ANALYSIS-Reinsurers expand product base to drive up revenues

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Saturday September 18, 2010 01:51:11 PM GMT

* Market rebound fills reinsurers' coffers

* Raises questions about how best to use funds

* Returning cash to shareholders won't boost long-term ROE

* Industry looks to insure previously uncovered risks

By Jonathan Gould and Sarah Mortimer

MONACO, Sept 17 (Reuters) - Reinsurers and their insurance broking colleagues are searching high and low for new products to drive revenues as top-line premiums stagnate in mature markets.

The financial market rebound since the first quarter of 2009 has helped fill reinsurers' coffers, but raised questions about how best to use the funds in a market where falling reinsurance prices make expanding the underwriting book dangerously unprofitable and where takeover targets are costly and scarce.

Reinsurers could give the money back to shareholders -- credit rating agency Moody's thinks another $6 billion in share buybacks could be on the cards this year -- but some in the industry have a better idea: new products.

The industry is pushing to insure or reinsure risks that have never been covered before, or use new technology to assess familiar problems, such as using climate change data to assess the likelihood of drought ruining crops in central Asia, for example.

"Returning capital doesn't create profitable growth and increase market share. Innovation, on the other hand, does," said Henry Keeling, chief executive of reinsurance broker Guy Carpenter, part of Marsh and McLennan, speaking at the reinsurance industry's annual conference in Monaco.

Guy Carpenter's business in Asia grew by 11 percent in the first half of the year as it cooperated with reinsurers on new products in agriculture and specialty risks.

Similarly, new flood models for central and eastern Europe are raising insurers' risk awareness and boosting demand for reinsurance, the broker said.

Yet the industry will need to work hard to sell enough new products to make up for weak pricing in traditional lines of business.

Reinsurers' capital continues to grow at a pace that exceeds the growth and demand for reinsurance in the catastrophe arena, said rival broker Aon Benfield -- creating an ideal environment to fuel growth and innovation in products.

INADEQUATE RETURN

In the absence of a huge catastrophic event, reinsurers are expected to make 11.3 percent return on equity (ROE) by the end of 2010, which is viewed as inadequate, said Bryon Ehrhart, chief strategic officer of Aon Benfield, the world's biggest insurance broker.

To increase ROE to a more desirable number, the industry has to put to work around $100 billion of capital, he said -- the best to do this being to deploy innovative new products.

Aon Benfield is investing in expanding business in motor insurance, aerospace, crops, Asian typhoon modelling and energy, and was rolling out 12 new products with reinsurers.

Such products could also include new liability products, after the BP oil rig disaster highlighted even the most financially secure organizations can't sustain such events without quadrupling their cost of capital, suffering material downgrades and needing to sell strategic assets, said Ehrhart.

Some new products can look relatively esoteric.

Reinsurer Scor for instance announced an insurance deal at Monaco to cover yaks in Mongolia as the French reinsurer expanded into livestock insurance.

At a more mainstream level Munich Re this week announced an insurance product to cover oil companies against liability risks arising from oil catastrophes during offshore drilling operations -- an area hitherto covered under the liability policies of the companies concerned, the world's biggest reinsurer said.

Microinsurance is another area where the sector ultimately may see substantial growth, catering to the some of the world's 4 billion people who earn less that $2.50 per day. Players like Allianz and Zurich Financial view such efforts as a fillip to future brand recognition.

Reinsurers could also turn to the capital markets to hedge risks associated with natural disasters, such as hurricanes and earthquakes, via Insurance-Linked Securities (ILS) products.

The ILS sector saw $3.4 billion in issuance through 18 transactions at the end of 2009, but is expected to exceed that amount in 2010, with Aon Benfield predicting an ambitious year-end issuance total of $5 billion.

Munich Re called for collaboration between reinsurers and capital markets in developing insurance offerings for business interruption, longevity and energy production risks.

There are so many markets that are not insured for at all and as yet the reinsurance market has not found suitable solutions, said Torsten Jeworrek, a Munich Re management board member.

"If the reinsurance market and financial markets bundle our efforts, the capital markets can play a significant role for the accumulation of those risks that are difficult to insure," Jeworrek said. (Editing by David Holmes)

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