Reinsurance is “extremely efficient” capital at current prices: JLT CEO

by Artemis on March 10, 2016

The fact that reinsurance represents an “extremely efficient form of capital” at current pricing levels is expected to result in an increase in demand from cedents, according to Jardine Lloyd Thompson (JLT) CEO Dominic Burke.

Reinsurance prices are at levels close to the lowest they’ve been in recent history and combined with the improved and expanded terms available, some reinsurance buyers are seeing an opportunity to acquire coverage at its lowest risk-adjusted level ever.

Speaking during his firms recent earnings call, JLT CEO Dominic Burke highlighted an expectation that demand growth for reinsurance will be seen as cedents demonstrate a “recognition that at current pricing reinsurance is an extremely efficient form of capital.”

“As we enter 2016, there are signs that demand for reinsurance is increasing,” Burke explained.

One of the factors destined to increase demand is an expectation that the reserve strengthening for longer-tailed lines of business seen at some major primary insurers, such as AIG, will become a trend seen more broadly across the industry.

Burke noted that in just over two years property catastrophe reinsurance rates have declined by more than 30%.

With rate pressure now having spread and almost all reinsurance lines seeing declines at recent renewals, with an expectation of more to come, the low-cost of reinsurance capital could stimulate some new buying demand.

On a risk adjusted basis and taking into consideration expansion of terms and conditions, the ultimate cost of reinsurance capital could be as much as 40% or 50% cheaper than three or four years ago, on certain property catastrophe risks.

With the El Nino phase expected to weaken, raising the possibility of more Atlantic tropical storm activity this year, some cedents are looking at what could be a real opportunity to load up on lower-cost protection in advance of the 2016 storm season.

“We are seeing some behavioral changes,” Burke explained, continuing “When you start seeing large insurers increasing their reserving, you start to think. When you see people starting to buy stop-loss programs, which is not normally an activity that you would see at the level it currently is today, you sort of realise people are running on fumes, and there isn’t much margin left in any of the pricing that’s existing today.”

Burke said that at JLT they did not see rate softening slowing down much at the recent January reinsurance renewal, rather explaining it as more of the same. However he does feel that rates may have bottomed out, as evidenced by the increasing demand.

“So, whilst I’d not call end of the soft market, I think we can safely say we’re at the bottom,” Burke said, adding “I think, insurers have very little flexibility and very little room to maneuver now from where they are. So where that leads them, that will be for each and every insurance company to look at their own business model and their own balance sheet. But from our perspective, right now, we’re still seeing exactly what we have experienced indeed in the reinsurance space, the 1st of January renewals were much softer than we anticipated.”

The increasing demand for reinsurance cover could also be a reflection that some companies may begin, as rates bottom-out, to feel a little more nervous about the coverage they have been offering on multi-year and aggregate contracts, especially where terms have expanded significantly.

Some reinsurers may find that their exposure is much greater than anticipated and if there are uncertainties about reserve sufficiency on longer-tailed lines, the last thing they would want to experience is an aggregation of catastrophe losses that create an outsized impact to their results.

So all of this bodes well for the insurance-linked securities (ILS) and catastrophe bond space, with the potential for any increased demand for reinsurance capital to also translate into an increased demand for ILS and cat bond coverage.

If reinsurance capital is deemed efficient at the lower pricing levels, then the efficiency of capital markets backed protection, which is well-documented, may be even more compelling for large cedents as they look to limit exposure and put in place coverage to protect their businesses. That should see increasing demand for cat bonds and ILS or collateralised protection too.

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