Pressure in the reinsurance market is increasingly moving beyond just pricing and there is now more pressure for the expansion of reinsurance coverage terms and conditions, CEO of reinsurer PartnerRe Costas Miranthis told analysts last week.
Bermuda reinsurer PartnerRe has certainly not been immune to the well-documented pressures affecting the reinsurance market, reporting that its catastrophe reinsurance premiums written declined by 25% and earned by 10% in the third-quarter, as the impacts of decreased pricing, reduced shares as well as cancellations of renewals fed into its results.
PartnerRe is, like so many others, trying to remain disciplined, shrinking lines and cancelling signings where it no longer feels the business is attractively priced or has sufficient technical price attached. But the pressure continues and Miranthis says that his firm is increasingly seeing pressure on terms and coverage, rather than simply on price alone.
Miranthis said that the competitive market shows no sign of turning; “Conditions remain competitive and I would expect this to continue to be visible at the January 1st renewals, which comprise a major part of our book.”
“Increasingly, we’re seeing pressure move from on straight pricing to expanding coverage terms. On a risk-adjusted basis, the impact is the same, lower expected profitability,” Miranthis continued.
This is the key issue for reinsurers, even if they continue to simply underwrite the business they had before the profitability is shrinking, due to lower pricing, plus any expansion of terms or conditions effectively erodes the profitability as well as opening them up to other risks of accumulation and greater uncertainty in their portfolios.
Miranthis doesn’t see any immediate signs of improvement but believes that the franchise and team that PartnerRe has built will help it to successfully navigate the difficult market environment. It is also something to protect, he said; “We spent a lot of time over the last decade building a franchise and would not jeopardise it for the sake of showing premium growth with pricing in a sense that simply does not meet our standards.”
In terms of where PartnerRe see the market right now, Miranthis said; “As primary rates might now be reaching an inflection point, downward pressure on risk-adjusted reinsurance rates persist. As I mentioned earlier, while we may be reaching a low point on reinsurance pricing, there is more pressure for the expansion of coverage and terms.”
On property catastrophe reinsurance lines specifically, the segment of the market where the pressure remains greatest, Miranthis acknowledged the continued influence of ILS and alternative capital, saying; “I expect to see continued pressure on pricing due to abundant capacity and benign loss experience to date. The non-traditional collateralized market continues to influence overall market dynamics, but it is only one factor in an environment characterised by excess capacity.”
However Miranthis feels that the traditional reinsurance, indemnity based product, remains attractive to cedents; “While there are many alternative products in the market I believe that the value of traditional reinsurance and tried and tested products with no basis risk is recognised by most buyers. But the availability of alternatives is putting pressure on price.”
Miranthis said that the pressure in reinsurance looks set to last into 2015, beyond the key renewals. “Reinsurance market conditions are clearly very challenging, and we expect this to continue in 2015,” he said.
He also noted that pressure is being felt in more of the specialty lines, as reinsurers seek to diversify away from highly competitive property catastrophe zones and lines.
“We are seeing more competition, especially from companies that have not traditionally been in those lines trying to break in. The environment is becoming more competitive for sure. People are trying to break in, but it’s nowhere as easy as it is for CAT where certain sectors of the market are more a commodity product,” he explained.
One of the issues with targeting growth in the current market is that there is a limited amount of opportunities that PartnerRe finds attractive, said Miranthis. Here he hinted that perhaps this might be one way that PartnerRe could leverage more third-party capital, to underwrite business that does not fit the return requirements of the reinsurers balance-sheet.
“Could we write it and partner with somebody else who will be prepared to accept the lower return than we deem appropriate for us for whatever reason because they may have a different risk appetite or investment philosophy? Whatever their reason is, yes, we could. and we have thought about that, and when we, if we, have something we’ll let you know in due course,” he said.
That could result in interesting questions about where business sits within the multi-balance sheet world of reinsurers that embrace third-party capital. That is why third-party capital strategies need to have clear definitions, strategies and lines drawn clearly indicating why certain underwriting business fits one balance-sheet but not another. Managing expectations of investors and avoiding any potential for conflicts of interest is key.
PartnerRe’s Lorenz Re sidecar will no doubt give the firm a grounding in how to embrace this type of strategy, should it decide that writing some of that business which doesn’t fit its own balance-sheet becomes too attractive to miss.
Miranthis has clearly seen the opportunity to make third-party capital a much larger partner than it currently is at PartnerRe, it will be interesting to see how the development of its activities in that area develop. Miranthis clearly feels that PartnerRe could help third-party investors to access the returns from reinsurance risk that they so clearly desire.
Miranthis commented; “Clearly alternative capital is here and will coexist with reinsurance and the challenge for us is to learn how to work better alongside those different sources of capital, which may have different risk appetites than we have. But for sure, they don’t have the access to business and the access to clients that we get.”
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