The changing dynamics of the global reinsurance sector, aggravated by ample sources of capital, competition and benign losses, has created a standoff between intermediaries, insurers, reinsurers and underwriters in the space, according to Vincent Dowling.
“We are at an O.K. Corral right now,” said Dowling, managing partner and co-founder of Dowling & Partners, likening the current reinsurance market to the famous 1881 Wild West gunfight.
“We have intermediaries who know they can skip around traditional sources and go direct to the capital markets. We have primary insurers and reinsurers that know they can skip the intermediaries to access the capital markets,” continued Dowling.
“We should understand what has changed is the business,” stressed Dowling, speaking at the Marsh & McLennan Young Professionals’ Global Forum 2015 last month.
As the participants in the global re/insurance market continue to navigate a softening, increasingly competitive and capital rich market, the establishment of hybrid reinsurance ventures and innovative structures has increased and also served to further change the landscape of the sector.
Dowling discussed that the early hedge fund-backed hybrid reinsurance model, like Third Point Re and Greenlight Re is now dead, reasoning that this is because “in the current market it is impossible to find that business and obtain an ‘A-‘ A.M. Best rating. The world has changed.”
Moving away from the initial hedge fund-backed reinsurers and to something strategically differing was the establishment of Watford Re, from Arch Capital and Highbridge Capital.
Described by Dowling as a watershed event because of its 50/50 “split of the economics between the hedge fund guys and reinsurance guys.”
“All of a sudden people woke up to the fact that there are a lot more hedge funds who would like to do this than reinsurance companies that can make a viable run of it,” explained Dowling.
The result of ventures like Watford Re for the traditional reinsurance players, notes Dowling is the realisation that they must adopt a similar approach and gain access to similar risk transfer vehicles, or simply accept that there are some lines of reinsurance business they can’t effectively compete for.
Dowling advised; “There are slugs of business which are going to Watford Re and new hedge fund guys in the future, and the traditional reinsurers are either going to have to say I’m going to take a much lower return, which most of them are unwilling to do, or get out of certain business lines.”
The subsequent impact of current market challenges and the establishment of efficient, hybrid reinsurance vehicles, is a reinsurance industry standoff explained Dowling, where the value chain has become disrupted and the reinsurer is too far from the customer, and everyone in the middle is trying to “grab a piece of the dollar.”
Dowling said; “The ‘circle of love’ between underwriters and intermediaries has been bent a few times but going forward the value chain will increasingly be under pressure.”
Looking forward Dowling emphasised a future “where the industry cannot do what’s doing now, which is to provide a poor product to its customer. When you are taking a dollar and only giving back 60 cents on the commercial side.”
Concluding; “That cannot work long term. We as an industry need to provide a better value to customers.”
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