Movements and trends in the global reinsurance industry suggests reinsurers are showing signs of both rational and irrational behaviour in the current, softening landscape, according to industry leaders.
At the recent Standard & Poor’s (S&P) insurance conference in New York, market leaders commented on current market conditions, with the rationality of firms’ underwriting being a key takeaway from debates.
The global reinsurance marketplace remains pressured from a range of headwinds, which are persisting to drive down rates and ultimately limit true underwriting profitability across the majority business lines.
A report from Bernstein discussing key points from the S&P event, draws on the views of Constantine Iordanou, Chairman and Chief Executive Officer (CEO) of Arch Capital Group Ltd., Chris O’Kane, CEO of Aspen Insurance Holdings Ltd., and Brian Young, President and CEO of Odyssey Re Holdings Corp., which formed the reinsurance panel at the event.
The panelists noted signs of both rational an irrational behaviour in the marketplace, citing that some reinsurers are underwriting in line with their expected returns, while certain high-profile accounts are being written at irrational levels.
One panelist noted that those in the space underwriting client relationships, perhaps accepting lower returns in order to receive the benefits and ultimately get paid back when the market does turn and losses start to mount, will most likely find themselves disappointed.
Despite the panelists claiming that reinsurers are for the most part underwriting rationally, and within their line of expected returns, discussions circled around the fact that a problem with this might be that return expectations are simply too low. And with limited room for profit on the investment side of the balance sheet some might find themselves in a more difficult position when losses normalise.
The abundance of capacity from both traditional and alternative sources, coupled with intense competition from the insurance-linked securities (ILS) space and traditional players and the benign loss landscape, as driven a supply/demand imbalance in the sector.
Ultimately, this has led to consistent rate declines at renewals, and despite a notable deceleration of rate reductions in more recent times, absent a truly significant market event, further rate declines are expected.
Industry executives stressed that if you have view that the cost of capital has come down substantially and your return targets are mid to single digit (MSD), and you’re exceeding the cost of capital then you can argue it’s rational behaviour.
However, another panelist added that while expected returns are in the MSD range, on average and when normalised, when losses start to mount the market will turn quickly, and some will find themselves in a very difficult situation.
It appears reinsurers are continuing to search for ways to offset the negative market landscape, with some irrational underwriting taking place as companies look to build relationships and risk overexposure when the market starts to turn.
Others in the space have shown a willingness to walk away from unattractively priced business, and looked to deploy capacity elsewhere to try to keep profits as high as possible.
Only time will tell which firms have been rational and which have practiced irrationality in the challenging landscape, when losses start to normalise and ill-disciplined underwriting practices come into light.
Returns in the global reinsurance space are expected to remain depressed for the foreseeable future, and even with losses, there’s a feel among the sector that the traditional reinsurance cycle is no more, and has been replaced by a flatter, compressed underwriting cycle.
As has been noted recently though, ILS fund managers have been praised for their discipline at renewals, with ILS discipline helping to slow down the reinsurance rate declines and it believed that continuing to show discipline could ultimately help to attract the next wave of capital to ILS fund managers.
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