“Tsunami of alternative capital” kept lid on market turn: W.R. Berkley CEO

It was the “tsunami of alternative capital” that kept a lid on reinsurance rates and prevented a market turn after the major losses of 2017, but at the same time may have helped to stimulate more focus on rate adequacy in other lines of reinsurance business, according to the CEO of W.R. Berkley.

Of course, the inflow of capital into insurance-linked securities (ILS) funds and alternative reinsurance capital vehicles and the effect it has had on reinsurance rates, especially in property catastrophe risks, is not a new story.

But increasingly the market sees growing opportunity for better rates in areas of the market where the moderating effect of efficient capital is less evident it seems.

One factor here is that many lines of reinsurance business outside of catastrophe and property have been underperforming, causing the traditional market to look for more risk commensurate rates, with price inadequacy becoming more regularly cited.

Speaking during the W.R. Berkley second-quarter earnings call yesterday, CEO and President Robert Berkley noted that while “on the domestic front, property remains very challenging… we continue to be cautiously optimistic that the casualty and professional markets are showing early modest signs of improvement.”

“On the international or the non-U.S. front again, property is challenging but casualty and professional actually seems to be gaining some meaningful momentum,” he continued.

In some areas where accounts have been loss affected or are for new buyers, Berkley said that “there seems to be a shift in the pricing leverage, where it’s not completely a buyers market.”

He added that for the property reinsurance market it will be interesting to see what happens about some of the commentary coming out of the London market, likely referring to the underperformance of some syndicates and lines of business at Lloyd’s, asking whether that may help to encourage greater discipline and better behaviours in the market.

But the fact that the reinsurance renewals showed so little in the way of rate gains was not expected, Berkley said, “I was surprised at the 7/1’s (renewals), but I was even more surprised back at 1/1. I thought after what you saw happen in the third-quarter and what you saw happen in the fourth-quarter, I didn’t think it was possible that this cat reinsurance market was going to be flat (sort of).”

“As I’ve suggested in the past, when it comes to property cat you just have this tsunami of alternative capital that I think is keeping a lid on the marketplaces ability to turn, as it has historically,” Berkley explained

Then continuing, “I think it’s one of the reasons why some of the lines of business that are not, that are places that alternative capital did not participate in, are showing signs that they are poised for more of a historical turn.”

As we wrote recently in this article, the price inadequacy of certain lines of reinsurance is causing reinsurers to take a closer look at rates and whether they are risk commensurate. This is leading to some upward rate pressure in lines of business where alternative capital is not yet prominent.

But this could just serve as an attraction for some alternative capital providers who are keen to start assuming longer tailed exposures, perhaps adding impetus for ILS players to find partners with whom they can separate risks so that somebody takes the tail.

It’s a potential threat to the ability of reinsurance firms to hike rates in areas where they currently still have more influence on pricing, due to the capital markets inability to penetrate longer-tailed business lines as effectively as they have in short-tailed risks and catastrophe lines.

But overall, even W.R. Berkley’s comments are encouraging for the entire reinsurance market, seeing ongoing chances of the business getting more profitable it seems.

Robert Berkley said, “We’re increasingly bullish about the reinsurance business outside of the United States and we are cautiously optimistic about where the reinsurance market domestically will be going.”

That sentiment bodes well for investors in reinsurance risks, as even slight price increases can make meaningful differences to ILS portfolio returns.