A smarter, more client-responsive reinsurance market: Willis Re

At a press briefing held this morning in Monte Carlo by global reinsurance brokerage Willis Re, John Cavanagh, the firms CEO, said that, to the benefit of clients, what we have today is a “Smarter, more client-responsive reinsurance market.”

The result of the increasing capitalisation of the reinsurance industry, thanks to lower catastrophe losses and increasing alternative capital, alongside the expansions of some terms and conditions, is a reinsurance product offering which provides more choice, more tailored solutions and a better fit between capacity and client needs, Cavanagh explained.

This is an often under-explained benefit of the entry of new and more efficient capital into the global reinsurance market. Cedents do have more choice in terms of their counterparty, more options available to them in terms of structures and product options and with the relaxation of terms and conditions, the ability to buy multi-year covers, stretch the hours clause, purchase aggregate capacity and generally augment their protection.

Cavanagh said that reinsurance pricing remains soft, although Willis Re believes it found the bottom, in terms of appetite, on some placements at the June and July renewals. On some areas of the market pricing cannot go any lower, he insinuated, but on other lines there is more room for further softening. However the recent low catastrophe volatility will see the rate declines continue, explained Cavanagh.

The result is not just an easier reinsurance market for the brokers clients, but a smarter and more client-responsive one. That sounds like the buyers market conditions we’ve written about many times and it seems this is likely to continue. Cavanagh said that buying less reinsurance in an environment such as this is unintuitive and he sees some signs of this beginning to sink in.

In fact, a number of reinsurance brokers at the Monte Carlo Rendez-vous have suggested that they are telling clients to take advantage of these conditions in 2015 and believe that there may be more reinsurance purchases as a result. The record low pricing is considered an opportunity too good to miss by some, with a number of primary insurers expected to up their limits purchased in January, by all accounts.

However, Cavanagh raised the question of whether the insurance and reinsurance market has become complacent? We saw the reinsurance market swallow huge losses in 2011 and 2012, as new and alternative capital flooded into the market, he said.  We’ve also seen these periods of low catastrophe activity before, but Cavanagh said that often a convergence of multiple events or a single massive game-changer often brings these periods of benign losses to a close.

“Frankly, it’s losses that change the game. That’s what’s going to have to happen to move the market,” Cavanagh said. But even losses are not going to move the needle significantly in terms of pricing, especially on catastrophe risks, so reinsurers cannot rely on a return to the profits they have been used to, meaning that they need to look to innovate and adapt with new products and risks.

In terms of the capital markets entry and expansion into reinsurance, Cavanagh said that Willis Re expects the influx of capital into catastrophe risks will continue. Similarly the hedge fund reinsurer model continues to garner interest and attract funds to it.

Cavanagh noted that some of the diversified insurance-linked securities (ILS) funds are now offering composite and un-modelled covers, in lines of business outside of pure property cat. This, as a trend, is something he expects to see continue.

Over the near-term horizon, Cavanagh said that there are no positive signs from a rating standpoint for 2015. Willis Re expects another tough renewal season, but he reiterated that there are signs that savings made on core programmes may be reinvested for 2015.

But, Cavanagh closed, rather than fight over the same pie of risk, which is growing far too slowly right now, it’s important for reinsurers and brokers to work together to create new opportunities for the deployment of more capital.

James Vickers, Chairman of Willis Re International, then spoke at some length about the brokers efforts to work with the UN and other organisations to make disaster risk and resilience a balance-sheet item for corporations around the world. This promises to unlock huge demand for insurance and reinsurance, if it could be mandated and corporations encouraged to disclose their 1 in 100 year loss potential and what they are doing to make themselves resilient against it, either financial or physical.

Capital, science and policy are converging on solutions and potential regulations on this topic and Willis as an organisation is playing a key role in this. The efforts are important for society and for the reinsurance industry, as it is not often that this industry gets to demonstrate the social good that providing disaster risk protection offers.

“Integrating natural disaster risk into the financial system” is a “fundamental opportunity for the reinsurance market,” Vickers explained.

Tony Ursano, CEO of Willis Capital Markets & Advisory, spoke on ILS and M&A trends. Ursano explained that the “insurance risk asset class has been legitimised,” and explained that he foresees additional growth in alternative capital as many investors have begun the process of assessing the asset class. Ursano said that he expects the pipeline of capital to continue to flow into reinsurance from the capital markets.

Steve Hearn, Deputy CEO of Willis Group Holdings, commented that the question of whether ILS or alternative capital is fickle or sticky is perhaps one of pricing now. If prices are good then capital will increasingly come into the sector, when pricing is soft some may leave. This ebb and flow of capital is a natural development of a more mature and converged reinsurance market.

Cavanagh added that thanks to the entry of alternative capital into reinsurance the post-event response for customers is more effective. He explained that ILS investors are considered, sensible investors and that Willis Re considers the quality of capital to be very high.

Ursano discussed diversification, saying that we are in the “first innings of what could happen in terms of diversification” and that many ILS investors would like to diversify more deeply into reinsurance. ILS investors are doing research into structuring, sourcing and partnering in order to access new risks. This is a slow development, Ursano said, but he believes it will happen.

The entry of alternative capital and institutional money into reinsurance is seen as a threat to traditional reinsurers, but the benefit to reinsurers clients is often overlooked. It is vital that the reinsurance sector works out how to leverage the interest in supplying capital to the sector in order to continue to lower the sectors cost-of-capital and provide increasingly smart and client focused reinsurance solutions.