Endurance feels soft market could get worse: Bernstein

Bermuda-based P&C insurer and reinsurer Endurance Specialty Holdings recently expressed a view that the reinsurance industry is in the infancy of a soft market, suggesting that further pressures and a decline in discipline could be on the horizon, explain analysts at Bernstein.

During the 3rd Annual Bernstein Financials Summit, the company met with a range of insurance and reinsurance companies to discuss the growing headwinds facing the U.S., and wider re/insurance markets.

“In particular, we were struck by Endurance’s comments that it thinks we are in the early stages of the soft market, as historically the damage of the soft market has been driven by fear-induced underwriting by players being squeezed out writing business irresponsible pricing to stay ‘relevant,’” said Bernstein.

A lack of underwriting discipline and care in the reinsurance sector is typical of a softening cycle, as reinsurers look to increase profits and business opportunities by taking on more risk than perhaps is properly understood, offering reduced pricing and relaxed terms and conditions (T&C) in order to secure business, potentially resulting in significant overexposure.

Reports of the current softening reinsurance market have been circulating for many months now, so it might be a surprise for some to hear Bernstein note that Endurance feels the worse could still be to come.

The current soft reinsurance market is underlined by ample capacity from alternative and traditional sources, a lack of catastrophe losses, limited organic growth opportunities and heightened competition, all of which contributes to pressures on rates and profitability.

Typically, a result of the softening market will see certain market participants show a lack of disciplined underwriting in order to secure business when margins are thinning; something Endurance feels is yet to happen in the current soft market.

As a result, “Endurance think the market is going to get worse – across both primary and reinsurance. Thinks companies tend to panic just as the market bottoms and start getting irrationally competitive just to preserve share. Nowhere near 9th inning of the soft market – more pain to come,” said Bernstein.

It’s an interesting point Endurance raises, and highlights a continued need for market discipline, which includes knowing when to walk away from underpriced risks and being in a position to accept reduced volumes in lower margin business.

The current soft landscape has been exacerbated by the inflow of alternative reinsurance capital and intense competition for business, but should reinsurers begin to add ill discipline in the mix as well things have the potential to deteriorate very fast for some.

When the market does eventually start to turn or losses and reserve releasing return to more normalised levels, those that neglected discipline in the hope of remaining relevant to the industry could find themselves in a dangerous situation.

That Bernstein’s note on Endurance claims that fear-induced underwriting is yet to be a significant element of the softening reinsurance market at this time, suggests that there could be some way to go before the market starts to turn.

Disciplined underwriting and the resistance to relax T&C is now as important as ever for reinsurers, but as the host of industry pressures persist the temptation for those that perhaps lack the scale or size of others in the sector to relax T&C and underwriting discipline might be too much.