The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Costas Miranthis It would be difficult to criticise a reinsurer for executing a planned succession at the top of its management structure at the start of the year.

Although there may be a few loose ends to tie up, the hard work on the key 1 January renewal season has been completed. And while the threat of European and US winter storms lingers, the first few months of the year are usually viewed as a benign time to reassess where the market is heading and strategically plan for the next big dates in the calendar at 1 April and the crucial June/July US wind renewals.

So you could forgive PartnerRe's new president and CEO Costas Miranthis for hoping for a bedding-in-period after taking over from Patrick Thiele on 1 January - a time to view the organisation from a fresh perspective and fine-tune strategy for the soft market challenges ahead.

The reality could hardly have been more different.

A record Q1 for international cat losses that included the second Christchurch quake and the Tohoku disaster combined with another capital event in the new Version 11.0 of Risk Management Solutions' (RMS) US wind model.

The events proved a game changer for property cat reinsurance underwriters as market psychology shifted, even before a record Q2 for US catastrophe losses driven by thunderstorms and tornadoes.

As Miranthis himself put it at The Insurance Insider's InsiderScope New York conference in May: "The fear is back," with hardening property cat reinsurance rates expected to last beyond 1 January next year.

IQ caught up with the PartnerRe chief as the ink was drying on 1 June renewals - and before his company's $325mn preference share capital raise - to hear his views on the wider reinsurance market and his own baptism of fire...

IQ: You've been in the job for nearly six months and a lot has happened in the industry, so how has it been?
It's certainly been very busy! You have to try to deal with the current issues - and there have been many of those this year - while not losing sight of your real purpose, which is to look long-term and shape the direction of the company. You have to try and maintain the balance between the two. It can also be quite lonely. You have a lot of responsibility as CEO for the company and your employees - to do the best that you can for them.

IQ: As a diversified global reinsurer, what lessons can be learnt from the recent cat events?
Diversification, by definition, is always a good thing provided that there's a correct price for the risk. The only question mark is whether the appreciation of risk for some of these events, particularly earthquake, was the right one. There's a danger in jumping to the conclusion that everything is suddenly different, but we may need to look at these events and see whether the models need to change.

IQ: Have we seen the end of the low single-digit rate-on-line that has been charged for some of these risks?
Risk will be priced on a technical basis first and if that suggests a low single digit rate-on-line then you add a charge for the use of your capital and that's the price. That may be changing but it's too early to say you will never see low single digit rate-on-line. That is pie in the sky and these are very rare events.

IQ: But have underwriters now got a different psychology around cheap capacity?
If there is a psychological effect it is around diversification for diversification's sake without getting properly paid for the risk. Some people that were only in the US wanted to move aggressively into new territories for the sake of it and were prepared to do things at any price. You might see a stop to that, but equally I don't think you'll suddenly see everybody talking about a minimum rate-on-line of 5 percent. Things don't work that way or otherwise certain risks wouldn't come to the reinsurance market.

IQ: Are some of these events no longer insurable?
They are insurable at the right price. Every now and again you get a rare sequence of events that are painful for reinsurers. But you have to look at these things over the longer term and the main issue is price and structure. For the right price there is the reinsurance capacity to cover risk. But the structure must not have a misalignment of interests between the cedant and the reinsurer.

IQ: Could we see a change in the public-private relationship in loss-affected countries such as Japan?
I don't anticipate any change in Japan but in other territories there's constant discussion about what capacity the industry can bring to help finance the exposure to risk and provide coverage. For example, there is a lot of discussion around US flood risk, about what the private market can do for something that is currently mostly covered by the state.

IQ: Would that extend to quake in the US?
The market is already there and anybody who wants to buy quake insurance can do so - but at a price. But banks that are natural holders of risk through mortgage portfolios might consider encouraging or even mandating the take-up of insurance.

IQ: Is there an argument that if we have a quiet H2 2011 some of that fear factor will dissipate and upward momentum in property cat rates will be lost?
I don't think so, because this is not driven by scarcity of capital. This is driven by what the right price is for the risk. You're not going to roll the dice just because you have too much capital. A big event would change the situation. In addition to the new respect for risk and appreciation of what the right price should be, there may be a supply dynamic that pushes prices further up. But I don't think that absent an event all of a sudden we switch back to a soft market.

IQ: Can we expect to see any change in strategic objectives from PartnerRe over the next year?
You won't see any radical shift in what PartnerRe is. PartnerRe's business is primarily based on severity-driven reinsurance. We're good at assessing, understanding and pricing risk. We're not good at mass distribution of products, or disintermediation, or running big machines with low cost. You won't see us going into any of these areas.

IQ: What longer-term challenges does PartnerRe face?
Our future is tied to the future of the reinsurance industry. It's an industry that is becoming more efficient so it's becoming more difficult to find well-priced risk. Cedants may retain some of the more diversifying lines that we like to have in our portfolio. Also, growth in the Western world is hard to come by so we need to figure out how we access other sources of growth in the emerging markets.

It's an environment where we also have to cope with more regulation. Good regulation is always welcome and in Bermuda we applaud and support the drive to enhance the professionalism of the reinsurance industry, but you have to fear the wider political drive to regulate the financial services sector, which is principally shaped by what is happening on the banking side.

IQ: What's the one thing you'd like to see change in the next year?
I'd like industry observers, whether investment analysts or journalists, to recognise the value we bring to the economy and our shareholders.

We have created a lot of value and we have a very important role to play in the smooth functioning of Western economies and I'm not sure we get a lot of credit for it.