1. The Satellite Insurance Market and Underwriting cycles Comments by J. François Outreville ARIA Annual Meeting, Québec, 2007

2. Cycles: what we know! –Large losses, investment, and general economic shocks occur, affecting insurer profits and capital –Institutional (regulatory) and accounting lags produce a cyclical profit pattern even under rational expectations (Cummins-Outreville,1987) –Due to information asymmetries and other imperfections, capital does not flow freely into and out of the insurance market (capacity constraints: Niehaus-Terry 1993, Winter 1994, Gron 1994)

3. Cycles: what to explain? –Shocks are not “causes” of cycles – a rational expectations market could exist with shocks but no cycles –The market is characterized by “real cycles.” i.e., alternating periods of Hard markets – high prices and limited coverage Soft markets – low prices and abundant supply

4. Cycles: other explanations –Risky debt: (Cummins-Danzon 1997) shocks drive insurers away from optimal capital structure, leading to supply shifts until Capital is restored and/or External capital is raised. –Reinsurance price: (Meier-Outreville 2006) reinsurance is preferred to external capital if available at an affordable price. Reinsurance allows a primary insurer to increase its premium volume with a given amount of capital. This will be reflected in more capacity.

5. Reinsurance in this paper -Satellite Insurance is a business for reinsurers Companies underwriting satellite insurance are among the largest reinsurance groups -Capacity in the satellite insurance rate model is influenced by the overall capacity of the reinsurers Return on equity and change in equity may be relevant variables

6. Reinsurance price cycle - The market for Reinsurance (Cummins and Weiss, 2000). - Property reinsurance business is subject to price cycles. - Price fluctuations in reinsurance can lead to either an increase or a decrease in insurance prices and premium volume.

7. Reinsurance Price Index

8. Reinsurance price cycle -Price Index -Period 1980-2002 result 8.73 and no significant trend (Meier-Outreville, forthcoming) -Satellite insurance -Minimum RoL 13.73 no trend 12.36 with significant trend

9. Reinsurance Price Indices

10. The Reinsurance Cycle and Return on Equity

11. Suggestions -The reinsurance price cycle (and change in equity) certainly impact the satellite insurance capacity. -Capacity may be negatively related to the concentration level of the reinsurance market in satellite coverage. -Capacity may be related to the overall financial markets (rather than only stock market performance)

12. Conclusion This is a useful paper that extends our understanding of –Relationship between price and capacity (simultaneous equations) –The impact of capacity constraints on cycles Future work –Better understanding of information asymmetries and barriers to capital flows in insurance markets –Relationship between insurance lines in the reinsurance portfolio