Fungibility of capital permanently changes reinsurance cycle: Markel CATCo

The abundance of capacity in the property catastrophe and retrocession reinsurance sector continues to contribute to a challenging environment, and signs are beginning to show of a change to the reinsurance market cycle owing to the fungibility of capital, says Markel CATCo.

During its recent half-year 2016 results announcement, the CATCo Reinsurance Opportunities Fund Ltd., a London and Bermuda listed insurance-linked securities (ILS) fund, commented on the continued soft market and heightened supply of capital.

“The excess capacity in the property catastrophe reinsurance and retrocession markets continues to prove a challenge, with signs that the reinsurance cycle is permanently changing given the more fungible nature of capital flows,” said fund manager Markel CATCo.

While the inflow of capital from third-party reinsurance providers has slowed in 2016 when compared to previous years, the willingness of ILS investors to assume insurance and reinsurance linked property catastrophe risks remain strong.

Markel CATCo expects the softening landscape to persist and as noted above feels the traditional reinsurance cycle is undergoing a permanent transition, as the abundance of capital ready to enter the space, from both traditional and alternative sources, appears sufficient to compress any price surge post-event.

“In a low interest rate environment, the appetite of capital market investors for catastrophe risk remains strong and there appears to be no sign of this waning,” said Markel CATCo.

Barriers to entry in the property catastrophe space remain lower than some other business lines, and as a result ILS capacity has for the most part focused here.

The notion of a change to the reinsurance cycle has been discussed previously in the market, with some executives and analysts expecting the highs and lows of the past to be much more moderated in the future.

In response to market challenges and the expectation of a protracted soft market, Markel CATCo explains that it’s focused on “ practising disciplined underwriting, using its modeling and underwriting expertise to select the most attractive and diversified risks at risk adequate prices.”

“Encouraging signs are being seen that other ILS managers are taking a disciplined approach to underwriting, with a willingness to turn down business that is not priced adequately. This is reflected in the slowing of rate reductions at the mid-year June/July 2016 renewals,” continued Markel CATCo.

This notion was highlighted by Willis Re at the start of the year, and it seems that ILS players have continued to show discipline through 2016, a sign of market maturity, sophistication, and longevity.

In spite of market challenges and reduced returns, capital markets investors remain attracted to the ILS asset class as a diversifying, uncorrelated and stable means of additional revenue, and Markel CATCo feels this trend shows no sign of waning.

It’s encouraging for the ILS market that Markel CATCo and other ILS funds/managers are remaining disciplined in the softening landscape and walking away from business that’s simply priced too low.

Efficiency and discipline have become of increased importance to insurers, reinsurers, and ILS players in recent times, and it’s possible that when the market does start to turn, or losses mount, those that haven’t been as disciplined as others could find themselves in a difficult position.

Despite cat losses remaining benign in recent years, the uptick in H1 showed how volatile extreme weather event and subsequent losses can be for firms, especially at times of broader market turmoil, explained Markel CATCo.

It will be interesting to see how ILS players respond to the continued soft landscape through the remainder of 2016 and at the key January 1^st 2017 renewals, especially if losses subside once again and competition remains rampant putting pressure on pricing and terms.