Alternative capital to compress reinsurance cycle: Vickers, Willis Re

by Artemis on November 16, 2015

The presence and growing reach of alternative capital in the global reinsurance sector won’t result in a market without cycles, but will lead to compression, where the peaks and troughs will be much less dramatic, according to Willis Re Chairman, James Vickers.

“I don’t see the market as ceasing to be cyclical, but I do see that the cycles will be dramatically compressed,” said Vickers, during a discussion at A.M. Best’s 2015 Insurance Market Briefing, Europe, held in London recently.

With the influx of alternative capital persisting, albeit at a slower pace in recent months than previously witnessed, the resulting larger pool of overall, global reinsurance capital could see large losses more easily absorbed.

The result of which, expects Niklaus Hilti, Head of Insurance-Linked Strategies at Credit Suisse Asset Management, is that large losses “will not cause a very hard market, and maybe it will last three days in the future.”

“But I still believe there will be losses. The unexpected losses will spread fear and we will see fear, and there we will still see a hard market. Because personally I believe a lot of capital which is waiting today on the side-lines will not come in if there is a big surprise and fear in the market,” added Hilti.

Exacerbating the impact of alternative reinsurance capital’s inflow into the sector is the ongoing benign loss environment. Relatively low losses from catastrophe events globally, has contributed to a market that’s awash with capital, where supply continues to outpace demand in the majority of markets.

Ratings agency A.M. Best also highlighted the potential dampening of reinsurance price volatility and the flattening of the reinsurance cycle in the future, driven by the growth of the convergence markets.

The demand for reinsurance has declined in recent times and will likely decline again in the future, owing to the markets cyclical nature, but the wealth of capital currently sitting in the sector and the reality that the convergence markets is predicted to continue its impressive growth, points to a cycle where peaks and troughs are far less pronounced than previous cycles.

Greater stability in pricing will be welcomed news to reinsurers that have experienced continued rate declines in recent times, as a result of the ongoing market pressures and the resultant challenging environment.

However, it’s likely that reinsurance market players will have to get used to structurally lower, albeit less volatile returns, than what they’ve been used to in the past.

Looking forward Vickers said; “But long-term I think yes, the advent of capital markets will not crush the cycle totally, there will still be peaks and troughs but they will be much more gentle. And hopefully from the original insureds and buyers point of view that will translate into more stability of cost over time.”

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