 ≈ $40 - $50 billion

  14. Thought Experiment (cont.) If average profit margin = x, how many years to earn back losses?

  15. “Unexpected” Losses • Asbestos & WTC were “unexpected” • Any reason to think the frequency of “unexpected” losses will diminish? • Expect the unexpected!

  16. The Blame Game 1988 Where was George? 2002 Where were the Actuaries???

  17. More Blame • More actuaries in reinsurance in 1990’s than ever before. • Correlation isn’t causation, but… • Did we get too tied up worrying about risk loads, DFA, variability, correlations, and other cool stuff?

  18. “Skurnick’s Theorem” It’s the mean, stupid!

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