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Catlin COO urges insurers to hold on to capital in sub-prime storm

Catlin Group COO, Paul Jardine, has called on insurers to be “very wary” of repatriating capital to shareholders in the current market environment, as the sub-prime debacle may hamper future attempts at capital raising.

The Catlin executive predicted that “the sub-prime crisis may mean that capital used for underwriting is significantly impaired”, and warned that insurers returning capital to shareholders now may find that “it’s been given away too soon”.

He added that “sub-prime may well be the extreme event that’s needed to turn the soft market”.

Although Jardine said that Catlin still saw “very adequate pricing” in many lines of business, with pricing levels in excess of levels ten years ago, he saw other signs of a softening market in London.

“Mergers and acquisitions activity usually peaks in a soft market, with firms looking for other ways to utilise their capital. This is exactly the wrong time to buy, but many people still follow the trend”, he continued.

Jardine, who is also CEO of Catlin Underwriting Agencies, also offered the audience at a presentation by actuarial firm Watson Wyatt on “pricing and capital management in a softening market” some key factors which insurers need to address for soft-market cycle management.

He urged insurers to manage their access to the business, via platform innovation, service levels, product development and local distribution channels. He also cited risk selection as being a key factor in cycle management, including ensuring that quality underwriters have access to adequate rate information, focus on the margin and undertake aggregation monitoring.

He warned against remunerating underwriters based on volume of business written during a soft market, instead favouring global bonus pools, based on overall group performance.

Jardine highlighted Catlin’s has adopted a diversification strategy, both geographically and in classes of business. He advocated an international office network as a channel for “writing local business locally. The stuff that doesn’t come into London”, he added.

Watson Wyatt has undertaken a London market survey on insurers’ perceptions of the current market and capital management. Respondents ranked underwriting issues as by far the most important issue facing insurers today, with capital management, competition, embedding capital and risk management into the business and talent management the four other most important issues.

When asked about current market pricing, respondents thought that property market rates were 10 percent above technical pricing, the marine market 20 percent above, whilst directors and officers rates were 20 percent below, aviation 5 percent and employers’ liability 20 percent below technical pricing.

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