23 and counting: Swiss Re and Insurance Bureau of Canada continue tradition

Swiss Re hosted the 23rd annual Canadian Insurance Industry Outlook breakfast event on April 4th at the National Club in Toronto in conjunction with the Insurance Bureau of Canada (IBC).

Swiss Re Canada CEO Jean-Jacques Henchoz welcomed the more than 140 in attendance and introduced the keynote speaker, Swiss Re Americas CEO Pierre Ozendo.

Ozendo told the attendees that the industry is coming off a period of healthy profitability but will have to gird itself to weather the vagaries of the softening market. He said excess capital is in great supply and the challenge will be to deploy that capital intelligently or return it to shareholders. Ozendo noted that cession rates are falling as primary companies are retaining more risk.

As for the interdependence of the insurance industry and the economy, Ozendo opined that long-tail Casualty business would come under strain if the Fed raises interest rates and inflation develops more aggressively than anticipated. Ozendo displayed many of the other trend lines to the audience of mostly primary company and broker executives, including investment yields which continue to decline.

Ozendo said the insurance community would not be immune from the subprime mortgage crisis, as estimates say it could sustain shock losses upwards of $4 billion from D&O and E&O lawsuits.

Ozendo said in the face of these market challenges reinsurers and their ceding companies would be well advised to undergo strategic planning exercises.

“We need to think 24 to 36 months out and work together to address these challenges,” he said.

As for Swiss Re’s results, Ozendo said the firm had a good January 1 renewal after a profitable year, but, overall, the top line would be down due to some inadequate and unsustainable rates in the market. But he reiterated that clients know Swiss Re’s position, and they know Swiss Re will be there when the market turns again

While the industry in Canada is only beginning to access the capital markets, there was great interest in what reinsurers and financial services companies can do to relieve the stress of peak risks. Ozendo discussed the growth of insurance-linked securities and their attractiveness for investors.

When asked what type of growth in this area he expected from insurance, Ozendo said investors like the fact that insurance liabilities are generally uncorrelated with the rest of their portfolios and he even envisions the industry developing instruments that combine several types of risk – from catastrophe to long-tail liability to variable annuities. He stressed that Swiss Re is an “originator” of risks, that it looks to absorb all types of risk, then either transform that risk, trade what it does not want to hold, or retain it all.

Mark Yakabuski, President and CEO of the IBC, followed Ozendo’s remarks and welcomed the guests. He announced the IBC’s intention to take a leadership position on the climate change issue and thanked Swiss Re’s Henchoz for agreeing to chair the IBC’s climate change committee.

Jane Voll, Vice-President, Policy Development and Chief Economist with the IBC, followed Yakabuski’s remarks with a look at the Canadian primary industry’s overall performance in 2007. The IBC’s presentation of annual performance trends has become a tradition in Canada, and Swiss Re’s reputation has benefited from sponsoring the annual “statistical breakfast”.

Voll said industry combined ratio rose to 93.7% in 2007 (from 91.7% the previous year) and underwriting income was down 22.5%, but overall it was still a positive at CAD2.1 billion. She spent some time analyzing the stress felt in Auto lines, noting that subpar performance stemmed largely from claims, which are running at twice the rate of inflation. Ontario Auto is particularly stressed, she said.

Although 2007 was a relatively calm catastrophe year, Voll said severe storm events are accelerating in Canada, with the 1-in-40 year storm becoming a 1-in-6 year storm. Voll noted that excess capital in Canada is declining, meaning the industry will be able to write less business.

“And when availability becomes a problem our phone will start to ring,” she said.

Guests started the morning with a social hour over coffee, then a full breakfast served by the National Club staff. Breakfast was followed by the remarks of Ozendo, Yakabuski and Voll. The speakers then fielded questions from attendees on governmental and regulatory policy, capital markets, litigation and overall industry performance.

 

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Presentation Pierre Ozendo, Swiss Re
Presentation Jane Voll, IBC

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