Some alternative capital will get badly burned: W.R. Berkley CEO

by Artemis on October 24, 2013

As alternative capital suppliers seek out new opportunities outside of the well-modelled pieces of the reinsurance business, some it will get badly burned, according to the CEO of commercial lines property casualty insurer W.R. Berkley Corporation.

William R. Berkley, Chairman and CEO of the insurer, made his prediction during the firms third-quarter 2013 earnings call. He was discussing the fact that many alternative and ILS capital providers have entered the reinsurance space dealing solely with well modelled risks. Berkley expects these capital providers will seek to expand their focus outside of the typical ILS perils, as we’re already seeing, and predicts that some of them will get burned.

This might sound controversial but it’s likely an accurate forecast. Over the years many insurers and reinsurers have suffered the same fate as they’ve attempted to move into longer-tail lines of insurance or reinsurance business, this is not just an issue in alternative capital and ILS. It is safe to expect that some new providers of capital into the reinsurance space, be they alternative or not, will suffer from being burned at some point.

CEO William R. Berkley said on the call that the insurer sees across the board pressures, predominantly on property catastrophe risks, created by new capital entering the markets.

He commented; “Securitization of non-tail risks is having an impact on cat business and large property risks. There are a lot of people who have investment portfolios and are looking for non-related risk profiles, therefore, you’re seeing an increase in cat bonds and other kinds of behaviors. That’s going to continue to impact back on the business.”

When discussing whether alternative capital and ILS is likely to look towards longer-tail lines of business in an effort to expand and deploy excess capital from investors, Berkley said; “I think these capital suppliers, who are entering the business entirely based on models and forecasts, are going to find that human judgments actually are of value and importance. A number of them will get badly burned as they step away from the highly forecastable pieces of the business to other parts.”

Berkley said that he expects the attempts of alternative capital to step outside of the well-modelled areas of the market will be; “Extremely costly and short-lived.”

The CEO was then asked whether W.R. Berkley is noticing the impact of alternative capital in its own reinsurance buying and whether traditional reinsurers are becoming more aggressive and competitive in selling longer-tail, casualty type covers, as they look to avoid the influence of ILS.

William R. Berkley answered; “I would say that the reinsurance marketplace is still reasonably disciplined, on the longer-tail lines, but it is certainly more competitive than the direct side of the business.”

The impact of alternative capital and ILS is being felt though, he explained; “Everyone is feeling the pressure of new capital entrants and is concerned about where and how that’s coming. That’s why Berkshire Hathaway went into  large E&S business, because they felt the pressure of capital. A big capital account wasn’t enough to get the business any longer, there were lots of people competing for it.”

President and COO W. Robert Berkley Jr, added; “Clearly there is more competition that has come into the property cat space. Trying to draw a clear correlation between the behavior of many reinsurers as a result of some of this alternative capital coming into the property cat space, how that’s driving a change in behavior in the casualty market, I think it’s probably a little bit early to reach a conclusion.”

So a large commercial focused insurer like W.R. Berkley is noticing the impact of alternative and ILS capital in its business and has concerns that it will broaden its scope to move into longer-tail lines, which could of course have more impact on W.R. Berkley’s own revenues.

Whether we will see a wholesale expansion of ILS and alternative capital into long-tail lines of re/insurance like casualty risks remains to be seen. Some capital is already venturing into this area but it is by no means on a wholesale basis yet.

Any new market will always see a handful failures, as it finds its feet and establishes its boundaries, we fully expect the insurance-linked securities and alternative reinsurance capital market to suffer the same.

As ILS capital looks for new opportunities there is definitely a risk that some will bite off more than they can chew, in terms of the longer-tail, but as we said at the start of this article we’d expect this to happen in traditionally capitalised re/insurers as well.

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