09The Fac Report - Aon

09
issue
INSIDE THIS ISSUE
A SEAMLESS PARTNERSHIP
The combined power of facultative
and treaty protections can deliver
a valuable management tool for
dealing with soft market conditions;
Jeremy Goodman comments. 2
A YEAR OF CHANGE
2007 was marked by a number
of significant transactions driven
by market change. Benfield’s
Research team reviews and analyses
the hot developments of 2007. 2&3
NEWS IN BRIEF
A round up of recent developments
for Benfield and for the Facultative
Solutions team including new modelling
capabilities, new services and new offices. 3
SOFT MARKET SAVVY
How insurers are looking to risk
concentration modelling and analysis
as a means of creating structures that
better manage reinsurance costs and
finding growth paths. 4
CLARITY OF VISION
Exposure management is a critical part
of the underwriting equation. Benfield
describes its latest moves to enhance
underwriter access to expert systems. 5
LAC TAKES OFF
The current high levels of infrastructure
development in Latin America and the
Caribbean are prompting fresh demand
for treaty and facultative protection. 6
CARIBBEAN PROGRESS
As the Caribbean Catastrophe Risk
Insurance Facility gears up for its first
renewal, Benfield reviews developments
to date on this world first. 6
BANKING MATTERS
The current turmoil in financial markets
may have turned sentiment against the
banking sector, but for those prepared
to differentiate some interesting
opportunities may exist. 7
WORLD VIEW
Our regular ‘at a glance’ review
of developments in regional markets
worldwide and what these could
mean during the next six months. 8
Spring 2008
The Fac Report
A Benfield Commentary on the Facultative Reinsurance Marketplace
SHOCK LOSS THREAT THROWS
SPOTLIGHT ON FAC
Q1 rise in single risk losses prompts profit impairment fears
A surge in large single risk losses during
the first quarter of 2008 is focusing
attention on the value of facultative
reinsurance as a means of guarding
against the negative impact on insurers’
results from a series of ‘shock’ losses.
Whilst fortuitous, rather than systemic
in nature, the collective scale and frequency
of the Q1 losses – which have been
spread across a wide range of industries
and geographical areas – are a cause
of increasing concern in the insurance
and reinsurance markets. As a result,
there is growing speculation that the
losses could start to stabilise primary
rates, at least in specific occupancies
or classes of business.
Although no overriding pattern has
emerged, a significant proportion of the
losses have come from the mining, energy
and steel sectors where, in a number
of cases, the size of loss has been boosted
by heavy business interruption and
contingent business interruption claims
fuelled by commodity prices. Largely
driven by the huge appetite for primary
resources, particularly from China,
commodity prices are now also being
pushed to new highs through the demand
for ‘safe haven’ investments.
The potential threat, which a string of
large single losses could pose to an insurer’s
www.benfieldgroup.com
results, has been further exacerbated
by the shift for underwriting operations
to maintain higher treaty retentions.
In addition, as treaty programmes pricing
is designed to align relatively closely with
a cedant’s underwriting results, insurers
that experience a series of such losses
could see an individualised impact in terms
of future treaty costs. This in turn could
impact competitive positioning and
margins in an already tough market.
Accordingly, various insurers are now
considering facultative reinsurance both
as a method of boosting sideways protection
while avoiding the costly process of buying
down retentions and of swiftly tailoring
treaty programmes to reflect rapidly
changing market dynamics. Perceived
advantages of such a route also include
the ability to maintain, or even grow,
business levels in the affected classes
if pricing, terms and conditions stabilise.
In this context, facultative reinsurance
also has applications for the captive sector
where it offers a means of rebuilding
attachment points at mid-term if a series
of large single risk losses has exhausted
captive or self insured retentions,
so lowering insurers’ attachment points
for the remainder of the policy term.
erik.nikodem@benfieldgroup.com

COMMENT
CREATING A SEAMLESS
PARTNERSHIP
In soft markets, when insurers and reinsurers are
working hard to maintain underwriting discipline
and profit potential, brokers that really add value
are those that identify ways to boost customers’
ultimate results through the intelligent use of
reinsurance. Against this background, it is gratifying
to note the soft market is serving as yet another
example of how powerful facultative reinsurance
can be as a strategic tool if used seamlessly
with treaty programmes.
For instance, having already proved its
worth in hard markets, the combined capabilities
of Benfield’s Dynamic Portfolio Optimisation
and CatFac analysis are now being used to better
identify ways in which to use combined treaty
and facultative reinsurance to optimise the
structure and cost of outwards programmes
in a downwards spiral.
Similarly, the sharp rise in large, single
risk losses during the first quarter of 2008
has underlined the applications of facultative
reinsurance as sideways protection against shock
losses within treaty retentions. Equally, facultative
cover can also have a role to play in assisting
treaty programmes to reflect changing market
dynamics, one current example being the rise
in potential business interruption costs due
to record commodity prices.
However, using facultative and treaty
protections in this way can only really work
if supported both by the necessary analytical tools
to identify and analyse ‘hot spots’ and by brokers
who have no hesitation about building close
working partnerships which transcend traditional
facultative and treaty boundaries. And all too
often in practice such ‘one team’ thinking
is impeded by both cultural and structural barriers
such as geographical or business profit centres –
hence the Benfield Facultative Solutions approach
of having one global Profit & Loss.
Simply put, if the broking sector is to ensure
its customers are properly positioned to maximise
capital efficiency during soft markets, while also
establishing ‘shelf capacity’ that can be quickly
used following an event-led turn in the market,
it cannot allow the old attitudes to continue.
Otherwise, it will be ignoring a potentially valuable
tool in the sector’s drive to deliver highly tailored
reinsurance strategies that meet the very individual
needs of each and every carrier.
jeremy.goodman@benfieldgroup.com
Jeremy Goodman,
Global Team Leader
SOMETHING
OLD AND
SOMETHING
NEW
2007 was marked by a number of significant
M&As ranging from SCOR’s acquisition
of Converium to the moves both by recent
start-ups and longer-established companies
to take advantage of Lloyd’s to strengthen
their business positions. There were also
signs that the European Union Reinsurance
Directive is acting as a stimulus for
reorganisation in Europe. The Benfield
Research team gives a brief overview.
The acquisition of Converium by SCOR
was perhaps the most important event in the
reinsurance arena in 2007. SCOR took the
market by surprise with its announcement
of a 32.9% stake in Converium and its intention
to launch a public tender offer for the
remaining shares. After initially rejecting
the approach, Converium’s Board of Directors
subsequently recommended an improved offer
to its shareholders. When the tender offer
closed in July, SCOR had acceptances for over
96% of Converium’s shares and the change
of ownership was completed at the end
of August. SCOR has subsequently raised
its ownership to over 98%. The management
of the combined entity moved swiftly
to present clients with a unified approach
at the September Rendez-vous in Monte-Carlo.
Upgrades of the Lloyd’s financial strength
rating to A+ by both Fitch and Standard
& Poor’s, the acquisition of Equitas by Berkshire
Hathaway’s National Indemnity and continued
evidence of structural reform all contributed
to the increasing attraction of Lloyd’s.
For some newly established Bermuda players
(and some not so new), Lloyd’s provides
the obvious benefits of a higher rating, access
to international licensing and distribution, and
diversification of product line and geography.
Deals during 2007 are shown in Figure 1.
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 02
Tokio Marine & Nichido Fire Insurance
Company (TMNF), Japan’s oldest and largest
non-life insurer, made a GBP442mn agreed
offer for Kiln Ltd in December. The deal
was completed on March 11 when Kiln joined
Millea Group as a wholly-owned subsidiary
of TMNF and was delisted from the London
Stock Exchange. Kiln will play a pivotal role
in the expansion of TMNF’s international
underwriting operations and in enhancing
its existing overseas activities.
American Financial Group said its
acquisition of a 67% stake in Marketform
Group Limited “supports one of our strategic
objectives of increasing AFG’s geographic
coverage.” Munich Re’s acquisition of MSP
Underwriting complements its existing Lloyd’s
platform through Watkins. MSP owns Beaufort
Underwriting Agency Limited (which manages
Syndicate 318) and Evergreen Underwriting
Services Limited.
PARIS RE, now headquartered in
Switzerland, emerged in its own right during
2007. The company’s shares were listed on
the Euronext Paris exchange in July. PARIS RE
was awarded financial strength ratings of
A- from both A.M. Best and Standard & Poor’s
and began writing business from the end
of September. The company operates in France,
Switzerland, Bermuda, the USA, Canada,
the UK and Singapore. Other young reinsurers
which made Initial Public Offerings (IPOs) of
their shares during 2007 are shown in Figure 2.
The stream of new reinsurer formations
slowed in 2007. The key arrivals are identified
below.
Ironshore Inc opened its doors to business
at the start of the year. The company
raised over USD1bn through a private
placement of equity securities, with

a group of institutional investors including
Bear Stearns, Lazard Alternative Investments
and Fremont Partners. It commenced
underwriting specialty lines of insurance
immediately through its Bermuda based
insurance subsidiary, Ironshore Insurance
Ltd, which is rated A- by A.M. Best.
The initial focus has been on US property
catastrophe risks.
Maiden Holdings Ltd was established
in Bermuda. Capitalised at USD530mn,
Maiden Insurance Company Ltd has an
A- financial strength rating from A.M. Best.
Maiden intends to write a portfolio of
quota share and excess of loss reinsurance,
targeting small insurance companies
and managing general agents in the US
and Europe. Initially it will take on business
through a 40% quota share reinsurance
treaty with AmTrust, a US-based multinational
property and casualty insurer
specialising in workers’ compensation
insurance, extended warranty coverage,
specialty property and casualty insurance
and related products and services for
small businesses.
The implementation of the EU Reinsurance
Directive from 1 January 2008 has provided
the impetus for various corporate restructurings.
Notable were Swiss Re and PartnerRe. Swiss
Re has established Swiss Re Europe, SA, based
in Luxembourg, which will serve as the risk
carrier for most of the group’s European
reinsurance and insurance business, operating
via branches in the rest of the EU. The new
legal structure is intended to improve the
FIGURE 1 – LLOYD’S M&A IN 2007
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 03
alignment of regulatory and economic capital
requirements. Swiss Re Europe will assume
the life and non-life portfolios from the UK,
Ireland, France, Germany, Spain, Italy, Denmark
and The Netherlands. Business transfers started
on 1 January and are expected to be complete
by mid-2009.
PartnerRe has renamed an existing
Dublin-based subsidiary Partner Reinsurance
Ireland Ltd. On 1 January 2008, this entity
became the group’s risk carrier for business
written out of France, Switzerland and
Canada. As part of the transaction, the
former French subsidiary, PartnerRe SA,
was merged with PartnerRe Europe. Branch
offices have been established in France
and Switzerland.
This article is an extract from ‘Changing
the Game’, the 2008 edition of Benfield’s
comprehensive review of trends and issues in
the global reinsurance market. It provides
a detailed commentary on the 2008 reinsurance
renewals – including full regional and specialty
market reviews – as well as discussion on key
developments such as diversification, capital
market appetite for reinsurance risk and
reserving. A full copy of the article is available
at www.benfieldgroup.com/research.
The Benfield Research team publishes a
wide range of independent research including
quarterly reports on the Bermuda and
European reinsurance markets. If you wish
to subscribe to this free service please contact
benfieldresearch@benfieldgroup.com.
Date Acquirer Target Price GBPmn Syndicates
May Validus Holdings Talbot Underwriting 194 1183
July Ariel Re Atrium Underwriting 193 570, 609
July Sagicor Gerling at Lloyd’s n.a. 1209
October Munich Re MSP Underwriting 35–40 (est) 318
December Tokio Marine & Nichido Fire Kiln Ltd 442 308, 510, 557, 807
December American Financial Group Marketform 37 2468
Source: Company announcements
FIGURE 2 – 2007 IPOS
Company Date Proceeds USDmn
Validus January 345
Flagstone March 173
Greenlight May 258
Source: Company announcements
BENFIELD NEWS IN BRIEF
BENFIELD PRELIMS
In Benfield’s preliminary results for 2007,
which were released on March 13, Benfield Chief
Executive, Grahame Chilton, noted the group’s
Global Facultative team performed well during
the year, generating an improved margin and
new business growth, particularly in energy and
retrocession business and in the Latin American
and European regions.
REAL-TIME RATING CHANGE NOTIFICATIONS
Benfield is the first reinsurance intermediary
to notify US customers about reinsurer rating
changes in real-time and correlate the impact
to their specific reinsurance contracts. Utilising
direct, live data from A.M. Best and leveraging
the power of our proprietary Global Reinsurance
Distribution System (GRiDS), Benfield delivers
immediate notifications to those affected
by reinsurer rating changes.
CHINA DEVELOPMENTS
Following approval from the China Insurance
Regulatory Commission (CIRC), Benfield
has opened a new representative office, Benfield
Beijing, and upgraded the group’s Shanghai
Representative Office to a General Representative
Office. The moves further enhance Benfield’s
commitment to the growing Chinese insurance
market and the Greater China region.
SINGLE RISK MODELLING SM
Benfield is also the first reinsurance intermediary
to bring US customers individual risk modelling
results—the latest feature of our award-winning
online risk mapping software, ExposureView.
Underwriters and agents now have the ability
to quickly obtain accurate, comprehensive modelled
loss results for a single location policy before
it is bound.
LONG RANGE FORECASTS
In its December 2007 extended range forecast
for 2008 Atlantic hurricane activity, Benfieldsponsored
Tropical Storm Risk (TSR) found early
indications point to an active Atlantic hurricane
season with Atlantic basin and US landfalling
tropical cyclone activity being 50% above the
1950-2007 norm. TSR calculated there is a high
(~70%) likelihood that activity will be in the
top one-third of years historically, forecasting
15 Atlantic Basin tropical storms including eight
hurricanes and four intense hurricanes.
HURRICANE BREAKTHROUGH
Ground breaking research from scientists at the
Benfield UCL Hazard Research Centre (BUHRC),
has for the first time quantified the link between
sea surface warming and hurricane activity,
which was published in scientific journal Nature.
The paper found rising sea surface temperatures
were responsible for about 40% of the increase
in Atlantic hurricane activity between 1996 and
2005 (when compared to a 50 year (1950-2000)
average) and that the current sensitivity
of hurricane activity to sea surface warming
is large, with a 0.5°C rise being associated with
an increase in activity of approximately 40%.

THE DPO DIFFERENCE
Benfield’s Dynamic Portfolio Optimisation
(DPO) is unique in that it addresses the correlation
of risk through concentration. Accordingly,
DPO-designed strategies quantify the impact on
the entire PML curve, identifying the policies that
have the most negative impact on results at the
portfolio level. By contrast, other optimisation
strategies tend to identify a portfolio’s ‘worst’
policies on an individual basis without taking
into account how those policies correlate
to the remaining portfolio.
As a result of this difference, DPO can assist
underwriting entities to significantly enhance
their strategic exposure management. Applications
include identifying both the key risk drivers
within property portfolios and areas that could
be profitably written without a significant effect
on PMLs. DPO also analyses the impact of potential
changes to a portfolio in terms of what this
would mean for reinsurance limits required,
for the cost of reinsurance to be purchased and
for the company’s retained net average annual loss.
DPO IN BRIEF
MODELS USED:
RMS, AIR, or a blend of these models.
PERILS:
Hurricane and/or Earthquake.
RISK APPETITE:
Specific return time (e.g. 100-year) selected by
the company.
PROFITABILITY METRIC:
Including or excluding non-catastrophe loss ratios.
UNDERLYING REINSURANCE:
Quota Share, Per Risk, Facultative and the Florida
Hurricane Catastrophe Fund.
KEY RISK DRIVER CANDIDATE RESTRICTIONS:
Flexible identification of policies, e.g., personal
lines policies only, avoiding profitable agencies,
or excluding policies with supporting business, etc.
GROWTH POLICY CANDIDATES:
Prospective new portfolios, policies similar to the
current portfolio, or standard sample policies.
In addition to customising analysis parameters
and policy selections, reports can be tailored
to include detailed policy lists summarised
by state, county, territory, or line of business,
or can be profiled for underwriting purposes.
Results can be shown as maps or used to
generate impact scenarios for reinsurance cost.
FINDING FRESH
ANGLES IN
SOFT MARKETS
The need to optimise reinsurance structures
and costs in a soft market is prompting
insurers to use risk concentration modelling
and analysis as a tool for businesses
to identify growth opportunities within
existing treaty structures.
Examples of recent US projects have
included analysing how books of construction
risks could be rebalanced to provide a fresh
approach for growth, and exploring potential
strategies under which personal lines carriers
– with multiple companies operating under
different pricing structures – could grow the
quality of their business by identifying where
best to focus activity.
Underpinning such initiatives has been
the combined use of Dynamic Portfolio
Optimisation (DPO) modelling, which looks
at the concentration of risks within portfolios,
and CatFac analysis. This duo creates the
analytical groundwork from which to identify
where growth can be achieved within existing
PMLs. It can be accomplished by employing
a dual strategy that focuses on underwriting
of particular types of business while using
facultative reinsurance to remove exposure
‘hot spots’.
This reflects the fact that the combined
analytical process enables key exposure drivers
first to be isolated, allowing very specific
facultative reinsurance mechanisms to
be structured to meet the particular needs
of the portfolio. Given the tailored nature
of facultative reinsurance, high levels of flexibility
can be achieved using mechanisms ranging
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 04
from automatic, to pre-agreed rating
agreements, to facilities.
Other applications for DPO/CatFac
combined analysis include helping with
the development of strategies for shared and
layered business by understanding how best
to build up portfolios through selective
underwriting. In this context, facultative
reinsurance acts as a tool to keep retentions
on each layer within the predetermined plan.
The DPO/CatFac methodology can also
be used to better test assumptions in terms
of the overall cost benefit of particular elements
of their business when viewed in relation
to wider capital considerations.
The current interest in Benfield’s DPO/CatFac
capabilities is a testament to the flexibility
of the tool, which first came to the forefront
as a mechanism to tackle hard markets.
In that scenario, the DPO/CatFac combination
was used to identify the policies, and the
locations within those policies, which were
disproportionately driving PML curves
for a given annualised event probability.
The analysis was used to reinsure,
on a facultative basis, such business
on concurrent terms and conditions.
Reflecting the potential value of such
analysis, in one example, which was based
on a portfolio’s 1:250 PML loss, some 5%
of the portfolio’s multi location commercial
property policies were found to be driving
25% of the loss.
sherry.thomas@us.benfieldgroup.com

CREATING A CLEARER PICTURE
FOR UNDERWRITERS
Following its success with US underwriters,
Benfield has now started to roll out
ExposureView, to a more international
audience. As the first stage in this process,
Benfield has established a London-based
hub for the product which is working with
a number of London Market companies
on initiatives to enhance the depth of their
US underwriting data.
A market leading exposure management
tool which uses geographic information systems
to create a physical picture of risks and their
accumulations, ExposureView has been in use
by US insurers since 2003 as a key technology
to visualise the potential impact of catastrophe
events such as wind, terrorism or wildfire on
their portfolios both during and after an event.
Originally developed to provide US insurers
with daily updates of wildfires, the system
has now become a valued underwriting tool
and can be used with a wide range of data
including personal and commercial property,
auto business, workers compensation risks
and offshore platforms.
Key to ExposureView’s success is that
it not only enables underwriters to plot and
view all individual risks – whether by street
address or a specific latitude/longitude – but
also overlays such information with ‘hazard
shapes’ or polygons that outline the boundaries
and impact of events.
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 05
Equally important, from an underwriting
perspective, the system also enables insurers
both to view specific risks and to see how
potential new risks would fit with the overall
balance and underwriting limitation of existing
portfolios. For instance, where necessary,
radius-based exclusion zones can be plotted
in conjunction with specific risks, to ensure
accumulation limitations are maintained, e.g.,
when underwriting terrorism risks.
The map-based output from the system
has also been highly valuable to claims’ teams
for use in deploying adjusters and managing
and analysing claims.
One of the key features of ExposureView,
in addition to the system’s mapping capabilities,
is the way in which it enables underwriters,
at the touch of a button, to retrieve their data
in spreadsheet format. This facility provides
instant access to the necessary information
to manage, analyse and evaluate claims,
enabling underwriters to produce swift exposure
evaluations in the wake of a major event.
In order to maximise the value of this
application, underwriters can, if required, take
a highly selective approach to retrieving data,
far beyond class of business. Examples include
the ability to isolate information on beachfront
properties or those that are of a wooden
construction type. The system’s current library
of information includes a wide range of data
including maps of hurricane wind speeds from
past events, footprints of past windstorm
events, data on various US earthquake zones
and also a terrorism target database. In addition,
it can also be used to visualise the impact
of Lloyd’s Realistic Disaster Scenarios.
Whilst the system’s Benfield-sourced
library of hazard shapes at present principally
focuses on US exposures, the system has
mapping availability for 63 countries. Given
users can tailor the system by incorporating
their own libraries of hazard shapes, this also
means the system has applications as a base
from which insurers can build highly tailored
exposure modelling tools, which reflect
the particular geographical priorities of their
own businesses.
All user information, including personal
libraries of event information, is only accessible
to the user in question, to maintain full
confidentiality.
dave.barthorpe@benfieldgroup.com
paul.budde@benfieldgroup.com
Readily accessible with a web browser and
an internet connection, ExposureView is part
of the value-added, innovative services
and technology that Benfield provides
to its customers. For further information,
go to www.benfieldremetrics.com.
Wilma 2005 wind
speed forecasts

CARIBBEAN RENEWAL MOVE
June sees the first renewal of the world’s first
multi-country disaster insurance facility, the
Caribbean Catastrophe Risk Insurance Facility
(CCRIF) with several measures designed to further
fill the liquidity gap for countries after a natural
catastrophe.
In a February bulletin, the CCRIF announced
a 10% reduction in premiums charged to
participating governments, a decrease in the
minimum attachment point for hurricane policies
from one in 20 year events to one in 15 year
events, an increase in limits to USD100m per peril
from USD50m and a minimum payment, when
triggered, equivalent to the relevant country’s
annual policy premium. The scheme, which
in its first year made payments to Dominica and
St Lucia in respect of the powerful earthquake
which rocked the Caribbean at the end of
November, also stated payment of legitimate
claims will be accelerated to as little as 14 days.
The CCRIF facility was structured in
conjunction with Benfield, as sole adviser, using
a mixture of aggregate catastrophe excess
of loss layers and a catastrophe swap. As a result,
the CCRIF also has the distinction of being
the first insurance facility to develop a parametric
insurance policy that is backed by both traditional
reinsurance and capital markets.
Just as important, it offers a fresh perspective
on how governments can work with the commercial
insurance and reinsurance sector. The scheme
has overcome many of the issues which have
historically hindered the development of such
government-backed initiatives – including striking
a workable balance between building capital and
imposing compulsory contributions on individuals
– by taking a far broader and more integrated
intergovernmental approach.
Critically the CCRIF provides participating
governments, rather than individuals, with
immediate liquidity if their countries are hit
by a hurricane or earthquake.
The CCRIF’s structure – which could be applied
to anywhere from Central America to China
to Africa – potentially points the way for future
inter-government natural perils initiatives.
Reflecting this, the World Bank, which provided
support and seed capital for the project, has
indicated it could serve as a pilot for similar
initiatives in other regions with small states,
such as the Pacific basin.
david.simmons@benfieldgroup.com
aidan.pope@benfieldgroup.com
TAPPING INTO A GROWTH
PROPOSITION
Insurers are increasingly turning their
attention to the possibilities offered
by Latin America and the Caribbean (LAC)
due to the current surge in infrastructure
development fuelled, in large part,
by revenues generated by the commodities
boom.
Such is the scale of current developments,
that for the first time the combined value
of the Top 50 strategic infrastructure projects
in LAC, as selected by the Sixth Annual Latin
American Leadership Forum which took place
in early April, has exceeded USD50bn.
The current focus on infrastructure
development reflects a general acceptance
that if LAC is to sustain and improve current
growth rates, the region needs to invest
significantly in all aspects of critical
infrastructure ranging from greater power
generation to better road links.
Estimates published in August 2005
in Infrastructure in Latin America and the
Caribbean: Recent Developments and Key
Challenges, a report by World Bank economists
Marianne Fay and Mary Morrison, indicated
spending would need to reach 4% to 6%
of GDP a year – as opposed to less than 2%
at that time – for infrastructure to catch
up or keep up with countries that once trailed
it, such as Korea and China. The report added
that while infrastructure had improved in
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 06
most of LAC over the last decade, a sharp
fall in investment in the sector was hindering
economic growth, poverty reduction and
the region’s ability to compete with China
and other dynamic Asian economies. Using
logistics costs (transportation and storage)
as one example, it added that while these were
about 10% of product value in industrialised
countries, in LAC they ranged from 15%
in Chile to 34% in Peru.
Current projects range from the USD15bn
plus oil and gas initiative featuring the USD5bn
Camperj Petrochemical Complex in Rio
de Janeiro and other strategic projects from
Petrobras, Pemex and Petrojam through to
USD3.2bn of ports and logistics developments
featuring the Buenaventura port projects and
including major highway and inter-modal
logistics in Colombia. A number of projects
in areas such as the Dominican Republic and
Mexico are also looking at renewable energy
generation through such technologies
as bio-diesel, solar farms and wind farms.
Against this background, demand for
construction insurance is increasing significantly,
as is demand for business interruption type
covers including advance loss of profits – for
instance, to protect against situations such
as where a power station does not come
on line as planned. In addition to the need for
significant capacity, interest in the offerings
of international markets is also being prompted
by the desire to tap into the expertise of
insurers versed in some of the state of the art
technologies which are relatively new to LAC.
Separately, the commodity boom has
also created greater awareness of the value
of insurance, partly because there have been
a number of significant business interruption
losses in the region affecting operations
in various business sectors. Recent examples
range from events impacting Brazil’s largest
steelmaker, CSN and Sadia, one of the world’s
leading producers of chilled and frozen
foods through to Chile’s giant food producing
company, Agrosuper.
Given that up to 50% of ceded premium
is being spent on facultative reinsurance,
Latin America is being seen as a growth area
for both facultative and treaty business.
Reflecting this, Benfield is in the process
of expanding its presence in the region
and intends to open further offices in the
near future.
pablo.munoz@benfieldgroup.com

OPINION: SORTING THE
WHEAT FROM THE CHAFF
The ongoing turmoil in global financial
markets may have created wide ranging
uncertainty for a series of products including
directors and officers (D&O), financial
institutions, structured credit and financial
guarantee business as well as certain types
of errors and omissions (E&O) protections,
but there is also a danger that it is blinding
the insurance sector to potentially good
business opportunities as well.
At present, the one thing that is not in
doubt is that there will be considerable activity
on the legal front. Nor, on the basis of past
experience, can it be assumed that the insurance
world will be as insulated from such actions
as might, at first glance, seem likely. Plaintiffs’
attorneys will be mustering their resources
to find ways through to potential ‘deep pockets’
– a factor which raises the potential for
creeping exposures on the D&O and E&O front,
if only due to the need to defend against
‘phantom’, as well as potential, liabilities.
Separately, the long-term security of the
monoline financial guarantee insurers is still
under close scrutiny. In this respect it is perhaps
salutary to reflect just how damaging to their
core business of guaranteeing municipal
bonds such insurers’ forays into guaranteeing
other products, such as wraps of synthetic
financial structures, have been. Simply put,
it took the monolines 25 years to develop
a 50% penetration of the US municipal bond
markets in the US. Now, in just a few short
months, that market share has contracted
to some 20%.
Against this background, it is important
not to lose sight of the fact that a significant
portion of the very large losses recently
announced by financial institutions flows from
recently instituted accounting regulations
involving mark to market assessments, rather
than losses crystallised from the sale of assets.
Such is the extent of impact of these regulations
that at least one large financial institution
has questioned whether the regulations need
amendment. Accordingly, until the mortgage
issues in the US unwind, the full extent
of institutions’ exposures and ultimate losses
will be unclear.
It is also important to bear in mind that
the mortgage related issues have not impacted
all industry and trade sectors to the same
degree. Financial assessments suggest that
many industries are continuing to perform
in an acceptable manner, despite tighter
controls on credit.
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 07
All of this means that, despite the current
generally negative sentiment about the banking
sector, financial institutions will continue
to be a potential source of good quality risks,
particularly in the trade credit, surety and
political risk areas.
Indeed, the very issue of banks’ reducing
capital bases, combined with the requirements
of Basle II, means many banks increasingly
need to assess the best allocation of capital
to maximise their returns – an area in which
insurance can assist by reducing exposures
to risks producing lower returns, so allowing
banks to concentrate on those areas of
businesses which produce the highest return
on capital.
As in all situations, it is important to
differentiate between the varying types of risk
that may originate from the banking sector
and not to apply a rigid, and perhaps less than
open view, to new opportunities. The insurance
market is in a position to assist, and has the
chance to grow its own portfolio whilst still
maintaining a disciplined and conservative
approach to the business.
As ever, in problems also lie opportunities
and it may just be that now is the time when
those insurers that are prepared to look beyond
sentiment to the actual risks in question may
be pleasantly surprised by the flow of good
quality risks coming to the market. It would
be a shame if such an opportunity to make
the most of a real underwriting opportunity
were to be missed because perception was
allowed to rule over reality.
phil.bonner@benfieldgroup.com
FACULTATIVE SOLUTIONS TEAM
The Facultative Solutions team is part of the
leading reinsurance and risk intermediary,
Benfield, which is listed on the London Stock
Exchange under the ticker symbol BFD.
With a worldwide presence of experts from
the property, casualty, financial lines and energy
sectors, we operate as one team, regardless
of international boundaries, with one profit centre,
empowering every member with access to
markets. Appropriately authorised Team Members
in Benfield give us expertise in alternative capital
solutions.
Drawing on the Group’s actuarial and analytical
skills, including Benfield’s market leading
catastrophe modelling, dynamic financial analysis
and dynamic portfolio optimisation capabilities,
we use our own resources to structure and place
optimum solutions for customers in all classes
of reinsurance.
Jeremy Goodman, Global Team Leader
jeremy.goodman@us.benfieldgroup.com
+1 917 320 4524
EUROPE
Michael Papworth, Team Leader London and
Global Property & Specialty
michael.papworth@benfieldgroup.com
+44 (0)20 7522 3956
Andrew Hopkins, Japan and AAA Team Leader, London
andrew.hopkins@benfieldgroup.com
+44 (0)20 7522 3902
Pablo Muñoz, Latin American & Caribbean
Team Leader, London
pablo.munoz@benfieldgroup.com
+44 (0)20 7712 8515
Pierre Bruylants, Europe Team Leader, Brussels
pierre.bruylants@benfieldgroup.com
+32 2 709 21 91
NORTH AMERICA/BERMUDA
Erik Nikodem, North America/Bermuda
Team Leader, Bermuda
erik.nikodem@us.benfieldgroup.com
+1 441 278 4544
AUSTRALIA/NEW ZEALAND/SOUTH AFRICA
Michael Lazarus, AAA Team Leader, Australia
michael.lazarus@benfieldgroup.com
+612 8209 4291
SINGAPORE
Nigel Cross, Singapore Team Leader, Singapore
nigel.cross@benfieldgroup.com
+65 6512 0211
If you would like to register to receive The Fac Report,
please contact us at thefacreport@benfieldgroup.com.
© Benfield Group Limited 2008. Benfield has used due
care in the preparation of this report. Our information
has been obtained from sources we consider reliable,
but its accuracy and/or completeness is not guaranteed.
This report is made available on an “as-is” basis and
Benfield will not accept liability to any person for the
consequences of reliance placed on its content. Benfield
reserves all rights to the contents of this document.

WORLD
VIEW
EUROPE
Following a second year of low insured industrial and
catastrophic loss activity, industrial property prices have
continued to fall slowly with average rate reductions being
seen across Europe of some 10% to 15% during the last
renewal period.
Insurers and reinsurers are continuing to post record
profits on the back of significant reductions in the frequency
and severity of losses driven by high deductibles and the
success of risk management initiatives focusing on risk
improvement and loss prevention.
Reinsurance cost and reinsurer security remain top
priorities for cedants, many of which are maintaining significant
retentions, buying out volatility such as catastrophes, terrorism
and high risk activities. The market is also seeing more
and more multiyear deals as risk managers seek to secure
guaranteed long-term capacity at today’s competitive rates.
Speculation is now growing that if lower than expected
2008 investment returns coincide with higher combined
loss ratios, this could depress profits sufficiently to trigger
a cycle change.
pierre.bruylants@benfieldgroup.com
LATIN AMERICA AND THE CARIBBEAN
Demand for facultative covers continues to be strong, with
no shortage of business flow, as cedants in Latin America
and the Caribbean seek insurance and reinsurance solutions
for their ever expanding business bases. The region’s many
entrepreneurs are showing no hesitation about seeking
international expertise as necessary. This appetite for facultative
market solutions is being further supported by the
general softening market conditions which mean plentiful
capacity is available at very attractive prices which are
still showing very good returns for both buyers and sellers.
As expected, at the end of 2007 the Brazilian market
was partially opened to external players. In essence, the move
means that although cedants will still be obliged to offer
60% of reinsurance placements to the local market, 40%
can now be offered to the international markets. Although
early days, the general expectation is that the liberalisation
initiative will create a new, dynamic market place with
multiple participants.
pablo.munoz@benfieldgroup.com
NORTH AMERICA AND CANADA
Property insurance rates continue to deteriorate, particularly
in the middle-market arena, where there is an increasingly
large over supply of capacity. In particular, the excess and
surplus lines sector in the US has become fiercely competitive
due to a number of factors. These include both a significant
growth in the distribution networks being used by existing
players and the entry of various new underwriting entities
to the sector which are seeking market share. Casualty
rates, while deteriorating, are not falling as precipitously,
partly due to a stabilisation of terms in various niche and
professional lines.
As underwriters seek additional limits to protect their
renewal positions or achieve more significant participations
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 08
on new business accounts, the perceived value of property
and casualty facultative capacity – and therefore demand
– continues to grow. Facultative reinsurance also continues
to be a valuable tool to those seeking to expand distribution,
increase hit-ratios and retain more business irrespective
of market conditions.
erik.nikodem@benfieldgroup.com
BERMUDA
While the lack of significant property catastrophe or casualty
events have contributed to a raft of, on the whole, record 2007
profits for Bermuda’s reinsurers and insurers, such results
have also been fundamentally predicated on the maintenance
of good market discipline. Overall, the market’s underwriters
have been taking a very consistent and prudent approach
to the underwriting of risk and to ensuring rate and term
adequacy in the softening cycle.
That said, the fluidity of layering options, dynamic
attachment points and the time-tested import of secure,
stable capacity which is unencumbered by the legacy issues
that are adversely affecting the balance-sheets of several
underwriters, means 2008 still presents the prospect
of attractive facultative partnership opportunities for both
cedants and reinsurers. Accordingly, despite the overall
softening in market conditions, the number and quality
of mutually beneficial deals to be struck between buyers
and sellers of facultative reinsurance continues to escalate.
erik.nikodem@benfieldgroup.com
ASIA
Driven by strong underwriting results, over supply of primary
and reinsurance capacity and strong competition among
the major retail broking houses, the soft market for property
and casualty risks has continued. Reflecting this, a number
of large power, energy and high tech risks renewed during
the first quarter of 2008 at significant premium reductions.
While a few major engineering projects have been delayed
due to financing issues, it still remains to be seen whether
the global economic situation is likely to have a more profound
effect on the region. Certainly, to date, investment in large
infrastructure projects covering everything from utilities
to refining has generally continued unchecked.
Separately, while a slight increase in recent loss activity
in the region has done little to stem the tide of softening
underwriting market, sentiment is now growing that any
further rises will force insurers and reinsurers to take a more
defensive position in managing their portfolios and protecting
their net positions.
nigel.cross@benfieldgroup.com
JAPAN
The second half of 2007 and early 2008 saw several large fire
losses in Japan and a large mining loss in Australia involving
Japanese interests. However, apart from the Matsushita Battery
loss, these so far appear to have mainly impacted insurers’
net and treaty results, rather than affecting facultative
reinsurers. Reinsurers also benefited from a benign 2007
Japanese windstorm season and lack of facultative
earthquake losses.
Accordingly, the facultative market took a favourable
view of Japanese business at the 1 April renewals, offering
improvements in rating, capacity and flexibility for fire
and natural catastrophe exposed business. There were also
opportunities to structure specific facultative peak risk
facilities, closely linked to treaty placements.
The Matsushita Battery fire focused attention on BI and
CBI exposures flowing from high levels of interdependency
between manufacturers. The continuing trend for large
investments in the flat screen and semiconductor sector has
also prompted increased demand for facultative reinsurance
to manage peak exposures and PMLs.
andrew.hopkins@benfieldgroup.com
AUSTRALIA AND NEW ZEALAND
The first quarter of 2008 has proved very slow in the
Australian and New Zealand markets, making it difficult
to assess with any degree of confidence what the year
may hold in store.
Unusually high rain fall during January and February
along the eastern seaboard of Australia resulted in a number
of large flood related claims with the mining sector being
particularly affected. Taken in conjunction with a large loss
in Peru which falls into one of Australia’s largest mining
schedules, this now means there is in excess of AUD1bn
of losses emanating from the Australian mining account.
While it is yet too early to say what impact this will have
on the mining sector – and possibly even the wider property
market – the developments have caused some concern
in the market.
Separately, fuelled by abundant capacity and competition,
New Zealand continues on its soft market path with no end
in sight to the current round of rate reductions.
michael.lazarus@benfieldgroup.com
SOUTH AFRICA
Although 2007 was once again a profitable year for the
local insurance industry, a deterioration in technical results
means that both insurers and reinsurers are seeing a decrease
in returns from the high levels of profitability achieved over
recent years.
At the same time, over supply of treaty capacity
and aggressive retail broking activity, coupled with the lack
of catastrophe losses both locally and internationally, continue
to keep rating levels down. The abundance of treaty capacity
has also reduced the demand among insurers for facultative
alternatives.
Looking ahead, there are now signs that local market
conditions may be starting to change. The 2007 deterioration
in technical results has been followed by a 2008 first quarter
notable for the number of large claims which have occurred
in the corporate sector. Accordingly, speculation is starting
to build that such developments could trigger the necessary
pressures for rates to level off in the medium term.
john.goetzsche@benfieldgroup.com