There will always be a soft(er) reinsurance market

Once again Artemis finds itself in Monte Carlo at the annual reinsurance Rendezvous event. In its 58th year the event brings executives from all over the world and the currently soft reinsurance market is a key topic in 2014.

At the first press briefing of the event, always held by the reinsurance broker Guy Carpenter, one of the topics discussed by the firms executives was the current pressure reinsurers find themselves facing and whether that will come to an end anytime soon.

Reinsurers will be hoping for a positive response to this, perhaps it will be the occurrence of a large catastrophe event, perhaps the discovery of new reinsurance business opportunities which lower-cost alternative capital cannot compete with, perhaps the exit of insurance-linked securities (ILS) investors entirely from the sector, or something else to brighten up their Monte Carlo visit this year.

However executives at Guy Carpenter all agreed on one point, the soft reinsurance market we see right now is likely here to stay and reinsurers had better learn to adapt, innovate and find ways to maintain their return on capital, or risk disintermediation and perhaps even failure.

David Priebe, Vice Chairman and Head of GC Securities, the reinsurance brokers capital markets and ILS arm, was most bullish, saying, “There will always be a soft market,” as he responded to a question about what reinsurers can expect in years to come from this difficult market environment.

Alex Moczarski, the reinsurance brokers President and CEO as well as being Chairman of Marsh & McLennan Companies International, agreed saying, “Short of a huge catastrophe the market will remain soft.” Moczarski also suggested that there would be hard markets in the future, but if and when they happened they would “Be short lived.”

When pressed as to whether innovation and new products would actually help reinsurers get back to anything like the underwriting returns seen in recent years, Moczarski ventured that it would be important to be first, or at least early, into any new market opportunities as the “Price advantage won’t last long.”

So, perhaps not the cheery outlook that traditional reinsurers would have been hoping for. However, that is focusing in on a few short comments, not the full picture.

The speakers from Guy Carpenter suggested that opportunities are actually in abundance for reinsurers, both in expanding coverage in existing lines of business, tapping new and emerging markets, narrowing the trillion dollar plus catastrophe gap between economic and insured losses and venturing into new areas such as cyber risk.

In fact, if you were to quantify the opportunity that reinsurers have in just these few ideas, let alone all the product design and innovation we would hope to see from those feeling pressured, it adds up to a larger reinsurance market than we see today.

Moczarski opened the press briefing by describing the pressures being felt and market conditions generally, saying; “Conditions continue to be driven by limited catastrophe losses and new capital continuing to enter from alternative sources. He said that; “Almost all lines of business and geographies have been affected directly or indirectly by the surplus capacity and weak market.”

Interestingly the presentation highlighted the growing amount of global reinsurance capacity that never gets put to work. This unused capacity has grown by around 20+% in a year, as reinsurers struggle to put money to work, both due to competiton from the capital markets and due to reinsurance demand not increasing rapidly enough to soak up supply. This is the capital that results in share buybacks and extraordinary dividends to shareholders.

The discussion moved onto what reinsurance brokers, like Guy Carpenter, need to do to remain relevant themselves and to grow in the challenging  soft market environment. David Priebe suggested that the broker needs to become an extension of its clients own operations and to be able to anticipate their needs, while proactively offering solutions. Something which to us sounds like a very sound strategy for what is in essence an advisory role first and foremost.

During questions the executives explained the need for reinsurers to innovate and be ready to adapt to the structural change that the reinsurance market is currently experiencing. Guy Carpenter feels ready to offer solutions, new avenues and ways for reinsurers to increase their value to cedents, all of which will help to secure them a place in the reinsurance market of the future.

There is opportunity for reinsurers, said Moczarski, but he reiterated the need for them to look to innovation to find opportunity, adding that there are some companies which do not have innovation in their DNA and so may struggle to compete effectively.

So, back to the title of this piece. A permanently soft reinsurance market with the price cycle softened, no huge peaks in terms of pricing (even after catastrophes) or if there are some they are short lived and soaked up by capital markets entering the space en mass.

A lower margin opportunity in some of the peak catastrophe risk zones where reinsurers have been used to making some of their most attractive returns and new lines of business opportunity where one has to be quick to reap the rewards before others come in with lower cost-of-capital and more efficient business models, thus eroding those margins too.

When you put it like that it really does sound like structural change and a new reinsurance market paradigm, as we’ve been saying for quite some time.

Just over a year ago, on the first Saturday of the 2013 Monte Carlo Reinsurance Rendez-vous, we wrote:

Time will tell, but the trend is pointing towards a real shift in the reinsurance business model and to cope with that shift everyone, insurers, reinsurers, brokers and even ILS asset managers, will need to prepare to adapt and innovate as the market moves forwards in its newly converged state.

That still holds true today. The convergence has now happened and is deepening and expanding to touch on almost every area of the reinsurance market. The soft(er) reinsurance market environment is now here to stay (or certainly appears ready to hang around) meaning change cannot be avoided by anyone.

Which means that those two words, from a year ago and many of our recent articles, adapt and innovate are more important to the global reinsurance market than ever before.

Read all of our pre, during and perhaps even post Monte Carlo Rendez-vous coverage here.