Economic Balance

1
Economic Balance

• John Wiik NHC

2
Aspects of economic balance

• Number of underwriters
• Number of reinsurers
• Number of brokers
• Number of clients
• Financial markets
• Premium rates

3
Risk / Return

• Shipping and marine insurance
• High market risk
• Hopes of better times the basis of operations?
  
• Evidence of long term HM negative return-
  Munich Re analysis 1950-2000 (-22)- Scand.
  Act. Journal 1972-96 (-1)- Bankruptcies,
  mergers acquisitions

4
Financial markets

• Financial returns in the red- puts pressure on
  insurers and reinsurers- calls for profitable
  underwriting
• Insurance stocks underperform - Less supply of
  capital- Uncertain possibilities for start-ups-
  Limited possibilities for stock-listed companies
  - More scrutiny in internal branch allocation?

5
Insurance Indicies vs SP 500 (1 Year)
.SXIK DJ E.StoxxINSU (Stoxx Ltd)  .LCIC
INSURANCE (FTSE International) 
6
Insurance Indicies 5 Year
7
The Underwriters Playground

• Better framework for sound underwriting in the
  offing?
• New standards of accounting- Lloyds annual
  accounting franchise concept.- Suggested IASC
  framework (2005)
• Increased focus on financial security ratings-
  Good rating requires stable results -
  Underwriters penalised for market volatility
• Increased investor focus on current and historic
  returns- in the aftermath of Enron, Worldcom
  etc.
• Less inflow of ignorant capital?

8
Premieum RatesHM Loss Ratios
HM 12 mnts Lr
Expected Lr
9
Premium Rates

• Expected gross loss ratio at current (2002)
  premium level 108
• Large vessel specific differences.
• 30-35 rate increase still called for.
• Things are not always as expected...

10
What is needed?

• Less acceptance of mediocre portfolio
  performance.
• More accurate and predictable rating - in terms
  of level, differentiation and annual
  fluctuations.
• Sustainable average rate-level 30-35 from
  current.
• Everyday optimism and annual realism!